Comments on: I love the car, but the car can't love me back.

Question: I love the car, but the car can't love me back.

Anonymous — Wed, 13 Jun 2007 16:00:56 -0800

Should I sell my car? Am I doing the math right?

Ok, here's the deal. I'm in grad school, have approximately $5500 of credit card debt and a car that I owe about $4000 on. The car is a 2001 Toyota Prius in good condition, which the Blue Book says I could still sell for about $11,000. So if I sell it for that price, I'll be able to pay off the lien and have enough money left over to get rid of my credit card debt with about $1500 left over.

I live in a town where, although I can mostly bike and walk, life would be much easier if I had a car that could at least get me to the grocery store. So the $1500 would go towards a cheap older car for local driving. (It's a college town, so there's always someone selling one as they move away.)

This would allow me to save the $300/month that would have been going to my car/credit card payments and at the end of the year I should be up by $3600, instead of still owing about $6000. Did I do the math right? Am I missing anything that makes it a better idea to hold onto the car and pay off the credit card debt in a year when I'm out of school and have a job? I can continue to make the car payment/credit card minimum each month without straining my current budget, but it would be nice to have that money earning interest in a savings account. There's no danger of me letting the credit card debt build up again. The only downside I've been able to see so far is that when I find a job I'll want to get a car more reliable than the beater, so that would involve taking on some small amount of debt again to get a more reliable used car. On the plus side, though, I would have the money I've saved to use as a down payment, so the additional debt should be quite minor. Am I missing anything?

By: The Deej

The Deej — Wed, 13 Jun 2007 16:09:47 -0800

Plus, your auto insurance will go way down.

I think it sounds like a winner. You can always get a better car later. There's nothing wrong with having a "disposable car" for now. Your approach is very responsible!

By: SeizeTheDay

SeizeTheDay — Wed, 13 Jun 2007 16:16:18 -0800

Technically, your math is correct. However, with used cars, you always take a serious gamble. Compare that with a car that you've probably owned since it rolled off the assembly line and trust (because you know the driver and all of the maintenance done). When you buy a car for a $1000 or $2000, you really get what you pay for.

While I do think that considering your debts, you probably have more car than you can afford, you're also so close to paying it off that I can't help think that you should be able to enjoy the fruits of your labor. Just stick it out for another year, eat the ramen, and next year you'll be thinking, "Wow, I almost sold this thing."

By: ikkyu2

ikkyu2 — Wed, 13 Jun 2007 16:16:25 -0800

Your current car is a known quantity; you know how it's been taken care of and you know in general what you've historically had to pay in maintenence.

Your $1500 car is a mystery in this regard and you may find that if it is a lemon, or if it's been driven 100 miles without oil, or if it's been to backyard mechanics who've installed non-spec junkyard parts on it, that it may be a $1500 car that needs constant infusions of cash to keep running.

Of course you may find a $1500 car that works perfectly fine. The trouble is that you won't *know* whether you have for a few months at least.

By: caddis

caddis — Wed, 13 Jun 2007 16:24:31 -0800

It sounds like you have a good plan. Even factoring in the risk of repairs (count on a few) for an old car you still save money. Time to execute it.

By: commander_cool

commander_cool — Wed, 13 Jun 2007 16:28:18 -0800

If you're only paying off $300/month towards your credit card and car payments, you're probably in a lot worse financial shape than the "keep the car" posters are recognizing.

The answer to whether you have more car than you can afford really depends on your interest rate. How much of that $300 is principal and how much is interest?

You might be better off with a newish car for about the same price if you can get a low interest rate by paying off your credit card. For example, is a newer Prius with a $1500 down payment and $300/month payment schedule a possibility?

By: acoutu

acoutu — Wed, 13 Jun 2007 16:45:07 -0800

If you buy a cheap car, you will take on many risks. Yes, this might just mean new brakes or tires. But it may also mean that your undercarriage will rust out from underuse or that your engine will drop out because the last owner didn't service it as often as they claimed.

You owe about $9500, if I understand you. Your car is worth $11,000. Your assets are more than your debts, which is better than for many people.

If you hang on to the Prius, it will probably still be worth something like $5,000 in five years. In fact, you might be able to drive it for another 10 or 15 years. If you buy a used car, you may be ahead in the short-term, but you're going to need to maintain and replace it within the next few years. When you go to buy again, you may take another depreciation hit.

You're going to be finished grad school in a year. Talk to your bank about financing options. If you have an income (TA, scholarship, RA), they may be willing to transfer some or all of your debt to a lower rate loan or credit card. In the meantime, look for other ways to pay down your debt, if it's possible.

