A couple weeks ago a reader left a comment on my Facebook page asking me what I thought about financing a car and how much I’d spend on a car.
I had to think about it for a minute.
You see, when I bought my current car I was pregnant with my first child and was in desperate need of something that didn’t break down every five minutes. So I spent $18k and financed on a five year term at a 9.25% interest rate. I soon regretted that decision.
A little while after purchasing my car I flipped my first house. I used the profit from that to pay off my car. I hated having a car payment with a passion.
But would I do it again?
Here is what I would and would not finance.
Would: A Car
I would finance a car again although I’d do it more intelligently.
Right now my grand plan is to drive my current car until she dies. And since I’ve had her for six years and she only has around 90k miles on her, I think she’s got another 6-7 years’ worth of life in her.
After that?
Well, ideally I’d like to think that I’ll be a lot better off financially in 6-7 years and have the cash to buy a new car. But if not, I’d be okay on financing under these terms:
- Purchase price 10k or less
- Find a super deal on a car
- An interest rate at 5 percent or less
- A maximum two year loan
I hate car payments. But if I was in a situation where I really needed a car and didn’t have the money to buy with cash I think financing under my set of rules is okay for me.
Would: A House
Another thing I’d definitely finance is a house.
Let’s be real. At my current savings rate it might take me twenty years to save up enough money to pay cash for a house. But in twenty years houses will probably be way more expensive so I’d still be out of luck.
I want a fixer upper. Something that is pretty ugly now but that I could completely transform over the next decade or so.
That’s what I like.
And the good thing about that is ugly houses are usually a little bit cheaper.
I would definitely finance a house but these would be my ideal conditions:
- An interest rate of five percent or below
- A maximum 20 year mortgage
- I would need to put 20% down (No way I’d pay PMI. That’s a complete waste of money.)
Would: Investment Properties
One of our good family friends is a real estate agent and he works with many real estate investors.
His number one advice is ALWAYS use OPM (other people’s money.) He says keep your own cash as a cushion and get financing from the bank. And since he works with many successful real estate investors I take his advice to heart.
(He also suggests buying investment properties under an LLC which I plan to do.)
Here are my conditions for financing an investment property:
- Rental property – would have to produce positive cash flow after figuring in mortgage payment, insurance, maintenance, vacancies and property taxes. That’s it!
- Flip property the same as rental property. I’d figure up the cash flow scenario if I was to rent because if I ended up not being able to flip, it would become a rental.
What I Wouldn’t Finance
Furniture – I did this when I was first out on my own. What a huge mistake!! I feel like this is one financial blunder that comes with a “poor” mindset.
Companies take advantage of low income families by charging triple to quadruple the price by giving weekly/monthly payments over buying in full. Please don’t do this. Promise, you won’t do it? Get free furniture from Craigslist or hand me downs from friends and family and save to buy new furniture with cash.
Except for one chair I bought every single piece of furniture I own is a hand me down.
Clothes – Again – not worth it. Don’t buy clothes on your credit card unless you can immediately pay that sucker off. Are clothes worth going into debt over? Heck no.
College – This is a personal decision. I can definitely understand why some people take out student loans however, I wouldn’t do it.
I love what I’m doing now and there’s no degree I could get that would allow me this much flexibility. I have the perfect career and I didn’t go to college. Plus if I did go back to school I’d start at the community college and pay cash.
I am definitely not saying that you shouldn’t go to college. However, start by looking for scholarships and grants.
Lawnmower – Another thing that I think is ridiculous is the financing of a lawnmower. I mean do you really need the latest and greatest zero turn mower, or would an older model off of Craigslist do the job? Not worth the debt.
Home Renovations – I absolutely love home renovations. Fixing up houses is one of my biggest passions. But would I go into debt to have granite counter tops and stainless steel appliances? Absolutely not. How would I be able to enjoy a renovated room if that room was causing me financial stress? Answer: I wouldn’t.
Obviously, we’re all different. My would’s and would not’s may look completely different than yours and that’s okay.
What would and wouldn’t you finance?
I completely agree with this list, especially not buying a house before you have the 20% down payment! We’re paying PMI now (long story, but we had to refinance to change the title of the house when the other co-owner moved), and it’s so irritating. I did just buy a new car, which wasn’t in the original plans, but we got a 1.9% interest rate and I desperately needed the car. Still, my husband has an Equinox like you do, and he’s going to drive it into the ground! After that, we’ll see if we can survive as a one-car family, and we’ll definitely save money for his next car.
