Tag Archives: vehicle financing

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!

Really Bad Radio Finance Ads

On my recent trip to Florida, I got to listen to the radio for a few days while driving around. It made me wonder if you can’t tell a lot about the culture of a place by their radio ads. Florida certainly has the great weather, but they aren’t doing that well economically. The state was hit badly in the mortgage meltdown, still has pretty high unemployment, and millions of not so well off residents. But they still want stuff beyond what their wallet and income can afford. So you tell me what it says about their financial state when these where the most common radio ads:

I went bankrupt, cash is tight, and I need Jesus to help my credit. But I got a new car with 96 cents down at 1-800 new ride. Yes, we have lots of this so-called subprime financing here, too. Just look in the back section of any Sun newspaper. You’ll be paying 25 to 30% interest and the fees will be $1,000 to $2,000. It is massively profitable for the dealer and there are lots of people who’ll pay whatever the price is to get a new vehicle. If that’s you – don’t. Send me an email as there are alternatives. Once you’ve signed for a 30% car loan you’re doomed for years, with no hope of trading or getting out of the trap.

Want new wheels and rims? First week special of only $20 gets you the choice of any rims and wheels! Go to rentawheel.com for the location near you. Yes, renting tires happens. At $40 a week and up, people with no money can make their ride look cool at annualized interest rates that make payday lenders blush.

When you’re in an accident, call the police, call a tow truck, and call us right from the scene of your accident at 1-800-411 pain. Yes, a lawyers ad for car accident victims. They’re not promoting their competence – they just want to be first to be called. After all, the US is a very litigious society and millions of people would just love the free money from a lawsuit, even if it takes 30 to 50% fees to the lawyer.

One of the stupidest ad lines I’ve ever heard: “Investing in gold and silver is the new savings account.” Hmm…let me think: A savings account may get a bad rate of half a percent or so, but there’s never been a savings account that’s actually lost money. Gold goes on a monthly roller coaster and is down about 40% in the last year. Adjusted for inflation, it’s not even close to being back to what it was in the early 1980s! Yet, these ads somehow makes you think it’s the place you should put your savings? That has to be the most insane idea I’ve ever heard…news flash: As of today, gold is barely over $1000 an ounce..buy at $1800 and take a 40% loss on your so-called “savings?”

Seven Things the Middle Class Can’t Afford Anymore

This was an article originally published in USA Today last week. Two are medical and dental that don’t apply very much here in Canada, but how many of these are accurate, or apply to you and me in the middle class?

Vacations: Most middle-class families just can’t afford an expensive vacation without sacrificing something else. A Statista survey found that 54% of people had to sacrifice another big purchase to be able to afford a vacation. We’re not talking about a camping trip here, but anything that involves an airline flight is expensive. Add meals and hotels and you’re over $3,000 to $4,000 pretty quickly.

A new vehicle: With an average price over $32,000 it’s just not something most people can afford – either because there’s no chance they have that kind of money saved, or because they couldn’t afford the payments no matter how long the term is stretched.

To pay off debts: Debt loads are rising way faster than incomes. So every  month, finances get worse and not better. Living pretty close to spending every dime of income on bills, necessities, and minimum payments makes it really difficult to make a dent in their debts. That makes it more critical not to get into debt in the first place. Because,  once you’re in, you’re trapped for decades. How do families get into debt in the first place? Vehicles they can’t afford, houses with little down payment and high monthly payments and that subconscious refusal to acknowledge they can’t afford something.

Emergency savings: We’ve talked about this before. Basic emergency savings are one week of net pay. Then pay off your debts smallest to largest and step three is to have a three-month emergency fund in place. But almost 50% of people couldn’t miss one week of pay. Why? See number one two and three.

Retirement savings: When you’re barely able to keep your head above water today, it leaves nothing to save for tomorrow. That’s just the reality of what’s coming in versus going out. That’s why you need to pay yourself first. If it comes off your pay or out of your chequing account every month you can’t spend what you don’t have. It’s pretty much the only way to save for retirement. In a recent study, 17% of Canadians plan to use the proceeds of their house sale to fund retirement….but don’t they need to live somewhere? After all, you can’t eat your house! That’s a terrible strategy, right up there with winning the lottery to fund retirement.

