Debt. In the world of personal finance, debt is a dirty word. Its sinful, carnal, an abstraction of evil itself. Growing up, I was always taught to avoid debt as much as possible. My parents taught me that the only reason you should ever go into debt is for education or a house, never for consumer debt. Yet so often, debt feels “necessary”. Like when buying a car for example. How many people can really afford to pay cash for a car? I mean, at least for a new car. You know, the one with all the features that you absolutely need.
Well, this summer my wife and I are planning to buy a car. We’ve been saving for a couple of years, taking transit everywhere we go while our friends zip around in their Mazdas and Volkswagens, getting to put their groceries in their trunk, not on their laps. It has definitely not been fun, but we’ve managed to save a lot of money by making this sacrifice. However, as much money as we’ve saved, we don’t have quite enough for the vehicle that we’ve been looking at. Therefore, one of the possibilities that we’ve considered was going into debt in order to buy a vehicle. As long as we can get a decent rate, and as long as we are able to comfortably afford the payment, and as long as it doesn’t greatly increase our debt load, then we definitely think that it could be worth it.
Our first step was to go to our local bank and ask about what sort of options were available to us. The bank manager sat us down and we were able to have a nice little conversation with him about what choices we had. Right off the bat, he told us that we could either get a line of credit or a car loan. Each has their positives and negatives. A line of credit is revolving, meaning that we pay for whatever we use, we only have to pay on the interest, and we can go back and forth between spending the money and paying it off. The car loan, on the other hand, is a one time offer, and you’re set on a payment plan that pays both the interest and principal. The line of credit could be up to 25% of our net worth, and the car loan would be secured on the value of the vehicle. The line of credit, we were told, is much harder to qualify for. So we gave him an overview of our finances, he ran a credit check on us, and we quickly eliminated the whole “line of credit” option as our net worth is kind of in the negative (thank you, student loans).
However, he approved us for a car loan of $5000, and gave us a rate of 8.25%, which definitely isn’t terrible, but isn’t quite what we were hoping for. If nothing else, however, it is a baseline. Something to work off of. One of the options that we have is applying for financing through a car dealership, so we have a bargaining tool on our side. They will have to beat the financing that we already have in order to get us to go through their financing department, and when it comes to dealing with car dealerships, I want every possible tool on my side before I even walk through the door.
Something I want to mention, however, is the dirty little tactic that the bank manager tried on us before he let us go. He tried to convince us to take out a larger loan, and put a bunch of the money that we put aside (in an online savings account) into a fund with their bank. He pulled out some calculators and rate charts and tried to show us how, if we gave him our money, he could get us a 3% return if we locked in the money for 5 years, so that we would eventually have a paid off car AND $5,000+ in the bank. Being a personal finance blogger, I quickly knew that 8.25% > 3%, and knew that it made absolutely no sense. The worst part was that when he was explaining his position, he showed the difference between a $5,000 loan at 8.25% and $5,000 being saved at 3%, telling us that we would only pay about $400 for the privilege of taking out a larger loan. However, if we were to do the plan that he was suggesting, we would actually be taking out an $8,000 loan, and putting $3,000 into savings. Yes, that’s right, he used imaginary numbers (“let’s say, $5,000″) to offer us a concrete number – $400.
Now, I know that as a bank manager, it is his job to get us to give him as much of our money as possible. But this was one step away from a blatant lie, and because he made it seem like this was something we should do that would be conditional on whether or not he actually gave us the loan, I felt as though it was a very dirty tactic to use on a young couple that might not have the same personal finance knowledge that I did.
Anyways, our next step in our car hunt is to go for a test drive or two, something that we’re hoping to do this weekend. So maybe next week I’ll let you know how it went, and what I learned! In the meantime, watch out whenever you’re dealing with banks, corporations and businesses. They all want your money, and will resort to almost any tactic to get it from you.
A Line of Credit, A Car Loan, and More Lies,Related Posts:
Alan Schram writes about personal finance and his encounters with it in his everyday life. Alan is recently married and is looking to save money on expenses and reduce his debts.
Banks are NOT our friend. They are there to make money by taking as much of our money as we’ll let them have.
It is a lesson that should be driven into all of our heads from a very young age.
When I was younger I was told, repeatedly, “Bankers are the type who give you an umbrella on a sunny day and ask for it back when it begins to rain.”
I used to wonder why this was said until I got my first car loan.
Alan,
Just a caution to you for when you go to look for dealer offered finance options. As you probably know the overwhelming majority of dealer financing is just indirect bank lending through the dealership on a central system called DealerTrack. Be very careful to look at the fine print of the financing being offered to understand who is the actual lender, what is the actual rate (versus the rate they offer which may be artificially lower through subventing meaning you are likely paying more for the car), and what up-front fees are connected to the loan. Banks are paying both DealerTrack and the dealer to get your loan at point of purchase. They’ll have to make that money back somehow.
Cheers.
