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It’s happened to everyone – you take your car to a shop for repairs and the mechanic reports back with a laundry list of items that need to be replaced. You start to wonder if it makes sense to keep putting money into your car. We often make large financial decisions based on emotion, and buying a new car is no exception. before you finance a new car, consider these money factors.
When a client looks to finance a vehicle during bankruptcy the first question I ask is how much the cost to repair the vehicle is. Most of the time it is much cheaper to fix their current vehicle car than to finance a new car.
For instance – lets say you drive a 2003 Subaru Forester that’s worth about $2,000. It’s been making noise so you take it to the mechanic for inspection. You get a quote for $2,000 to repair a timing belt, water pump, and new accessory belts. The cost to repair would be about what the car is worth. Is it time to take your car to the junk yard?
Don’t junk your car over routine maintenance.
If you finance a new car it will still wear out, break down and need routine maintenance. Maintaining a vehicle can be expensive especially if the car has been neglected. Don’t forget that newer cars have more technology and cost more to repair and maintain. There are multiple computers, cameras, sensors and a dizzying array of gadgets. They break and cost a fortune to replace.
Don’t rely on a warranty. It’s a false sense of security. A warranty is an insurance policy issued by an insurance company which is in the business of making money, not paying for your repairs. Have you ever had to argue with an insurance company? Good luck!
When you finance a new car it’s not just the monthly payment to consider as I’ll explain below. But first, here are some real world numbers from someone purchasing a 2018 Ford EcoSport SE AWD with 14,000 miles.
The sale price was $15,500 which is pretty reasonable, but you have to take into account sales tax $1,454.67 (9.38%), Admin Fee of $299 and an additional fee of $104 for a total sales price of $17,357.67. The buyer was required to front a cash down payment of $1,000, reducing the total amount financed to $16,357.67.
Still not too bad but lets talk about interest rate. If you are in a Chapter 13 Bankruptcy you are most likely to get an unfavorable interest rate because you are considered a higher risk. The APR (interest rate) on this particular loan was 22.99% with a term of 60 months. The monthly payment is $465.43. The total of 60 payments at $465.43 is $27,925.80!
Vehicles depreciate, or lose their value, as time goes on. The moment a new car is driven off the lot it loses about 10% of its worth. After about 5 years it will lose about 60% of its value (source). If you are in Chapter 13 Bankruptcy and your goal is to get a discharge and be debt free, financing a new car is the opposite of what you want to do.
Remember that 2018 Ford EcoSport you just paid $27,925 for? It will be worth at best $9,000 if you sell to a private party. If you trade it in to a dealership, expect to get about half that. Ask yourself – if you put $27,925 in the bank today, and five years later you had $4,500 left – would you feel that was a good investment?
In Shawnee County, KS – that 2018 Ford EcoSport SE AWD costs $453 per year for just the property taxes. By comparison, a 2003 Subaru Forester runs $25 per year. When every penny counts – don’t just guess – use this LINK to find out what you are going to pay every year to tag your vehicle. Ask yourself if you can afford to set money aside every month to get your car tagged. Don’t rely on a tax refund. Something always comes up.
When you finance a vehicle you must have full coverage insurance. Most creditors require a $500 deductible. And if the car you bought is upside down, you’ll be required to get GAP insurance. Keep in mind that car insurance rates are higher for people with poor credit. It doesn’t make sense but that is how it is.
Get a car insurance quote before you buy. I can’t stress this enough. It’s a 5 minute phone call to your insurance company to find out. Remember the 2018 Ford EcoSport you are paying $465.43 per month on? Add about $150 per month on top of that. If you have any kids of driving age living with you it will cost even more.
The number one reason a client approaches me about wanting to finance a vehicle is because they want something reliable. Don’t confuse reliability with a car needing routine maintenance. All cars need maintenance. A reliable car doesn’t need anything more than normal repairs. An unreliable car has repeated, unplanned breakdowns.
The top 3 most reliable vehicles are made by Lexus, Mazda and Toyota. It’s worth noting that Toyota makes Lexus. Above average reliability cars are made by Kia, Hyundai and Subaru. Somewhere in the middle you will see Honda, Ford and Nissan. The least reliable tend to be made by Chevrolet, Volkswagen, Jeep/Chrysler/Dodge, BMW and Audi.
Your 2018 Ford EcoSport is costing you $453/yr in tags & taxes, $150/mo insurance and the car payment is $465 – that is $653 per month. How much are you paying for rent or mortgage? If $653/mo is even close to what you are paying for rent or mortgage then it’s time to have a moment of self reflection and ask yourself if you really need a new car, or do you just want one? It’s nice to have backup cameras, automatic braking, lane keep assist, heated and cooled seats, etc. But is it worth it? Do you need it?
Try to fix only the most important issues to get your car back on the road. Put money aside you would have been making on car payments and fix the rest of the issues a few months later. If the car keeps running then build up your savings for a newer vehicle. The longer you can go the more cash you can save.
If it is an emergency and you can’t come up with ways to raise $1,000 – $2,000 to buy a temporary vehicle then you may have no alternative to financing. Remember you will likely still need to come up with a down payment. If you’ve exhausted every option and can’t borrow any money from family or friends, have no retirement to borrow from and no assets to sell, then try to find the cheapest used car that will fit your needs and pay it off as quickly as possible.
Chris W. Steffens, Attorney at Law is a Bankruptcy Lawyer serving Topeka, Lawrence, Overland Park & Kansas City KS. I’ve filed hundreds of cases and spent years honing my practice at one of the largest consumer bankruptcy firms in Kansas. I bring with me my exceptional knowledge and experience and I treat every client with the respect and care they deserve.
Disclaimer: The information you obtain at this site is not legal advice. You should consult an attorney for advice regarding your individual situation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established. We are a debt relief agency. We are attorneys who file bankruptcy cases.