Don't get me wrong. I didn't buy a car till I was almost two years out of undergrad.

By: SeizeTheDay

SeizeTheDay — Wed, 13 Jun 2007 16:46:05 -0800

Two things to respond to commander_cool. One, $5500 in credit card payments, at 15% interest (just to approximate) would equal $70 in interest a month.

Second, and here's the more important point, car loans are typically setup as amortizing. That means that in the first couple of years that you pay off the loan, you pay much more interest than principal. As you get closer to the payoff date, however, you start paying far more principal than interest. Basically, banks have already collected what they're gonna get from you early on in the loan, and when you sell your car, the only real loser is you. Why? Because not only have you paid a crapload of interest to the banks, now because of depreciation, your car is worth (on the market) a fraction of what you paid for it.

I'm not trying to make a strong case for keeping the car. But I know what it's like to put all that money into one, and risk losing it simply to save yourself a headache for a year. I hate saying this, because it's rough, but you bought a car you couldn't afford. And now, you're (IMHO) about to make a dumber decision by selling it for a serious loss, just because you're a little hard up for cash. Tighten the belt, suck it up, and the car will be yours, free and clear, before you know it.

By: commander_cool

commander_cool — Wed, 13 Jun 2007 16:55:56 -0800

SeizeTheDay, there are so many interest-free or low-interest car loans available these days (if one purchases a car less trendy than a Prius) (don't get me wrong, I drive a Prius myself, but I paid cash on the barrel) that one is likely better off with $9500 of 0-6% interest debt than $5500 of 24% debt (which is almost never going to get paid off at minimum payments) and $4000 of 9% debt. And I suspect the OP is closer to, if not above, 20% than 15%.

He's not a year away from paying off $4000 on a car if he's only paying $300/month on credit card and car combined, like a lot of posters have said.

The 2001 Prius has held its value well up to now, but that premium is going to decrease as hybrid cars become more and more common.

The OP should likely be spending more on student loans (which are lower-interest and tax deductible) so he doesn't incur credit-card debt to begin with. See if there's a way to milk more out of that system.

15% interest is bad, but not so bad as to require drastic measures. But if your interest rate is 24%, it's time to get that monkey off of your back.

By: krautland

krautland — Wed, 13 Jun 2007 16:58:14 -0800

also: living in a large city means you probably have some local car rental company like zipcar or igo around that will let you do quick runs for a subscription fee.

By: davejay

davejay — Wed, 13 Jun 2007 17:27:04 -0800

If you have access to a cheap used car that you know the history of, go for it; you're making a good financial decision.

If you don't have access to a cheap used car that you know the history of, but you're mechanically inclined, go for it; you might end up making repairs, and the car won't last forever, but you'll still be ahead of the game provided your repairs/future replacement used car costs don't add up to nearly your monthly car payment.

If you don't have access to a cheap used car that you know the history of, and you're not mechanically inclined, but you can live well and happily without the car, go for it. A car-free lifestyle, if tenable, is a much more relaxed and inexpensive one.

If, however, you can't get a cheap used car that you know the history of, aren't handy, and feel like your personal well-being will take a big hit if you don't have a car...do it anyway. Here's why:

1. You'll get rid of that debt;
2. You can immediately buy a one-year-old Toyota Echo or equivalent -- with manufacturer's warranty still in effect -- for around $12,000. Your monthly payment won't go down, but you won't be making credit card payments, you'll have an economical, reliable car, and your insurance costs will likely be a bit lower vs. a hybrid. Oh, and how reliable are hybrids long-term? Don't they have high battery replacement costs after seven years, or something? I may be full of crap on that last bit.

The downside, of course, is that you'll be paying off $12,000 much longer than $4,000 -- but at least that CC debt won't be hanging around, which is mentally quite satisfying.

By: davejay

davejay — Wed, 13 Jun 2007 17:28:15 -0800

oh, and of course you can do all this but not buy a new car, try living the lifestyle for a bit, and if it drives you mad, go out and buy that echo or what have you.

By: davejay

davejay — Wed, 13 Jun 2007 17:28:28 -0800

er, YARIS. Sorry. That's what they call them now in the US.

By: cior

cior — Wed, 13 Jun 2007 17:42:11 -0800

Suggestion: Don't buy another car. My boyfriend and I don't own one (despite having $ in the bank, great salaries) and we're very happy with our lifestyle.

1. Riding public transit is a community act. We both feel happy and connected to our city when we use it. Even though our system is crappy, it's still a lot better to us than dealing with a car.

2. It's a neat thing you can do for the environment. Older cars use more gas, perhaps have worse emissions.

3. When you need groceries or a day trip somewhere, use a car share. Perhaps there is one in your city? Check out Flexcar, Zipcar, City Carshare or Wikipedia's giant list of car share providers.

