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The Frugal Guide To Buying A Used Car

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Volkswagen VW Jetta Used Car Buying

I have a confession to make, but I’m a bit embarrassed to admit it. I bought a used car. Please don’t judge me for this news update. Would you allow me to explain why a frugal guy like me did this and how I made it as frugal as possible? Pretty please?

For starters, I’m moving out of Iowa City this year to another city nearby. The rents are cheaper there, but it’ll require a little commute. Without a car, the move would be impossible. There’s no regular, public transportation available. I wouldn’t be able to make it to school and work each day.

I fretted over this decision for quite some time. I remembered how stressed and awful I felt with a car. It encouraged me to be lazy — driving instead of biking or walking. Additionally, the car loan I had left me nearly penniless each month. I couldn’t save much.

For the last year-and-a-half, I went without a car. I sold it, paid off the remainder of my car loan, and began saving hundreds of dollars by biking everywhere. The commutes to grocery stores, school, and work were tiring, but I was saving every pedal of the way. In fact, over this last 18 months, I saved thousands of dollars.

Now, I’m re-entering the world of car ownership. To make this purchase, I needed another car loan. I paid off about two-fifths of the total price and financed the rest of a $10,000 2014 Volkswagen Jetta. Let’s dig a little deeper into why I chose this car and how I made it as frugal as possible.

Make time for the search

When someone finally decides to buy a car, two pressures tend to take hold: I want it now and I need it now thinking. The want it now has extra time to find a good value, but feel compelled to be zooming around in one as soon as possible. The secondary, need it now group has not left enough time to thoroughly search. They don’t have the luxury of looking.

If at all possible, plan for a car search. Begin it as soon as you get an inkling you’ll need a car. For me, I knew about 6-7 months ago a car would be needed. I started browsing Craigslist, eBay Motors, and dealers’ websites for more information about what was available, pricing, and distance from me.

Then, for every car that sparked my interest and seemed like a good deal, I researched price expectations, reliability information, ratings, and true cost of ownership. Around the same time, I visited my car insurance’s website to calculate expected monthly costs for every possible iteration. By the end of my 6 month search, I knew my stuff — I just needed the car.

Use a credit union for financing

Big banks have one motivation: big profit. When it comes to financing, they’re usually a last resort — regardless of credit history, score, or income. Unless you are immensely wealthy, big banks can’t help save you money on a car loan.

When I was gearing up to buy my first car a few years ago, the first trip I made was to Wells Fargo. I’d been a banking customer with them for 6 years at the time. Curious to know what they’d offer me, I asked the loan officer and was told I should expect double-digit interest on any loan duration or amount. I laughed out loud at the absurdity, and asked if those were the final offers. They were.

I found solace at a credit union; PenFed, to be more specific. Credit unions run on shareholders, much like banks do. The key distinction is that shareholders are credit union members. If you open an account, you usually become a shareholder. You can vote on new board members, propose programs, and advocate for fairer pricing. Credit unions are motivated to help their members succeed. They’re not in it solely for the profit.

With my used VW Jetta, PenFed was able to give me a 2.49% car loan for four years. Even though I’m spreading the remainder of the car over four years, the payments add up rapidly. Fortunately, little will be going back to the bank as interest.

Find rental/fleet vehicles

When you look at the price I paid versus the expected price for a 2014 VW Jetta (upwards of $12,000 for one in this condition), you might wonder, how the heck did he do it?! The key was finding a rental vehicle in this instance.

There’s an underlying assumption that rental and fleet vehicles get driven harder than personally owned vehicles. In fact, it’s pervasive if you look into buying rental cars. Commenters and “experts” weigh in to tell you what they think, but the best advice I’ve seen comes from Bankrate.com:

While we all know rental cars have somewhat of a bad reputation as cars that have suffered abuse by their renters, there’s no guarantee any used car you buy hasn’t been abused in the same way unless you personally know its history.

It simply comes down to logic and critical thinking on this one. All used cars get driven, right? When we buy a used vehicle, we assume either the individual owner or dealer is telling the truth. Some rental vehicles get driven hard, and some non-rental used cars get driven hard, as well. There’s really no way of knowing.

