Tag Archives: car financing

A Retired Couple’s Financial Nightmare

Good morning George:

My husband and I are both retired. We own our house with no mortgage. But we have a line of credit of 27,000 on it (at prime plus 1 and it keeps going up)….we have a zero % loan on a truck with 24,000 still owing for another two years. We do have a savings account of 45,000… We both receive a OAS and CPP each month ($ 2,600 total ) but unfortunately our truck payments are taking just about ½ of that…..we are doing our best to live on our pension incomes without taking too much of the savings each month 😊

My question is because of our age do you think  that we should pay the truck off now  out of the 45,000 saving account then we’d have the truck payment gone and have more income to do more with our lives while we are still reasonable healthy to do so….

We now realize buying that truck and tying ourselves up for 6 yrs. was a BIG mistake ☹ but the damage is done and horse is out of the barn…

 

OK, a few things first:

-This email hit me really hard and was rather depressing for a number of reasons.

-I’m sharing it, and talking about it, because it is not an isolated story, but quite common, and getting more so for a lot of seniors.

-The numbers have been rounded to not make it too complex to walk through.

-When I share the odd time that the $20 Money Tools book will save you a hundred bucks on literally every page, I KNOW this couple would never have made the truck purchase or likely have run up the credit line if they’d read either of those chapters first!

Good news: Everybody “sold” you and has made a bunch of money at your expense! The bank won because you’re in a huge financial trap. Your line of credit is a $90 interest only payment (at 4.7% and rising) and thus you’ll pay it for decades without ever paying off a dime. The car dealer’s 0 interest was likely the reason you got the truck at a payment of half your fixed income. They made the profit, and likely sold you some add-ons buried into the payment. So everybody did well…

Your good news is that you have a four-year old truck that will last another decade. You’re right – you can’t change the past, and it’s now worth less than half of what you paid, and likely worth less than you still owe. So love it, take care of it, and drive it into the ground. The other good news is that this is easy to “fix” to create some breathing room.

For anyone not on a fixed income, the fastest way to become debt free is to keep $1,000 in emergency savings and pay off everything else. (The Money Tools book “step up” plan)

In your cases, being retired and having a $2600 fixed income, I would do it a little different, and you have two choices:

1..Pay off the LOC from your $46,000 savings and reduce it to a $5000 limit (as an emergency account). Your savings may be 0.25% at most, so your LOC is NINE TIMES the rate and you’ll never pay it off. And that’ll go up with one or two more prime increases in the next six months to be 12 times the interest you make on savings.

That $90 saving isn’t much, but since it’s all interest, it’s a total gain. Then leave the truck at $1,000 payments for the next two years and subsidize your income from drawing down some savings. It won’t be much of a lifestyle, but there’s a fixed end in sight and zero temptation to “drop down” on how much you pay on the truck.

Option 2 is what I would do: You’ve worked too hard to not have some financial freedom, to go out for dinner the odd time, etc. to live on $1500 for two more years while you’re healthy. It’s stressful, because you have utilities, cable, truck insurance, food, etc. so there’s literally nothing left over – in fact, you’re using some of your savings each month just to tread water.

I would pay off the truck from savings today. Yes, you’re giving away (not getting the benefit of) the last two years of 0 percent, but the financial insanity of those payments will be over. That should or could stop dipping into savings to meet your monthly expenses.

The math says keep the zero percent truck and pay off the LOC but this isn’t purely about math with your situation.

That leaves the LOC. It’s $90 a month to tread water. Now to decide if that’s just going to be around for the rest of your life because of your fixed income, or whether you want to spend 10 to 15% of that income to get it paid off. That’s your call:

25 years to pay it off = 248 a month

15 years = 302

10 years = 372

5 years = 587

See now how the bank has won huge? There’s zero chance you can pay it off in any reasonable amount of time, so their total income (the interest total) is massive…and we all trick ourselves into just looking at the low rate… Even if you paid it off in 15 years, by that time they’ll have made about $12,000 in interest…90 bucks at a time…

You can’t use the rest of your savings ($46000 less truck payoff) leaves $22000 to pay off your credit line. You have to at least keep 6 months of your expenses a full emergency fund.

Two Vehicle Shopping Heads Up Stories

Ford has a national ad that they’ll make your first three payments for you to a max of $1,500. Firstly, if you’re a cash buyer, and you should be, they’ll give you the same amount as a cash rebate.

This ad campaign reminds me of a nice retired gentleman when I was finance manager in Kelowna. He was buying a half ton to tow his 5th wheel. He really wanted a three-quarter ton, but couldn’t afford the price difference.

At that time, there was also an offer that the manufacturer would make the first three payments, but there wasn’t a limit on how much those payments could be. So I had the sales person find him a three-quarter ton and set it up for a one year loan at about $4,000 a month payments. That way he had the first three for free, and that $12,000 saving got him the truck he really wanted. He was a cash purchaser, so the huge payments weren’t an issue since he had the money. Since then, the payments have always been capped. There’s always an angle and a trick. 540 of them are in the Money Tools book. That $20 at Mosaic will turn into a ton of savings if you just read one or two of the chapters! In this case, if your payments will be $300 or so, times three, you’re leaving $600 on the table. Go to your bank or credit union, get the loan and take the full $1,500 rebate instead of the three payments that only add up to $900!