By: jessamyn

jessamyn — Wed, 13 Jun 2007 19:56:56 -0800

Followup from the OP:

OP here with a few clarifications. I'm in a college town too small to
have ZipCar or another shared service, otherwise I'd definitely go
that route since I only use my car a couple of times a week at most.
I bought my car used from the original owner three years ago for
$10,000, so the current KBB price is still actually more than I paid
for it. Why did the previous owner let it go for so cheap? He was a
retiree and I think really just wanted to cut back on the number of
cars he owned. Anyway, I got a fantastic deal. My car loan is
through the local credit union and the payment is $188/month and I
have about 20 months left on my 5 year loan. Interest rate on my
credit cards is about 15%, so I pay about $100/month to pay the
minimums. Answers have been helpful so far! Keep 'em coming!

By: itheearl

itheearl — Wed, 13 Jun 2007 21:36:57 -0800

See if you can't get a lender that would be willing to re-finance your car loan, perhaps with a lower monthly payment. If your collateral is worth more than the amount you want to borrow, they should be eager to help you out.

Interest on two or three year loans is lower than longer term loans, and any car loan should be less than the rate on the credit cards.

By: coffeee

coffeee — Wed, 13 Jun 2007 22:05:53 -0800

how is your credit rating?
If it's good enough, you could sign up for a credit card with an introductory 0% interest rate and transfer all your debt onto there. Since the 0% interest rates are usually offered for about 6 months, you could tide yourself over till you get a job by repeating this process.

more information and good credit card deals can be found here: http://www.fatwallet.com/forums/

By: fieldtrip

fieldtrip — Wed, 13 Jun 2007 23:11:03 -0800

Coffeee's suggestion to transfer the credit card debt to a card with a lower APR is a good idea. But, I would suggest to do a lot of research first and pick the right credit card. There are tons of cards that will give you a low rate (or 0%) for 6 months--but, you don't really want to transfer your balance every 6 months. If you can find a card that has a low APR forever that is what you want. I have an American Express Blue Cash card with a 3% APR on a transferred balance-just cut up the card after transferring the balance and don't incur any more credit card debt (easier said...)

By: j-dawg

j-dawg — Thu, 14 Jun 2007 04:21:19 -0800

I'll join the "go car-free if you can" crowd. I finally made the decision a few months ago after dithering about for two years, and I've never been happier. Sure, you may need a car again later on, but if for right now the only downside is having to haul a couple heavy bags of groceries every week, that's not so bad.

To revisit your real question though, one potential downside to your math: Blue Book is not a reliable indicator of the real market value of your car. In most cases, you should expect to get 10-20% below Blue Book.

By: commander_cool

commander_cool — Thu, 14 Jun 2007 05:35:05 -0800

Note that if you have twenty months of $188 payments left on your car, you owe less than $4000 on the car, perhaps as little as $3500 or less. (Check with your credit union.) Sounds like you got a great deal on the car, and that you might be better off with the $11,000.

If you only use a car twice a week, how much would it cost to take taxis whenever you need a car? It might be cheaper than the depreciation (plus gas, insurance, maintenance) on the car you own.

By: commander_cool

commander_cool — Thu, 14 Jun 2007 05:36:39 -0800

"you don't really want to transfer your balance every 6 months"

When my ex-wife maxed out my credit cards, I transferred my balance every six months for a couple of years without any problems until I got everything paid off. I wasn't able to get all my debt into 0%, but I also had a lot more debt than $5500.

By: altcountryman

altcountryman — Fri, 15 Jun 2007 09:43:58 -0800

This is a tough one. Your logic makes a lot of sense, but you do take on some risk when you consider a cheap used car (as the Bottle Rockets say in Thousand Dollar Car, "If a thousand dollar car was really worth a damn, then why would anybody ever spend ten grand?")

While I hate to see anyone paying credit card interest, you've got to weigh that against the value that you lose if you sell the Prius, buy a cheap car, then need a better car when you graduate. Considering you got a really good deal on the car, it seems like you could lose some monetary value even though you'll save your interest payment, especially if you factor in some repairs that might have to be done to an older used car.

A lot of this is speculative and depends on how you'll feel about the different outcomes. I'd try to imagine yourself at or after graduation in each scenario, and see which is more comfortable - sold car, saved $$, debt free, need to shop for a car, or have some leftover CC debt, but have a decent, paid-off car.

It might be a horse apiece. The good news is that your debts aren't so high that either situation seems pretty OK, and. And you're clearly approaching personal finance in a sensible way, which puts you miles ahead of most folks.