Amidst the murkiness, you can often find a good deal. Whether true or not, people tend to discount these cars and the dealers usually do, too.

Find a friend — don’t go alone

Whether you go to a dealer, a Craigslist creeper, or your neighbor, scoping out used cars can be tricky. It’s hard to check over an entire car at one look, and oftentimes test drives don’t allow the potential purchaser to spot the defects. This is a simple instance where four eyes and two brains are better than yours alone.

When I went shopping, I tried to bring a good friend of mine who also happens to know cars. That allowed me to assume a role when at dealerships and individual’s cars. I could play stupid, as my friend checked under the hood, around the brakes, inside the wheel well, etc. This team effort allowed me to focus on what the seller was saying to pay careful attention to the words shared.

Additionally, having two people present makes a more convincing argument. When you’re negotiating a final offer, having an “expert” around can help convince someone to lower the amount. It’s a game of triangulation against the seller, and if you can perfect it, the prices can become much better.

Alright, now I’d love to know what secrets you have to securing a good value when shopping for used cars. What tips do you have?

Should We Put An End To Mortgages?

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Apartment Complex

“The reason they call it the American Dream is because you have to be asleep to believe it.”
–George Carlin

Mortgage loans have been around for centuries. In the late 1700s, colonists used loans to encourage settlement and economic expansion on federal lands. The leaders of the new world parcelled out land, while encouraging lower classes to settle and build. Ironically, these lands were calculated, bought, and sold as if these new owners always laid claim to the land — denying Native Americans the right of ownership, executing them, and pushing them further and further West.

Nonetheless, the colonies and post-Revolutionary War period in America included basic mortgage loans. Eventually, in the 1900s, these loans grew in popularity and necessity. Homes, condos, and bare land was more expensive and unaffordable for the working classes. Increasingly, people needed financial support to invest in real estate — to find shelter.

Thankfully, banks were available to help everyone out. Without financial institutions and their mortgages, it’s unclear what would’ve happened. In today’s economy and real estate market, most people are unable to afford a house without credit. On the surface, it seems that many Americans would be homeless or forced to forever rent — unable to own. We’re forced to choose mortgages without a substantial alternative.

But let’s hypothesize for a moment. What would happen if mortgages suddenly disappeared? What if they weren’t an option for the impoverished, working classes, or even middle classes of America? What if banks were unable to write even one more loan?

For starters, it’s likely the entire real estate market would collapse. The decimation of domestic markets would domino throughout the world, and cause an economic meltdown. People would be unable to eat, shop, or pay for their continued existence. Landowners would quickly benefit from skyrocketing rental prices, but huge swaths of population would be forced to seek shelter elsewhere. The working classes would need to leave en masse from cities.

The end of mortgages would spell destruction and terror for the financial institutions that profit from their existence. Banks — big and small — would go belly up. Insurance companies would cease to exist. And a slew of related industries would (i.e., from appraisers to real estate agencies to utility companies) struggle to continue. The stock market would follow the steep declines elsewhere as the economic engine would slow to a halt. Money would be stuck. Over time, trillions of dollars would disappear — poof! — from the world markets. They wouldn’t return, either.

My, how powerful a few documents can be! Imagine how one contract prevents global catastrophe — end times. Moreover, that this agreement separates people behind walls — street and shelter.

Mortgage loans make little sense, though. The continued propping up of home prices through financial instruments ensures working classes spend the rest of their lives working. Renting isn’t much better either. With little incentive to build affordable housing for working classes, builders have increasingly constructed luxury condos for upper middle classes and beyond. A recent Yahoo Finance article highlights this shift:

“…a growing number of Americans must spend more than 30 percent of their income on rent — a level that the government considers financially burdensome. Over the past decade, that number has jumped from 14.8 million to 21.3 million, or 49 percent of all renters.

“A surge in apartment construction has done little to help address this problem because in many metro areas, a large proportion of new apartments are concentrated at higher-income levels. The median rent on a newly built apartment was $1,372 a month in 2014, about $500 more a month than what about half of renters could afford without being financially burdened.”

This story exemplifies the catch-22 for working classes: either fork over astronomical, burdensome amounts in rent or “purchase” a home through mortgage loans. Either way, banks and other financial institutions are complicit in the bubble. They own your future. Unless you’re independently wealthy, you lose.

