Tag Archives: car loans

Two Financial Mistakes We Keep Making

Almost every week, there’s another media story of a condo or apartment building fire, not to mention the huge destruction in Ft. McMurray. In almost every story you’ll hear that a lot of families lost everything, and didn’t have insurance.

Renters insurance costs around $100 or $200 and you really need to have it – or get it today! Your landlords insurance does not cover your stuff. If there’s a fire, you need to have your own coverage. If you don’t, you’re not just out everything you own, but are also liable for the landlord’s stuff in your rental. That includes the fridge, stove, any furniture, carpet, etc. Nobody ever thinks it’ll happen to them – until it does. That $100 or so will pay off huge in the event of a claim. You’re not insuring the building, but only the $10,000 or $20,000 of your content – that’s why it’s so inexpensive. If, on the other hand, you’re a landlord, give that heads up to your tenant. You can’t make them do it – but lack of knowledge shouldn’t be the reason they don’t have coverage.

The second financial mistake applies to hundreds of thousands of people: It’s over-financing their vehicles. In the event of a write-off, or theft of your vehicle, the insurance company will not pay off what you owe. That you over-financed it is your problem and not theirs. What you owe has nothing to do with what the insurance company will cover.

They’ll pay you the “fair market value” only. They insured the value of your vehicle, they didn’t insure the amount of your loan. If you’re buying a new one, buy something called full replacement for under $50 that’ll give you two or three years where they’ll replace it without depreciation. For everyone else, figure out what your loan amount is, then look on Autotrader to get a rough idea of your value. THAT value is close to what you’ll get from the insurance company. Hundreds of people a day are finding out that they’re short thousands of dollars to pay off their car loan. Don’t be one of them!

It’s Grad Season and Lots of Businesses Want to Meet You

Your 17 to 21-year old has banks, car dealers and especially credit card companies salivating to meet them.

Those companies will do whatever it takes to get their business. Banks, and especially credit card companies, have THE best marketing minds in the country and want your teenager in debt to them – really soon and really deep.

We have a huge emotional attachment to our first credit card. It’s the reason they’ll do whatever it takes to be front and centre in your teenager’s wallet. Once they’re first, they own you and the memories and loyalties are way bigger than a teenager’s first boyfriend or girlfriend – and last a lot longer. On average, we keep our first credit card for over 15 years. It doesn’t matter the rate hasn’t been competitive for years, that the perks are junk or the fees they add on.

It’s not even important that they’re students and don’t have much of an income. For this group, the default rates are below average because, in most cases, parents will step in and pay the balance, or at least make the payments.

Why you? Because they can’t market much to your parents. Adults already have all the credit cards they need or want. So they can’t grow their business unless they get to you. It’s millions of fresh customers and bonus: You don’t know squat about credit and the dangers of credit cards, but you do love to impulse buy.

The same applies to banks wanting to get you hooked on an overdraft or line of credit once you have some income. That overdraft will be there for decades and it’s not like you know how to shop around for the best loan deal or rate.

Car dealers also can’t wait to meet you. How many cars are you going to buy in a lifetime? Three? Four? Five, maybe? Well, the average salesman sells maybe a hundred each year. So who do you think knows stuff and totally has the upper hand? It’s like bringing a plastic knife to a gun fight – you’re gonna lose, even if you bring one of your parents or a buddy.

So you’re all set. You’ve got your student loan payments for two decades, you got the credit card, an overdraft and that car payment. Grade five math says that most of your income is now going to pay all that. So someone telling you save some money is just a pipedream.

This Couple’s 25% Car Loan Has Lots Of Insights

Last week the CBC did a story of a couple in Kelowna who signed up for a 25% subprime car loan. It exploded on my Facebook page with large numbers of shares.

It’s commendable that the CBC did this feature, and great education, but I’m guessing they didn’t put this family in touch with anyone that could actually help them. But, that aside, I have 20 minutes worth of learning and warnings here, and five minutes to share them. As always, I’ll post the rest of the story on my website.

