In an effort to get us back on track for financial fitness, I’ve enlisted fellow writer Rachel Musgrove to help out by covering vehicle financing with our first-ever guest post. Rachel doesn’t usually write personal finance but her voice and tone are a great fit with Pennywise Family. Please take a moment to comment and let Rachel and I know what you think.
I remember seeing him drive up in that 1999, four door, green Chevy Malibu. He had me snagged from the start (I dig safety). At some point in our relationship he mentioned that he was leasing the Malibu, but I had no clue what he was talking about. As a matter of fact, I had no idea just how detrimental that a lease can be until we got married and I started doing the bills. That bugger was an anchor that weighed down our finances for years. With no warrantee to aid us, we were pinched into paying about 10k to fix three major break downs. The last time that I ever saw that Malibu, the water hose blew as the lot manager drove it onto the lease companies’ property. True story.
While you may have heard this already, I’m going to repeat it just in case: if you cannot pay for it with cash, then do not take it home. Think my story is a fluke and won’t happen to you? Let’s check out your options:
OPTION ONE: Leasing
Leasing is when you borrow money in order to rent a car for X number of years. Most lease options require a sum of money to be put down at the origination of the contract. This isn’t a portion of the money that you are borrowing; this comes straight out of your bank account.
One of the terms that every lease requires is for the holder to carry full coverage on the car. After all, it is their car and they don’t want it scratched. Lease contracts also give you a particular mileage that you must stay under or else they charge you per mile. The average lease will charge anywhere from .10-.25 cents on every mile after an average of 12,500 miles per year. So if you decide to drive to the grocery store one too many times and your mileage is, let’s say, 3200 over your limit then you owe the bank an additional $320-$800.
Then there are the licensing fees, which are more expensive according to the worth of your car. Oh yeah, and the incredible interest rates that loan officers will schmooze out of ignorant victims. Try on 10% interest on a $25,000 loan. Over the life of a 60 month lease, you’ll be paying roughly around $725/month for the kit and caboodle. When those 60 months are up, it’s time to give the car back. Don’t forget to put that top of the line insurance to use! If they find any scratches on the car, they will probably charge you more than the average bear to repair it.
OPTION TWO: Renting the car
I’m just doing this for the fun of it. If you were to rent a car from Hertz, they would charge you $770 per month. Oops! Did I forget to mention taxes? That brings our total to about $925 mo. And that doesn’t include insurance. It appears as if borrowing money to rent a car is savvier than a direct rental from Hertz. The only bonus, that I can see, to a direct rental is that you spare yourself the credit risk involved in borrowing. Either way, that’s an insane of money for transportation.
OPTION THREE: Cash upfront
The only downside to this option is that you actually have to have money to pay for the car. There are a few upsides, the first of which is that you can pick and choose the coverages on your insurance. There’s no one to stop you from turning down the medical portion of car insurance since you already have health insurance through your work. Why double?
You’re almost guaranteed to pay less in taxes (unless you bought a 2009 7 Series BMW with the cash that you’ve been hiding under your mattress) because we homo sapiens tend to suddenly feel cheaper when the hard earned cash is in our grasp. Since our car is a less expensive one, than what we probably would have chosen had we borrowed for it, the taxes dip as well.
And last, but certainly not least, if the kids scratch the paint with their bike handles or the dog wees a bit on the way to the vet, it’s no skin off your nose. Let’s face it: these things happen.
OPTION FOUR: borrowing to buy
This option is very similar to leasing except that you get to keep the car once you’ve paid off your loan. According to bankrate.com, the average auto load percentage rate is hovering right around 8%. So, with our imaginary $25,000 loan, you’ll be paying right around $950/mo on a 48 month loan (including taxes and full coverage insurance, which is required under the terms of the loan). Woah. How much are you paying a month for you housing? At that rate, you may as well just live in the car.
Taking in a car whose cost exceeds 18% of your budget is *ahem* not smart. So, unless you’re pulling in some serious cash and living at your parents house, you may want to come up with a better plan.
There is good news, though! No one will be looking to charge you for spilling coffee on the interior. You may have a conniption fit, though. You’re paying just under a grand a month on that bad boy.
OPTION FIVE: a bus pass
Here in Seattle, Washington you can score a metro pass for right around $100/mo. If you don’t have the cash to buy upfront, this is always a money saving option. Not only will you not be spending $800 bucks a month to drive someone else’s car, but your finances will be freed up in order to save for your own car. Now don’t whine about how it takes forever to get to work on a bus. Think of it as a good time to educate yourself by reading yesterday’s newspapers left behind by your seatmate. Not to mention the planet saving benefits!
Survey says: Don’t borrow in order to have a car in the driveway. You’ve gotta trust me on this one. If you do go with a lease, invisible people on the internet will call you mean names. If your friend was lending you their car, they would only charge you for gas. Good friends don’t even do that.
Is the bank your friend? The only reason that there business hasn’t cracked in our current economic climate is because they are making money off of fools like us. If you want to help out the bank, then go for the loan. If you want to help out yourself, you may need to start with option number five. And remember, cool chicks dig safety.
Side note Rachel–I once was telling someone about my job, and the guy said “you work for *him*” I said “yeah, you know him?” He said “Won’t ever forget him, he bought a brand-new Camaro from me with a suitcase full of $20 bills.” It made me laugh because it’s exactly the kind of guy this boss of mine was–we glued a penny to the patio outside his office once to see if he’d stop every day to try to pick it up. He did.
PHOTO SOURCE: PUBLICDOMAINCLIP-ART.BLOGSPOT.COM