A $400 Raise & Six Ways to Go Broke This Christmas

Wow! Someone at the radio station this weekly program is on just got a $400 raise! THAT is the greatest Christmas present to get, isn’t it? But he didn’t get it from his boss – he got it from and for himself. He just finished his last $272 car payment that had been around for six long years. Adding tax back (since all your payments are made with after-tax money) that’s $400 he’s no longer sending off each month.

He’s spent $29,000 gross income on a stupid car that isn’t worth a tenth of that today. If that car payment hadn’t been around, the same $272 a month for the last six years would now give him $25,000 in his bank account. Hmmm…out a net of $19,600 versus $25,000 that could have been his: That’s a $44,000 difference!

If he can suppress the “stupid” gene in all of us and keep driving the same car payment free, that $273 over six more years would have been $62,000. But the car financing was P.G. pre-George and I hope he’s now re-allocating that same amount to a savings account and paying cash for the next one.

And  from Dave Ramsey…. Six ways to go broke this Christmas season

Keeping up with the Jones…Newsflash: The Joneses are broke, too – it’s just that you don’t know it! The last thing you need is their debt load. Image isn’t everything.

Confuse toys with food: You NEED food, shelter, clothing and utilities. After that, it’s a want. Don’t confuse gifts and gadgets with necessities and remember the priorities in life – and in Christmas.

Presents for everyone: Newsflash: You can’t afford to give every third cousin in the family a present this year – or any year. Forget that sense of obligation and get real.

The store picks the present: The mall will eat you alive and spit you back out. Do not go without a list of people to buy for, the cash in your pocket, and a plan. Wandering around aimlessly for ideas will cost you a ton of extra money. All the specials and cool stuff will empty your wallet and fill your credit card statement in a hurry!

I’m number one: No, you’re not. It’s Christmas – the money you spend on yourself, even before Christmas, shouldn’t exceed what you’re spending on others. Make a rule for yourself: For every dollar you spend on yourself, another dollar goes to charities. It may help re-focus your priorities.

Christmas travel: Few things will speed you along the going broke plan than trying to fly a family of five to grandma for Christmas. It’s fine to travel, but make it reasonable. Besides, your grandparents are retired and THEY can afford to visit you if they want to!

Is It Right or Wrong?

Today, here are two moral dilemma stories. What do you think? Are either, or both of these, right, or wrong?

A number of years ago, in Michigan, some dealers experimented with a system that had a computer chip installed in vehicles which were financed. If the payments were past due, the owner would get a warning from this electronic signal in the car. It warned that the vehicle would become inoperable if the payment was not made within three days. Another warning came through the car the following day. Then, on day three, the car’s electronic system was automatically shut down, and wouldn’t start. Talk about a way to get someone’s attention to make their payment!

The dealerships were able to finance the vehicles with this software for a lower interest rate, because the risk of arrears was much lower on these loans. It resulted in a lot less repossessions, but the backlash was so huge, the technology didn’t take off to any large degree. Very bad idea, or would you buy it with the mindset that it’s reasonable not to drive something you can’t afford to pay?

Last year, in the U.S., between 700,000 and one million people walked away from their homes – but not in a typical foreclosure.

Strategic defaults are foreclosures of homes were the mortgage holder HAS the money, and HAS the ability to pay, but chooses not to. These people owe more on their home than the value, and make a conscious decision to stop making the payments. It will give them six months or so free housing until the bank comes to foreclose. At that point they walk away, reasoning, they’re saving themselves tens or hundreds of thousands of dollars paying a debt that is way more than their home is worth. They literally trash their credit, but reason that they are still way ahead, financially, by now being able to walk away from their home. In many interviews, on various programs, a lot of these homeowners were asked if they didn’t feel guilty, or some moral obligation to pay the mortgage that they CAN pay and voluntarily signed. The answer has always been no.

If you have the financial ability to pay, would you walk away if you owed $10,000 more than your home was worth? What about $50,000? What about when the value of your home has dropped by 50% or more such as many places in Arizona, Florida, or California have experienced?

Before you answer that, you should know something else. The biggest apartment complex in the world is Stuyvesant Village in New York. We’re talking 11,000 apartments and 18 highrises. In January, they defaulted on a $4.4 billion mortgage and voluntarily walked away. And who was one of the big five investors? The Church of England.

What’s the Real Cost of Your Vehicle?

