Author Topic: Student vs. Car Loans  (Read 4058 times)

bill9223t

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Student vs. Car Loans
« on: June 26, 2012, 10:57:51 PM »
I recently found MMM's blog and have been hooked ever since. Being just a year out of college and combined 100k in debt, my girlfriend and I have realized that frugality and wise utilization of our savings will be absolutely necessary in getting out of debt and ultimately achieving financial independence.

Mr. Money Mustache has repeatedly drilled into my head NEVER to buy a car on finance. And while I know I should be cycling to work, my girlfriend and I will soon be moving to Los Angeles (where she's from) and renting somewhere in the city. I do not have a job there yet but upon getting one I will be buying a car. I am at least trying to keep it Mustachian by looking in the $5-8k range for used Hondas/Toyotas with around 100k miles that will hopefully last me the next 3-5 years until I'm out of debt. I am saving up cash for the move and will have at least $8k in savings by the time I purchase, so my thinking was to listen to MMM and buy the car cash so as not to accumulate another dreaded loan. However, after thinking about this I am not so sure it is the best option. I have about 10 different student loans (for about $70k total) and most of them are at respectable interest rates, 3-4%. I have a couple Federal ones at 6%, and one painful loan at 8%. My plan for the loans is to use all and any extra money to first get rid of the 8% one and then any at 6%. The only reason I haven't been paying extra towards these right now is that I need to save for the move first and secure a job in LA. I'm wondering if I would be better served using my cash savings and (once I get a job) pouring them all into the 8% loan, which should eliminate it almost entirely, while taking out a car loan for my used Honda/Toyota. I wince even thinking about taking out another loan, but doesn't it make more sense to rid myself of that awful 8% loan if I'm able to get financing for a used car below 5%? (I do not actually know what interest rate I could get on a used car loan, but I have recently heard of others getting as low as 2%) As much as it would suck to take out another loan, I know that paying off student loans is like an investment with a cash return equal to the interest rate. If I use my extra cash instead to pay down my super-high interest student loans, I could soon turn my focus to the car loan and hopefully still prepay it a bit so as to avoid the full financing cost. I majored in finance at college and this makes sense to me, I'm just hesitant to go with this plan after recently reading MMM so adamantly warning against car financing.

Xtal

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Re: Student vs. Car Loans
« Reply #1 on: June 27, 2012, 06:30:43 AM »
I would say buy the car with cash for the following reasons:

1) Your car insurance will be much lower than if you are financing the car.

2) Interest on student loans is tax-deductible.  Interest on car loans is not.

3) If you pay cash, you won't be tempted to buy more car than you need or can afford.

You've already proven you can save money.  Use your badassity to buy a car with cash, and then start attacking your student loans.

Or better yet, find a job and a home close enough together that you can bike to work and skip buying a car.  Once you have a job, get a map of the area and draw an 8-mile radius around your place of employment.  This is where you look for housing.  (That gives you a 75-square-mile area to work with!)
« Last Edit: June 27, 2012, 06:35:04 AM by Xtal »

grantmeaname

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Re: Student vs. Car Loans
« Reply #2 on: June 27, 2012, 07:27:30 AM »
It would help to know what sort of rate you could qualify for on a car loan, but I'd say that it seems like a solid plan if you really need a car. Do you?
If you're 70k in the hole just by yourself, you can't afford luxuries. Unless there's a big reason you really need one, a car is a luxury. I'm with Xtal, the best option is not to get a car at all.

Sunflower

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Re: Student vs. Car Loans
« Reply #3 on: June 27, 2012, 10:38:57 AM »
I don't have any advice on the financial side of things but biking in Los Angeles is totally doable and depending on where you live/where you're looking for jobs there's actually some decent public transportation options. For example, the red line and the gold line both connect nice livable city areas with downtown. There are also a series of metrolink lines that go farther into the Valley and elsewhere. I have a car and it makes my life a lot easier sometimes but I could live a perfectly happy life without one here in the concrete jungle.

Another Reader

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Re: Student vs. Car Loans
« Reply #4 on: June 27, 2012, 11:24:41 AM »
You may have a difficult time qualifying for a decent car loan with no time on the new job and the existing debt. 

Do the two of you have jobs where you currently live?  Is moving to Los Angeles a "want" or does your girlfriend have a much better job waiting?  With your debt load, I would not consider moving to an expensive place like Los Angeles without two job offers that beat the current salaries by a significant amount.

If you both have good jobs where you are, why not delay moving until you can pay down the debt load to a more manageable level?  With only a year in at your first post-graduation jobs, you may have trouble finding new jobs and an expensive rental on one or no income would exhaust your savings quckly.

onehappypanda

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Re: Student vs. Car Loans
« Reply #5 on: June 27, 2012, 02:26:41 PM »
You can't just look at the interest rate to determine which idea is the better deal- interest rates are only a very tiny portion of the total cost of owning a car. A new car might have lower interest rate BUT it'll likely cost more like $20K, when you could get a reliable used car for less than half of that in cash. Will the interest you save on your student loans make up for the extra $10-13K in the car purchase price? Keeping in mind that with your current debt load and young employment history you're unlikely to qualify for the best interest rates. There are also used cars that you can finance, but then your interest rate will be higher (probably not much less than your current loans) and you'll still be paying a ton of fees to the dealer. On top of that, a new car with a loan will come with a much higher insurance rate, and you'll be required to carry full insurance, and that'll likely wipe out a good chunk of any savings you may have.