Increased access to capital through mortgage loans encourages people to buy bigger homes than need at prices they can’t afford. Homebuilders respond by building bigger homes and charge more for new developments. Families and households buy more to fill bigger homes, as well. The cycle is vicious, expensive, motivated by consumption, and facilitated by an endless supply of cheap money via the Federal Reserve. It’s the antithesis of minimalism, frugality, and simple living, but we have little choice than to participate.

As the story continues, wholesale gentrification of vulnerable communities can occur. Those with poor credit and/or unable to make down or monthly payments must vacate. To refuse the paradigm means leaving good neighborhoods and schools. Home prices are propped and buoyed by the continued investments of the masses. Banks encourage people to spend more than they can afford on spaces larger than they need. And all I can think is, “Who were these mortgages meant to benefit?”

A mortgage is less a contract with your bank, and more a contract with your employer. To take out a 30-year mortgage loan is a financial conscription to work. It’s a benefit to your employer and guarantee for decades. You can’t stop working, as the consequence would be disastrous. Mortgage loans are the perfect economic engine for the wealthiest of our economy. They can make vast sums from borrowers and sit back to watch their money multiply.

Sadly, we’ve accepted these rules. We’ve cozied up to banks and pledged to pay them back for half our remaining lives.We’ve played the game by repeatedly checking FICO scores. We’ve shown them our good credit (when possible) as examples of personal responsibility, when it says nothing of systemic bias, racism, and uncontrolled job loss.

We are left with few choices. I dream of resisting the system and regularly think about living in a van or tiny home, but I’m afraid my partner and family wouldn’t care for this reality.

As a future psychologist, I’ll be lucky to make $65,000 to $75,000 to start out, which would necessitate participation in the mortgage loan game. And this says nothing of the student loan debt that would be necessary to pay off six years of doctoral education.

No house could be purchased outright unless I worked for decades and lived in a passenger van in the meantime. Yet, one of the most fundamental psychological needs is shelter. Without it, we cannot talk about saving money, cooking at home, or living well. People need the safety of shelter, but over the centuries, our homes have ballooned in price and size. Our inflated budgets have been decimated by a simple financial tool that we accept as a necessity for existence.

Nobody seems to bat an eye. Nobody says this is senseless. Nobody resists the status quo. Rent or “buy,” the same trap is set.

So, as preposterous and provocative as it might sound, what if we killed mortgage loans?

3 Vital Decisions for Financial Fitness

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Winter in Iowa

Winter is here in the Midwest. A breezy, 20-mph wind cuts through everything. The roads have an icy sheen. My breath is eviscerated as I walk out the door. I choke. My commute — a brisk jog — is bone-chilling. With my backpack rustling back and forth, I gingerly move from foot to foot. Frankly, despite the cold and madness of running in work clothes, I’m going to miss these days. I’m going to miss the toughness of this work and school routine.

I can feel my time in Iowa City is winding down. Over the next year and a half, I’ll move on to my internship (similar to a medical doctor’s residency). That internship will be in a new location — new peers, new streets, new names, and… new weather. As one chapter closes, another opens, right?

The decisions I make today will greatly affect where I end up — physically, emotionally, and financially. The next couple years include challenging financial concerns and I want to openly process them with you. There are three domains of my life that I’d like to consider: possibly buying a car, planning for travel/lodging costs associated with internships, and potentially moving three times in three years.

To buy, or not to buy… a car

One and a half years ago, I said sayonara to a hefty car loan and excess liability. The 2006 Honda Civic coupe was cool, efficient, and reliable. But paying off an $11,000 car loan with little money leftover to save or afford repairs felt dangerous. So, I sold it.

Since then, I’ve used my bike and feet to travel nearly everywhere. While I didn’t need to lose weight, the decision has kept me svelte and fit. When all you have is your physical health to get around, you tend to take better care of yourself. Simply put, I’ve enjoyed being car-less — it’s freeing.

I don’t lavish browsing Craigslist and other used car websites, but I’m increasingly sneaking peeks. In the next couple semesters and moves, a car could help me immensely. I’ll use it to go grocery shopping, visit my girlfriend, and potentially move into a more affordable housing complex. Without a car, these tasks become exceedingly difficult.