Last week, I bought a new car. No, it isn’t new, new. It is a 13-year old Buick, but with 160,000km, it’s a major upgrade from my Chrysler, which I retired after 308,000km.

Anyone who has ever read the vehicle chapter in the It’s Your Money book knows that I am not likely to buy a brand new model. No matter what the incentives, there is no chance I want to pay for the average 20 to 30% depreciation in the first year. And low-rate financing doesn’t interest me, because adding interest costs to a car makes things worse, and more costly. Even at zero percent financing, I would be giving up the alternative of a rebate, and would now have monthly payments. That isn’t going to happen, because a car payment is the biggest monthly cash flow robber, and I would always be financing something that is worth less and less each month.

For anyone who does want to consider a new vehicle, www.edmunds.com has a great calculator which estimates the true cost of ownership over the first five years. They include gas, depreciation, insurance, and a host of other factors. Before heading for the dealership, it’s well worth a trip to their site. While it is U.S. vehicle prices and costs, the comparison between vehicles alone is very insightful.

In my case, since new wasn’t really new, I was happy to just write a cheque for $2,400 for my Buick. I’ll let you know in a couple of years what it’s actually costing me.

What I did want to figure out, without attempting to be smarter than a fifth grader, or doing more than a few minutes of math, is the real cost to drive my old Chrysler. In my case, the car cost me $133 a month. That’s an amount I can live with, even though my brother is quite a bit better off than me, at $71 a month, with his old Olds Achieva!

If you believe that a vehicle is a status symbol, you are likely destined to be broke. If, however, you think of a vehicle as basic, reliable transportation, you will likely be way ahead of millions of people, financially.

First, however, you need to know what your current vehicle is costing you per month, or per km. You can easily calculate your cost below, and do send me a note if you can beat my figure, which is used as an example on the worksheet. And remember three other points which will help you to avoid making your vehicle into a money pit:

• Avoid having a finance payment on your vehicle at all costs.
• If you have one, keep the vehicle after it is paid off and re-direct the same payments to a savings account. You won’t miss the money – you’ve been paying it all these years. But now it’ll grow for you, instead of going away.
• If you are in a lease – get out. There is very little chance you will ever have any equity and all those payments are just treading water before you’ll likely be giving the vehicle back to the dealer.

Vehicle Cost to Drive:

Original cash price of the vehicle: $10,200 $__________
Or:
The total of all payments:
(add up all the monthly payments, because
this will include the interest you paid to
finance the vehicle) n/a $__________
Or:
On a lease, add the monthly payment with
taxes AND the end of lease buyout amount n/a $__________

Add the rough total of any repair bills: $ 3,600 $__________

Do not include insurance, gas, basic maintenance, such
as oil changes, tires, etc. Yes, they have to be paid, but
they won’t be too different between vehicles.

Subtract the current value of the
vehicle, or the actual sale price: $ 2,300 $__________

Equals the total cost to own: $11,500 $__________

Number of months you owned the vehicle: 86 months __________

Total km you have driven:
(That is the mileage right now, less the
mileage when you purchased the vehicle) 212,000 __________

Your cost per km: 18 cents/km __________
(Divided the total mileage you’ve
driven by the total cost to own)

Your cost per month: $133 __________
(Divide the total cost to own by the
number of months you’ve owned it)

Lifestyles of the Formerly Rich and Famous

Getting ahead financially really isn’t complex, or hard to do. We just need to do one thing: Spend less than we make. Yes, it really is that simple to say, but often that hard to do. We just get addicted to our “stuff,” and our lifestyle. Yet, any drop in income has us in denial and clinging to our former spending habits, instead of making some basic adjustments. But with less income, that lifestyle now has to be financed with debt. And like blowing up a balloon, there will always be an end to that shell game.

The rich and famous are even more likely to go through this denial phase. But denial only goes for a short period of time. And that time-frame is often shorter for the rich, since they choose (yes, it’s a choice) to have monthly expense which are a whole lot more than for the rest of us.

In the entertainment field, Zsa Za Gabor, Marvin Gaye, Mick Fleetwood and Don Johnson of Miami Vice fame have all been through a bankruptcy. As has Sopranos actress Lorraine Bracco, M.A.S.H. star Gary Burghoff, filmmaker Francis Ford Coppola, and singers Natalie Cole, Elton John, and Toni Braxton. The most famous bankruptcy likely still to come will be Michael Jackson. Somehow an estimated $500 to $800 million net worth in the 1980s is all spent, and then some. Jackson is holding on by his fingernails, with hedge fund financing and multiple mortgages on his Neverland ranch and his Beatles music catalogue.