This couple had a recent bankruptcy on their credit. For five years that guarantees a rate of 20% or higher for a car loan. The dealer got them financed through the TD Automotive division. Where is it the TD’s fault this couple is really high risk. Hello? They defaulted on all their debts in bankruptcy – whatever the reason! Risk equals rate – always will. Just look at the fine print of most credit cards that range from 10% to 27%, or lines of credit from prime to prime plus 6%.

Yes, the dealer probably made over $5,000 on a huge markup of interest rate, fees, and price of the vehicle. They didn’t even get to pick a vehicle – they were told it had to be this one to get financed – not true, but it’s one of so many red flags in this story. Yes, the dealer lied when they promised (if they did promise) the couple could refinance at a decent rate in a year. That was never going to happen, but I hear that promise all the time to get people to sign up for insane financing thinking it’s only for a short time. And if this promise wasn’t in writing it wasn’t true. Never rely on verbal promises as you’ll never collect on them. Now the dealer is offering 5% financing on a new car? THAT would make things so much worse. But that’ll take too long to explain. Someone get this couple in touch with someone who can help, or go to Mosaic and get them my $20 It’s Your Money book – it would have saved them $5,000 or more.

How often does the average person buy a vehicle? Maybe every five years? Well, a salesperson sells 10-12 a month, and the business manager deals with 5-8 a day. So, you have one purchase experience versus 600 sales versus the finance manager having financed and upsold 6,000 times in those five years. With a score of 6,000 to 1 that’s like bringing a knife to a machine gun fight. You don’t have a chance – this couple didn’t have a chance.

Yes, this couple got massively ripped off. But they CHOSE to be ripped off. I’m sick and tired of our ever diminishing personal accountability. I can already think of three options this couple had, other than signing up for a loan that will end up costing them 2 ½ times the price of the vehicle.

But I can already hear a lot of people thinking that this isn’t fair and no wonder the rich get richer. Yup – they have investments and savings while YOU have debt and payments. 90% of millionaires did not inherit their wealth – they became millionaires on their own. 75% of millionaires do not finance their cars. Well – they’re rich…yes, because they don’t do dumb financing. If you want to be a millionaire, get a $2,000 car instead of a $500 car payment. Then start setting aside some money. When you have some savings, step up and buy a newer vehicle. But a $500 car payment will guarantee that you’ll be stuck in debt for another decade and won’t ever be able to save. Go look up what Warren Buffet drives if you want some more evidence.

The average guy can’t get ahead – yes you can – get your finances under control, get rid of the killer car payments, or sell that house that’s eating up 50% of your income. I haven’t had a raise in two years – well – go get a raise. Good chance you get paid what you’re worth in the market place. So up your game, get to work earlier, work smarter or harder, or upgrade your skills. The average guy can’t get ahead? Come on – stop thinking like a victim. This is Canada and not North Korea.

I’m sick of the victim mentality. Repeat after me: If it is to be it’s up to me. The government, or two people in the story stating there should be more regulations, isn’t going to fix your financial life. It’s gotta be you. My apologies if I’m being unclear.

Whatever your borrowing today, at whatever rate or payments, may seem like a good idea and the only solution. But whether it’s a car, a line of credit, a payday loan, or your credit card, it will make things worse, much worse, down the road.

When you say you can’t do it, it wasn’t your fault, you have all these payments, you had to get that loan, or it’s too hard, you’re going to spend the rest of your live proving that you’re right.

PS: Why would a new vehicle loan at 5% make things so much worse?

This couple’s first 30 months of payments has paid almost 75% of the total interest at 25% as it’s very front loaded when they owe the highest balance. Having overpaid on the price and paid very little principal, they’d still owe at least $7,000 more than the car is worth. That shortfall has to be “rolled” into the new loan. Almost 50% of people owe more on a trade than it’s worth – this couple is the rule and not the exception. A new vehicle depreciates 30% in the first year. Even if it’s a $20,000 vehicle, the moment they drive it off the lot, it’s worth $6,000 less. A $6,000 loss and $7,000 hangover of their old one means they instantly owe $13,000 more on the new vehicle…and things get worse and worse and the vicious cycle continues with no hope of trading that one for six or seven years, huge payments again because the $7,000 loss is hidden in the new one and heavens forbid it’s written off or stolen because the insurance pays the real value and not the massive over-financed loan.