Now more than ever, I’m conscious I might be trying rationalize buying a car. That can be financially disastrous. Thankfully, I’m engaged in a careful consideration — unlike my first car purchase, which includes:

  1. Talking openly with family and friends
  2. Browsing used car sites patiently
  3. Scoping out values, which will hold resale and reliability
  4. Considering two price points: dirt cheap and car loan levels
  5. Reviewing how I could potentially get by without a car

I’m motivated to try and buy a car in cash, but heavily limited by my bank account, the stock market’s recent decline, and the two following tasks: internship applications and two apartment moves in the interim.

When I look at my bank accounts, I’m seeing a tiny number: $3487.93. While I’m happy and privileged to have a positive number between my checking and savings accounts, I’m concerned. I make little net income each month as a graduate student. Buying a car would drain nearly all of my liquidity. It’s forcing me to be careful — along with the reminder that I hate debt. I desperately want to stay positive in my net worth. If you’ve got some special advice about car buying or an offer I can’t refuse, hit me up!

Let’s talk about your future, young man

My time in Iowa City always had an expiration date. Graduate school is a relatively fixed duration of 5 years here and then a year-long internship — 6 years total. Afterwards, it’s time to finish up the requirements and look for professional opportunities. And this final transition can be painfully expensive.

In 2011, the average out-of-pocket expenses for applying and traveling to internships cost doctoral students $1,800. When asking classmates, they’ve cited costs around $2,000-$2,500 nowadays. With this financial burden in mind, and aforementioned funds, I’m in a bind. In the best case scenarios, it seems I either use a major portion of savings towards a car — with little remaining for internships — or dedicate it towards internships and remain without a car. At this point in my life, neither sounds smart.

Worse, I might have to take out a car loan to afford the internship experiences or a student loan to afford everything else. Those are both worst case scenarios for my financial present and future. I loath loans and cannot envision them being part of a healthy budget right now. These aren’t home mortgages; rather, complicated instruments that encourage spending, manipulate critical thinking, and have led me into deeper holes.

One thing I can do is redirect some poorly performing investments into internship savings, follow a close food budget for the next year and a half, and pour every extra penny into internship savings. With this drastic action, I might be able to buy a car in cash right now, while continuing to save for this decision. This version is an ideal, though. I’ve learned that financial decisions are often controlled by unexpected and unpredicted events, but I can try.

Moving out, moving on

After four years of easy living in graduate student housing at the University of Iowa, I’m dealing with one of the sadder moments of my time here: being forced to move. Financially, the current apartments I live in have become financially burdensome. When I moved to Iowa City, rent was a competitive, amazing $435 per month for a one-bedroom apartment. Compared to the greater community, rent was dirt cheap and offered month-to-month leases.

Two years after I moved here, a private company built new buildings and prices skyrocketed. Next fall, rents will be $999 for a one-bedroom apartment. That’s $564 in rent increases. I can’t afford this place anymore. It went from graduate housing to luxury living for staffers and University of Iowa faculty making far more than fixed-income students. While complicated, it’s a symptom of the privatization of public resources and universities.

Despite the previous increases, I’ve stayed for consistency and friends. Now, it’s time to move out and on. I’m looking further out from the city center. Prices would be lower and I’d be closer to grocery stores. With my final year in Iowa right around the corner, this is an inevitable and financially necessary decision.

Although, despite savings in rent prices each month, I’ll need to afford moving costs and rental deposits. Even in an effort to save money, I’ll need to spend some. Oh, the irony! And the situation becomes even more challenging: over the next three years, I’ll need to move three times. Moving costs and new rental deposits will be a theme for my life temporarily.

In short, money is tight. Three domains necessitate savings, planning, and careful consideration. Purchasing a car, financing internship applications, and moving will drain my savings, but I’m dedicated to avoiding debt and making smarter financial decisions. Previously, I would’ve made rash judgments and rationalized them as “completely necessary.” I would’ve said “I need to buy this [insert expensive item here].” Today, my financial state of the union is better than ever, but precarious. I have to be careful and decisive — rational and reasonable.

The Curious Case Of Rising Interest Rates

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Watch your savings rate!