But this common, often self-imposed problem, does not just apply to the rich. With bankruptcies up 16% year over last year, and the current recession, more and more people are reaching the danger level.

The National Post last week had a story of a drywaller whose income shrunk drastically last summer. Yet, for more than six months, he stayed in denial by using credit cards to maintain his lifestyle, and to make payment on his “baby,” as he called his Honda Acura. That may work for a while, but by January he had filed for bankruptcy.

Optimism is a great mindset, but when it comes to our debt and finances, staying realistic is always a much better frame of mind. And don’t kid yourself. Filing for bankruptcy is neither easy nor fun. Along with a death in the family or perhaps a divorce, bankruptcy will always rate amongst the top five traumatic experiences of a lifetime.

Is Your Car Making You Money Or Killing Your Financial Freedom?

Last week I had to pay a $900 bill to repair my 99 Chrysler with almost 300,000 km on it. Ouch is right – but once the shock wore off and I wrote the cheque, I was actually quite happy about it. Let me explain:

I paid $10,000 cash for my car and have driven it for seven years now. Since then, normal maintenance aside, I’ve spent $2,500 on repairs and the car’s worth $3,000 right now. So with a $10,000 price, plus the $2,500 repairs, minus today’s $3,000 value, the car has cost me $9,500, or $113 a month.

One of my friends is in the car business. She gets dead cost, or less, for her vehicles and has leased around the same $450 a month payment, forever. When I bought mine, she had a three-year lease, then a second one, and is now on a third vehicle on a four-year lease. Seven years at $450 a month means she’s spent $38,000 as of today. Her lease balance on this one is way higher than the value, and when the lease is over she has nothing but the need for a cab ride home.

Compared to her $38,000 versus my $9,500 spent, I’m $28,000 ahead of her. Yes, she drives a cooler car, no doubt, but I’d rather have the $28,000 in savings.

Another friend takes some of what I’ve been teaching and won’t lease. He bought a new car about six years ago and just traded it for another new one. The first one was $25,000, taxes aside, and he sold it for $8,000. The new one was $27,000, and it’s depreciated at least 20 percent when his butt hit the seat. In about the same time-frame, he spent $17,000 on the first one, and the 20 percent depreciation on the new one of $5,400. So his two cars have cost him over $22,000, or $305 a month for the last six years.

Neither one of these friends is very rich, and neither one of them thinks they waste money needlessly. But I’m $13,000 ahead of one and $28,000 ahead of the other. Yes, they have cooler wheels but I’d rather have the money.

And you know what: Nobody in the world really cares what you drive. If cars are a status symbol, instead of reliable basic transportation, it’s gonna cost you a lot of money. After all, there isn’t a car around that’s worth more tomorrow than it is today, so why keep throwing tens of thousands of dollars of payments and interest onto something that you’ll never ever recover?

Oh, and two more things: The GM and Chrysler merger appears to be off the rails this week. I don’t see how two on-the-edge companies in big financial trouble will make one strong company anyway, but get ready for massive layoffs – merger or not. It doesn’t take a finance degree to see that GM can’t keep losing over $1 billion a month.

The holdup right now is U.S. government approval and support. (Make that, more bailout money in addition to the $25 billion the auto industry received from Congress.) There’s also the issue of the $7 billion loans Cerberus has for buying Chrysler from Daimler last year. You see, the banks, including JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley have been selling off large pieces of their loans to raise cash. But it’s next to impossible to get all these pieces back together as now there’s dozens and dozens of lenders who have a piece of this. It’ll make it likely Cerberus will have to pay off this total and start with new loans that are easier to trace – but now much harder to obtain….stay tuned!

And with GM only having enough cash for this quarter, you can bet there’ll be another wave of bailout money. Will it solve much of anything? No, sorry. A bailout changes nothing structurally. It only helps the companies to tread water a while longer. It’s kind of like making your minimum payments for a while. When the money runs out, nothing has really changed.

What’s The Payback on Hybrid Cars?