If You Want a Vehicle That Lasts 300,000 KM

Consumer Report does THE most extensive research and surveys on vehicle reliability. That’s great news if you’re looking for a new (or better yet, almost new) vehicle. If you keep your vehicles for a long time, you need to have the list from Consumer Report of vehicles that should last you for at least 300,000 km:

Unfortunately, nine of them are imports, which makes them more expensive to buy, but that may be worth the initial outlay if you can drive it for 8 to ten years:

Honda Accord, Civic, and CR-V

Toyota Prius, Camry, 4Runner, Corolla, Sienna and Highlander

and rounding out the top 10 is the Ford F150

With technological improvements, all vehicles are way more reliable than they were a decade ago. But these ten are the best of the best, according to Consumer Report.

On the other hand, Forbes just put out their list of the 13 worst vehicles to buy. From best in snow to the vehicles to avoid, I’ll post the link to their research and story on my website:

http://www3.forbes.com/business/13-new-cars-to-avoid-for-2016/?utm_campaign=Cars-To-Avoid-2016-CAN&utm_source=Facebook&utm_medium=referral

Happy New Year – For New Vehicles

Yes, it really is the new year in the world of car manufacturers. They haven’t  built 2016s for months and, by now, over half of the 2017 have been delivered to dealers.

If you’re in the market for a new vehicle, you have to figure out if it’s deal or no deal in buying a 2016 between now and winter. If you keep your vehicles for a very long time, there may be deals to be had. If you trade more frequently, you could be shooting yourself in the foot – financially speaking.

Here are a few things you have to know:

A new vehicle is defined as one that has not been registered. If you’re buying a 2016, after you take possession, it is actually a one year old model the next day.

Dealers will focus most of their ads, energies, and bonuses on selling off the 2016 models from now until winter.

Dealers cannot return vehicles to the factory. They’re stuck with them to either sell them to customers, to another dealer, or trade with another dealer.

Because of that, in September, almost all manufacturers send dealers a check for around five percent of the invoice value for every 2016 in stock. That money is used to help with advertising, or to allow the dealer to sell it at a great deal and still make a profit.

That means, as late September comes, the deals will get better. But the selection will also get more limited. A deal is not “employee pricing,” or “factory clear out.” Those are advertising slogans. So you’ll need to do some homework.

Here’s why that matters so much: If you’re keeping your vehicle for 10 years, get a great deal on a 2016. Yes, it’ll be 11 years old when you sell it, but that’s pretty irrelevant at that point. If you buy a 2016 and want to (or need to) sell it next July, you essentially have a three year old vehicle: You purchased a 2016, the 2017s have gone a full year, and the 2018s will be out next July. That means you will take a massive loss in attempting to sell it, trying to trade it, or if you need to get it paid from an insurance claim. Yes, it’ll be really low mileage. Yes, you’ve only driven it for less than a year, but the calendar doesn’t lie. Be careful with your purchase decision, and don’t lie to yourself as to how long you’ll keep it!

And before you go car shopping, you HAVE to read the Money Tools (or in the US: Start Fighting Back!) book chapter: Choosing some shiny metal over debt freedom.

One more heads up as it may apply here, but certainly on every financial decision you make: Don’t base your decision on the advice of those who don’t have to deal with the outcome!

The Vehicle You Drive May Match Your Credit Rating

One of my best friends has 10 years experience driving in Toronto. She’s absolutely convinced she can tell what kind of person is driving based on the type of car. For instance, she’ll never drive behind Chevy Cavaliers because she thinks they’re some of the worst drivers. Now that’s her very unscientific opinion, and yours might be different – assuming you ever gave that much thought.

But does the kind of car you drive have a connection to your credit rating? The credit bureau reporting agency Experian did a study that says yes. This study is really accurate because they took actual credit information and actual car owners. You may disagree, you may be exempt, but the averages are accurate. Now remember that the connection is only for those people who finance or lease. If you’ve paid cash there’s no loan payment on your credit report and the connection can’t be made.

Lexus: If you’re driving an RX350, your credit score is in the 775 range. Where 850 is perfect, that puts you in the top 10%. Makes sense, since the vehicle is very expensive and has super high payments.

Acura: Drivers of two Acura models (the MDX and RDX) make the list of top five credit ratings. These drivers average credit scores of 765 or so and average less than one percent default on their loans. What’s strange is that owners who leased don’t have good credit ratings for some reason – just those who financed.

The Subaru Forester and Outback complete the list of top five of highest credit rating drivers.

Leading the ‘really bad’ credit list of the bottom five is the Dodge Avenger. In the story from the Arizona Republic, the headline was: Driving a Dodge Avenger? Your bumper sticker might as well say: Bankruptcy filer on board. Some of the reasons are that the vehicle is very inexpensive and purchased by large numbers of subprime (bad credit score) customers. The average Avenger owner’s credit rating is 619 – a score that wouldn’t qualify for a line of credit or many decent credit card offers.

Two Kia models are on the bottom-five list: The Rio and Forte. Both are inexpensive and thus need a much smaller down payment. With average car loans over six years now, that matters to payment sensitive owners.

Rounding out the bottom five are the Chrysler 200 and Nissan Versa.

Remember that your credit rating is based on how much you finance, how high your payments are compared to the rest of what you owe on credit cards, loans, etc. Of course, the most critical factor is making your payment on time – every time. Those two things: On-time payments and your debt load make up two-thirds of your credit rating.