I can imagine how frustrating paying PMI is. My mom has to pay it and I think it’s around $150/month for her if I’m remembering correctly. That’s a lot of money!!
And I’m one of those people who understands that people actually need cars. I love the early retirement blogs that talk about walking or riding bikes everywhere but where I’m from that’s just not feasible. You need a car to get back and forth to work, the grocery store, etc. And with interest rates being so low I don’t necessarily think it’s a bad thing to finance a car.
In my experience Equinox’s are pretty good cars. I’ve had very few problems with mine and I definitely think she has several years ahead of her before she dies.
I have noticed that the male personal finance gurus like Dave Ramsey tell you to drive a 2k beater. I drove one of those to and from work. I had to go thru a bad part of town and it was scary! There are some personal safety issues here! So, I think it is okay to buy a car with financing. However, that does not mean that you go to the car lot and go crazy!
C
I 100 percent agree with you.
And here’s the thing about driving a 2k beater: you’re going to spend a ton of money in maintenance and repair. Heck, you might even have to replace that 2k car every year or so. Is it worth the frustration?
To me it makes more sense to look at a car as an investment. (And no not as in a money making investment. In that sense cars are the worst investments EVER. They only depreciate.) But in the sense that you’re going to be driving this thing as long as humanly possible. So doesn’t it make sense to shell out a little more money to find a car that will stick with you for YEARS instead of buying a beater every couple of years?
A lot of the “financial gurus” make such generalized statements and give out some pretty awful advice in my opinion.
I think that is a generalized statement and not really good advice… I agree with pretty much everything you posted except for a car less than 10,000. It’s a nice thought and it’s possible but most cars in my area that are 10,000 or less have about 100,000 miles on them even more sometimes… you still potentially could be buying someone’s problem. depends probably on if you have someone that can help you buy it.. My sister just bought a suv jeep for 15000 it broke down yesterday after they have only put 3,000 miles on it off of craigslist. I drove to pick her up and then drove to her house and back to my house total of three hours in my old junker. LOL
Just curious….where do you live? I was reading comments on another blog the other day where commenters were saying used cars in their area were as much as new after registration and fees. Just curious if their are fees like this in your area?
All you have to pay here is 7.25% sales tax and title which isn’t really anything.
I definitely wouldn’t want to pay 10k for a car with 100k miles on it!! I guess with cars you never really know what you’re getting. I feel bad for your sister!
The key to buying a 10k car is that it does take a long time to find one. You have to look before you really need it. There are tons of cars in my area that are 10k and 110k miles. A Subaru, honda or toyota can go 150k or 200k. I feel blessed to have my old Honda CRV. My brother in law loves looking at cars and he found it for me. 79k miles and 9k. It is truely a blessing.
Honestly, I can’t really get it when some people say that their clothes are invested. They buy designer and branded clothes and bags, but for me, I would save more and use it to invest a property especially rental property.
I may have to finance a car soon. I have no problem with it as long as I could get the interest rate under 2% and I could bet a 100,000 warranty to help with any repairs. I have had my car since high school and its is going to be time to upgrade. I don’t really feel bad for that. I need a car for work and I know I am going to get a reasonable car.
I wasn’t talking about fees and taxes just pricing. 😉 I’m not saying you can’t find a car with under 100,000 miles for 10k. but unless you buy a small car OR an older vehicle with low miles they are going to have about 80,000 and more for a vehicle around here. Lots at 10,000 are over 100,000 miles for 10k. I live in the Twin Cities metro area.
If you have someone that knows cars though you probably can find a better deal.
Really good list especially on what not to finance. Clothes and furniture are luxuries that you should only purchase when you have more than enough than what you think you should have. And there is always no good reason to put yourself in debt with wants unless you are sure you can actually pay it off on time without affecting your monthly budget.
I would also finance for an investment property, house and lastly for a car. I really want to have a rental property in the future, I see lots of people who owns a rental property and they said that it was their best decision when they purchased one.
If possible, in hindsight, I would have done a lot more to avoid student loans. I couldn’t have gotten into my field without that piece of paper, but paying that monthly bill all of these years later makes me cringe a bit sometimes.