Find a car, take out a loan, hand me the keys
In the summer of 2011, I bought a used Honda Civic. It was my first car buying experience. I had emailed a private owner through Craigslist, and found a time to meet and test drive the vehicle. After inspection and various checks at a local dealership, it was blessed by the car gods mechanics. Then and there, I decided to purchase the car for $11,000.
Naturally, as any indebted American knows, I didn’t have the funds to purchase a car. I was fresh out of college, with about $3,000 in savings. The only thing that made me creditworthy was my successful use of credit cards in college and a predicted income that could support the purchase of a vehicle.
The owner and I went to a local bank to see a notary and have a teller confirm the funds contained on my bank loan check. I wrote in the total purchase price and handed it over. In exchange, I was given a couple sets of keys.
The car was mine — all mine.
Let the car loan payments begin
At nearly $200 per month, my five-year car loan is difficult on my budget. Unfortunately, when I first purchased the vehicle, I didn’t really have a budget. My budget was based on my ability to receive $15-20,000 in student loans every year — despite my tuition being paid for by a graduate assistantship.
Every month I was bleeding red, as the car loan payments would take any surpluses. But even more, I still didn’t have a budget to stick to and stay accountable for. Instead of selling or never buying the car, I convinced myself that I needed this automobile — at this price and quality.
My choice to buy a 2006 Honda Civic bordered on the egoistic. The voice inside my head said, “You deserve this nice car, Sam.” But the burden of spending $200 per month on top of student loans that were costing me 6.8% APR was a rough combination. It contributed greatly to a precipitous fall in net worth.
I could never properly calculate the true cost of the car, my student loans, and where my total debt would be in the following days, months, and years. Having a car — or, more specifically, a car loan — complicated everything.
Consider other options later, buy now
The entire buying process is like a wild carnival — walk in and you’ll see rides, games, laughter, prizes, and more. Browsing for cars at dealerships makes you feel special. People suddenly approach you, wondering what you’d like to buy, drive, lease, etc.
Car buying — whether with a private owner or dealer — is an American rite of passage. We own about 250 million vehicles between a population of 319 million people. Everything about this process seems tailored to these expectations about ownership and independence — powerful cultural values.
This swirl of attention, cultural identity, and peer support affected me when I plopped the original $11,000 to purchase my Honda Civic. I only considered other options (i.e., cheaper vehicles or not buying a car at all) about a year into my car loan. It was then that I realized all the powerful financial consequences of my decision.
Think: Debt, burden, liability, and depreciation
I hate to be another consumer, loving an inanimate object, but I have a real affinity for my car. My Honda Civic has taken me all over the midwest. When I moved to Iowa, I packed everything I could into my car and gave away what was left. It’s been my trusty sidekick for a while now, but it’s time for us to depart.
I finally listed it on Craigslist.
With nearly $200 a month in car loan payments, inevitable depreciation, insurance costs, and other debts that are demanding my attention, it’s time to finally sell my car. Not only is it the frugal thing to do, but the car has become a real luxury for me — there are other ways (i.e., the free bus) to get around in Iowa City.
Hopefully I can sell the car reasonably soon. I’d love to be able to reduce my monthly bills and start saving even more. I came up with a little list of questions to ask before ever buying another car again. Maybe these will help you resist the urge to splurge or even sell your car!
Questions for the car buyer/owner/seller:
- How much will this vehicle cost you over 10 years?
- Do you currently have an emergency fund set up to handle accidents and/or insurance premiums?
- How often will you drive your vehicle and for what purpose?
- What size vehicle do you need?
- How do you currently manage without a car (if you do not own one yet)?
- What’s motivating you to purchase this specific car?
- How do you feel about the impact your greenhouse gas emissions will have on the environment?
- What would the car provide that a regular bike could not offer?
- How would your budget deal with a spike in gas prices or if insurance premiums rise?
- Will this impact how many hours you need to work or extend your period before retirement?
I own two cars. One is fully paid for and another has a loan on it. My car is the only way I can get around. We don’t have good public transportation in our area, so you don’t get to work without a car. While I know car loans can be bad, I got mine at less than 2% interest, so I pay very little on the loan. The other car is just my play toy, but it was budgeted for and paid for with cash.
My question is, if you are selling your car and still owe payments, then doesn’t the bank own your car? In my state and many others, you can’t legally sell your car until you actually own it with a clean title. If you don’t pay off the loan here and you sell the car, then the new owner can’t register it until you pay off the loan and the lien is released. I don’t know the specifics, but figured I would point it out.
First of all, less than 0%?! Holy cow is that impressive. Well done. I’m around 3% for my car loan, which isn’t too bad. The problem for me is that the interest rate is artificial, as the depreciation and maintenance costs end up becoming far more expensive. Effectively, the car loan is only 3%, but the car is consistently losing money. The losses are larger.
But you ask a fantastic question. There are a couple options here. I believe (but will definitely double-check) that the bank will give the liened title for a sale, and then I’ll immediately owe the bank the principal. Otherwise, I could possibly scrounge the funds temporarily to aid in the exchange. I really appreciate the question, as it’s a point of ignorance. Need to do some research on this! 🙂
Sam
It is not that easy owning a car, is it? From the moment you purchase it, it would entail expenses. How necessary is owning a car anyway perhaps depends especially on the budget.
Jen,
You’re right. It’s a combination of budget and community, public resources. I’m in a city that borders on needing a car. I’m going to try and go without it for right now! 🙂 We’ll see what happens.
Sam
At least you bought a reliable car for a good price. Imagine being one of those people who buy luxury cars on a whim. Forget that the price would easily be $10,000 higher, but insurance and maintenance costs would be outrageous. And plus once you go luxury, it’s hard to go back. That’s why I plan to never get a luxury car. That would be quite a hit to your net worth.
Good luck selling your car.
Syed,
Hah! Absolutely. You can’t beat a Honda Civic for reliability. I’ve only had one issue: needed to replace the battery. That’s about as minor as it gets! Runs fantastic and is fuel efficient. Can’t beat it! Feel free to snap it up. 😉
I can’t see myself buying a luxury car. No, I’m looking to get a bike right now. Haha.
Thanks for your comment!
Sam
I feel like I should have read this earlier. If I have read this, I might not have purchased my car or have chosen a different type of a car. I bought one on May 21st 🙁
The questions that you provided seem to be really meaningful for me. I had to weigh up the cost when I don’t have a car and the cost when I have to pay my five-year car loan. Finding someone who gives me a ride has been really hard for me because my social network here is very limited. Asking help to other people so frequently and not being able to provide any help for them made me seriously feel burdened. I didn’t want to take a taxi and pay expensive taxi fare any more. Anyhow, after reading this, I feel somewhat regretful not buying a cheaper and smaller one!!
Oh, If you’re interested in a bike library, check out the Iowa City Bike Library. I borrowed one and used it. What you need to do is just putting a deposit, having your own bike for a certain period time (6 months), and geting back the deposit!
Yun,
Thanks for your comment! All is not lost just because you bought a car! 🙂
I definitely understand there are pros and cons to having a car in certain cities. It sounds like you took some serious time before buying your car, and that’s the really important part. For me, I bought my without thinking enough. That ended up costing me more than I could really afford.
I’m going to be getting a bike soon. That’s a wonderful idea! Thanks so much.
Sam