So, all in all, I'd say definitely don't finance a car. Buy in cash or don't buy one. And +1 to whoever said you might want to rethink moving to a really expensive city unless you've both got jobs lined up, not with your current debt load anyway.

bill9223t

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Re: Student vs. Car Loans
« Reply #6 on: June 27, 2012, 06:34:05 PM »
Thanks for the help guys. We moved to Australia straight after graduating from Notre Dame and have been working here; our visas are up in a couple months so yes we do need to move back to the US. We do not have jobs lined up yet but are beginning that process; we are both earning just over 50k here and while we have good degrees, i doubt that we will be earning much more than that starting out in Los Angeles. We do however have a place to stay rent-free until we get on our feet, so we will be doing that and keeping our expenses super-low until we're both employed. My girlfriend does have a car already at home, so perhaps we could get by with only one car. I've only been to LA a few times and haven't seen much of a public transportation system there; I guess I always just assumed a car would be more of a necessity. I think the plan for now will be for both of us to secure work first, then see if we can find a place to rent in our price range that might allow me to cycle or take public transport to work.

I may cave and decide that I want a car. Hearing these responses it sounds like maybe cash would be the better option. I didn't know too much about used car buying/financing, so I did overlook the fact that with my situation I probably wouldn't be able to get that 2% financing on a used car. I had figured that if I was able to get financing so cheap, it would be a better option even after figuring in the deductibility of student loan interst (I checked yesterday and the loan is actually a brutal 8.75%). Onehappypanda, do not worry I was never ever considering buying a new car (especially one that costs $20k) with the debt that I'm in.

gooki

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Re: Student vs. Car Loans
« Reply #7 on: June 28, 2012, 02:37:48 AM »
I'd try living with the one car first, and start paying down that 8% loan today.

menorman

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Re: Student vs. Car Loans
« Reply #8 on: June 29, 2012, 11:49:43 PM »
Thanks for the help guys. We moved to Australia straight after graduating from Notre Dame and have been working here; our visas are up in a couple months so yes we do need to move back to the US. We do not have jobs lined up yet but are beginning that process; we are both earning just over 50k here and while we have good degrees, i doubt that we will be earning much more than that starting out in Los Angeles. We do however have a place to stay rent-free until we get on our feet, so we will be doing that and keeping our expenses super-low until we're both employed. My girlfriend does have a car already at home, so perhaps we could get by with only one car. I've only been to LA a few times and haven't seen much of a public transportation system there; I guess I always just assumed a car would be more of a necessity. I think the plan for now will be for both of us to secure work first, then see if we can find a place to rent in our price range that might allow me to cycle or take public transport to work.
The amount of places to live in your price range will drop drastically if you add a second car. Parking cars in the city both at work and at home can be a bit of a hassle. Choosing to live somewhere less in the city itself just for cheap/easy parking at home for will then quickly run you into the realities of MMM's True Cost of Commuting post. As far as public transit in LA, it isn't likely to be the best you've ever used. At the same time, it isn't completely incompetent either. Depending on your industries/job prospects, living in a suburb like Pasadena/Pomona/El Segundo/Fullerton/etc. that isn't exactly in downtown LA but is in close proximity to a Metrolink/transit line might also work out quite well. By living closer to the train station, one (or both) of you could use "active transit" to get to the train then ride it into downtown for work then leave in the evening. You also open yourself up to cheaper housing the farther you get from downtown LA itself, especially as you go east.

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I may cave and decide that I want a car. Hearing these responses it sounds like maybe cash would be the better option. I didn't know too much about used car buying/financing, so I did overlook the fact that with my situation I probably wouldn't be able to get that 2% financing on a used car. I had figured that if I was able to get financing so cheap, it would be a better option even after figuring in the deductibility of student loan interst (I checked yesterday and the loan is actually a brutal 8.75%). Onehappypanda, do not worry I was never ever considering buying a new car (especially one that costs $20k) with the debt that I'm in.
I agree with Xtal on this one. Loan interest is deductible, car interest is not and also comes with those pesky hidden costs of owning a car. Insurance is mandatory here in CA, and if the car is financed then the lien holder will require full coverage. Gas here in SoCal has dropped recently, but we were running in the $4.20-$4.40 range for quite awhile and I'm pretty sure it will be spending more time than not in that range going forward. Then of course, if your primary driving is in LA (especially anywhere near the 405), then your car most definitely will be in harsh conditions and it would be prudent to do maintenance sooner rather than later. However, after all that, IF you feel you must buy a second car, I'd recommend you head to a bank/credit union before you even start car shopping to secure a loan. That way, you don't even have to worry about screwing around with financing through a dealer. You could probably also get something private party, but the bank will likely want to glance over the car first to make sure it won't be a liability on their sheets.