On Wednesday, December 16, the Federal Reserve opted to raise interest rates for the first time since 2006. The Fed pointed to healthy economic indicators – specifically, job growth – as the key motivator for action. Chairman Janet Yellen explained that rates would rise from 0 to 0.25 to 0.25 to 0.5 percent. Experts are suggesting this is just the beginning for rate hikes.

I’m not a Federal Reserve expert, fan boy, or aficionado. Nor have I spent years chastising its existence and advocating for a gold standard (I’m looking at you, Ron Paul). But I fundamentally understand the borrowing window. When the Fed keeps rates low, it makes borrowing cheaper. Vice versa, higher rates tend to make borrowing more expensive. Rates can also discourage or encourage greater savings rates.

The Federal Reserve seems to hold the reins on savers. As an advocate for frugality, I wondered how banks had changed their rates since last Wednesday’s decision. CNBC reported that Wells Fargo, JPMorgan Chase, and U.S. Bancorp “almost immediately” changed their “prime rate” (for borrowing). With a higher prime rate, new borrowers would see more expensive car loans, credit card interest, and home mortgages. It should bring new revenue to the banks, too.

A couple days ago I received a notification regarding my American Express credit card. Despite perfect payments, a near-800 credit score, and constant monitoring, my interest rate was being changed. The credit card would now inflict a 22.49% interest rate for carried balances. In other words, if I purchased something and wanted to pay it off over time, I’d be taxed an extra 22.49%. The move corresponded perfectly with the Fed rates, as my interest rate was previously 22.24% (still astounding).

When it comes to credit and borrowing, the changes were swift. Curiously, my savings rate remains unchanged. I still receive 0.10% and 1.00% for my Ally checking and savings accounts, respectively. These sit stagnant. While I understand that banks have an interest in protecting and securing greater profits through higher borrowing rates, I’m struggling to see the same “immediate” benefits for savers. Where is this additional quarter-point interest rate to encourage more savings?

It seems banks play the best of both worlds. When rates lower, they advertise and sell huge amounts of loans. Suddenly, the economy becomes bloated with cheap money and people spend instead of saving. And then higher rates create reason and rationale for banks to raise loan rates, with little care for updating savings rates.

Unfortunately, as banks keep rates low, the average saver suffers. Many low income and vulnerable populations rely on strong savings rates, but haven’t received them for years. Heck, I remember a time when my savings account paid 2-3% interest. Those days seem to be long gone — even with higher rates on the horizon. Today, savings rates can’t even keep up with modest inflation. Maddeningly, putting more in savings simply means you’re losing money each month!

As we consider this double standard in the banking world, let’s consider what we can do and where there’s money to be made:

1. Stay on the capital side

There’s power in capital. Whether you’re lending cash through peer-to-peer lending programs or investing in rental properties, those who put their money to work are handsomely rewarded. The game doesn’t shift much when interest rates change moderately. However, if you don’t have much savings, it’s important to build a little egg before engaging in these tactics.

2. Invest your spare cash

If you’re unable to buy real estate or invest larger amounts in lending, make a simple portfolio to invest your spare cash. There are various platforms that can automatically invest spare change, but nothing is easier or cheaper than opening a Vanguard account and choosing their exchange traded funds (ETFs). I’d recommend Vanguard Total Stock Market ETF (VTI) and Total Bond Market ETF (BND). Together, they afford rapid exposure to the markets with reduced risk due to diversity. Depending on your risk allowance or aversion, portfolios can be split 50/50, 60/40, 80/20, or even 90/10 between the VTI and BND. You’ll likely get a fantastic expected return no matter what you decide — in comparison to savings rates.

3. Advocate for higher savings rates

Unfortunately, the default — savings accounts — are too miniscule to help people who need it most. Despite the Fed’s decisions to raise interest rates, it seems that many interest bearing cash accounts aren’t receiving the benefits. As banks continue to hit record profits, there seems to be some wiggle room for better interest rates. Advocacy isn’t often talked about in personal finance, but speaking out and up is one of the most effective ways to change situations. Write your representatives in Congress and tell them you are waiting for banks to reward savings. Tell your bank that you’re looking for alternative locations for your money, and maybe even leave for a credit union (as they tend to pay better rates).

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