- Michael
All I can think when I read this article, is how someone can be so sheltered and have no idea what a simple loan is like. Maybe loans work much differently in Ontario than in my home province of Alberta, but I cannot believe it is that different.
I think you will find that when you go test driving and decide to buy a car that you will be offerred much better terms by the dealership, who also use ‘the bank’. Don’t go to a bank until you have a bill of Sale on a vehicle in your hand, and have arranged financing at the dealership. Yes, this will mean two credit checks (One at the dealership, one at the bank) but it is normal when shopping for a big ticket item to check 2-3 options. Just don’t go crazy. On any car loan over 10,000 you should be getting a rate between 6 & 8 %, unless your credit is in the crapper. What the bank offered you wasn’t a car loan, it is a personal loan tied to the car. A car loan is based on the value of a vehicle and the amount of the loan, and terms and conditions are all part of that. You went backwards. pick a car, then get the loan.
Would I be correct to summarize that you feel consumer debt is appropriate in some circumstances, as long as it doesn’t pose much harm to your financial goals?
.-= Roshawn @ Watson Inc´s last blog ..Through the Looking Glass =-.
Good for you, Alan! After you’ve paid back the loan (ASAP), save a little every month in a high interst account for your next car. That way you won’t need to borrow for a car ever again.
Being in debt is the modern version of being a slave. The bank(creditor) OWNS you.
It sounds like he was doing what most banks and salesmen do, and that is sell you on “their” best option as opposed to yours. However they can dress it up to make it look pretty to do so is considered to be a sales tactic, but I consider it to be a lie, as you saw yourself.
Man if I were you I would just avoid the whole taking on debt thing completely. Buy a cheaper, but nice used car you can pay cash for and then take whatever money you would have used for a payment and put it into a special savings account. About a year from now you can upgrade after selling the one you buy, and using the money you would have used for a car payment and buy what you really want—and with no loans at all. Just my advice my friend. But as you know I REALLY HATE DEBT!
You have been this patient, so that you don’t have to go into debt. Wait just a little bit longer for your dream car and I bet you will be happy you did!
.-= Brad Chaffee´s last blog ..My Beef With Rich Dad Poor Dad Author Robert Kiyosaki! =-.
Was this one of the big banks or was this like a credit union. If you are willing I would be interested to know which in particular it was so I can ensure I do everything I can to not deal with people who would pull a stunt like that… asking you to pay them 5.25% per annum for no benefit to you is just insane. But really I think they are hoping you would take the money and spend it, since you have access to it now.
[...] A line of credit, a car loan and more lies [...]
Alan,
Just a caution to you for when you go to look for dealer offered finance options. As you probably know the overwhelming majority of dealer financing is just indirect bank lending through the dealership on a central system called DealerTrack. Be very careful to look at the fine print of the financing being offered to understand who is the actual lender, what is the actual rate (versus the rate they offer which may be artificially lower through subventing meaning you are likely paying more for the car), and what up-front fees are connected to the loan. Banks are paying both DealerTrack and the dealer to get your loan at point of purchase. They’ll have to make that money back somehow.
Cheers.
- Michael
It’s too bad that you didn’t qualify for a line of credit. Interest on a line of credit is lower than that of a car loan. I would use the cash savings along with a line of credit to pay for a car.
Here’s a crazy idea. Use a credit card to pay for the Car! Sign up for a new credit card that offers an introductory low interest rate for a limited time and use that as a down payment. When the promotional period expires switch to a line of credit.
Be warned, this strategy can take its toll on your FICO score. Not recommended if you are thiking about buying a home in the near future.
As for the bank managers, those poor guys have targets to meet and they will try to sell you anything from Mutual Funds to Credit Cards. What I hate the most is the insurance they sell on the lines of credit.
Good luck with your new car!
Darran
By the way, student loans should not have prevented you from qualifying for a personal line of credit. Student loans and car loans are considered good debt. Credit card debt is bad debt. You need an education and you need a car to get to work. Whoever told you that you can’t get a loan because of your student loans needs to rethink that position.
All I can think when I read this article, is how someone can be so sheltered and have no idea what a simple loan is like. Maybe loans work much differently in Ontario than in my home province of Alberta, but I cannot believe it is that different.
I think you will find that when you go test driving and decide to buy a car that you will be offerred much better terms by the dealership, who also use ‘the bank’. Don’t go to a bank until you have a bill of Sale on a vehicle in your hand, and have arranged financing at the dealership. Yes, this will mean two credit checks (One at the dealership, one at the bank) but it is normal when shopping for a big ticket item to check 2-3 options. Just don’t go crazy. On any car loan over 10,000 you should be getting a rate between 6 & 8 %, unless your credit is in the crapper. What the bank offered you wasn’t a car loan, it is a personal loan tied to the car. A car loan is based on the value of a vehicle and the amount of the loan, and terms and conditions are all part of that. You went backwards. pick a car, then get the loan.
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