Hybrid cars are somewhere between the flavour of the week, a status symbol, or the wave of the future. I’m not sure, because they’re certainly way out of my budget.

They’re very expensive and the one question I’ve always had is whether or not the kind of money they cost is justified, along with the huge monthly payments that come with it. Are they worth it – not in the sense of helping the environment, but in terms of our pocketbook?

There is finally a comparison of their paybacks, developed by Edmunds.com. In business that is called ROI, or return on investment. In other words, if you buy a hybrid, how long will it take to get the extra money you spent back in savings versus buying a regular gas engine.

The Ford Escape wins, hands down. The difference between an Escape with a gas engine vs. a hybrid is made back in savings after three years. That’s a reasonable time for the extra expense and coming in second was the Honda Civic.

But this will stun you. The darling of the hybrid world is certainly Toyota. But do you want to take a guess as to how many years it takes to break even on the Toyota Camry? It’s 13 years!

What about the hottest hybrid, if not in sales, then certainly in buzz, the Prius? How about 18 years! Yes, 18 years before you get your money back over the comparison gas engine. THAT is hard to justify.

Never mind that Edmunds.com didn’t take any financing into account. They only compared the cash prices of these vehicles. If you want to help the environment, that’s great and admirable. But you still have to consider what’s coming out of your pocket in the first place because: It’s Your Money!

Oh and I have one more question while we’re on the subject of vehicles. There is a manufacturer now advertising something like “even better Canadian pricing.” Then they explain they’ve taken the recent incentives and changed them to price reductions, instead.

So how does this lower prices? There was a $2,000 rebate that’s now $2,000 off the price. It’s not better pricing – it’s the same thing! And it’s called marketing! Be careful out there!!

The Good News: Interest Rates Came Down this Week

The better news: Sit tight – they’re coming down lots more. There’s no guarantee, because even weather forecasters can’t get it straight a week out, but with the huge drops in the U.S. and the slowdown in the economy, this one is kind of a no-brainer.

The bad news: It’s only a rate drop and all those bills you have still need to get paid. Kind of like gas prices dropping a couple of cents – real exciting, but not that big a deal in the big picture. But every bit helps…

If you’ve got debts ranging from mortgage loans to cars, lines of credits to credit cards, some will be affected, some won’t.

We’ll talk about mortgages and what to do if you’re in the middle of a fixed term in a couple of months when they come down some more. Yes, there is help and hope for you. But If you have a variable rate, or floating rate right now, your payment is coming down. If you’re mulling changing it to a fixed rate one – hang in there for the next couple of rate decreases before you lock it in.

Anyone considering borrowing when the rate goes down – your payments will be lower, and that’ll save you money – a little bit. But it’d be great if you held off a little longer for a few more rate decreases. Drive your car a little longer, get that line of credit a little later (if at all), or if you’re in the market for a home get the pre-approval in place now (it’s good for 60 to 90 days) to lock in the rate and lenders WILL give you the lower rate at the time you’re closing approaches.

If you’re looking to buy a new vehicle make sure to get the price from the dealer using either the rebate OR the cool rate they may offer. That cool rate just got less attractive so take the net price after the cash rebate and get a quote from a credit union. Very often the rebate and prime rate financing is better than the 1.9 or 2.9 the dealer has! But you’ll never know if you don’t do the comparison shopping!

Your credit cards won’t change at all – sorry. They’re around 19% average, they’re a rip off, and they ain’t moving – there’s way too much profit in the high rates they charge and you’re paying it so there’s no way they’re coming down. But until you really really believe they’re a rip-off, you’re not likely to get angry enough to change to a debit card and stop using credit cards altogether.

Lines of credit, however are all based on the prime interest rate. If it’s secured by your home, the payments are interest only, or if it’s an unsecured line it’s generally three percent payments. Those will drop. But why do you have the line of credit in the first place? If it was for an emergency, you’ll have a zero balance and it won’t matter.

If you do have a balance, don’t lower your payments with this interest drop. Keep paying what you’ve been paying. This is a huge opportunity to be able to pay the same amount of money but more of it will go to principal and you’ll have it paid off faster.

That applies to all of your borrowing. Is it to tread water and pay as little as possible or is it to use this rate decrease to step up to the chance to pay it off quicker? Only you can decide but there’s nothing like financial freedom with NO debts and monthly payments.