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Auto Financing After Bankruptcy – Marlon Answered

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In case you haven’t heard, I am offering free debt help.

Visit the Ask Matt Jabs page and fill in the form to ask your question… for free!

How much should Marlon spend for a vehicle?

DFA reader Marlon asked:

“On super bowl Sunday of last year my sister in law totaled my car. 15 days later we bought a 99 Mercury Cougar.  We went to a buy here pay here car lot.  As of March 1st we will have made one year of payments. Just this past December I got my bankruptcy discharged. I would like to get out of the 99 Cougar and into something safer.

How long and how much should I come up with for a used vehicle?”

The 1/10th Rule for purchasing a vehicle

I first saw this concept used by the Financial Samurai, and I like it.  The 1/10th Rule states that the car you buy should cost no more than 1/10th your gross annual salary.  Example:  If you earn a $50,000 yearly salary [50,000/10 = 5,000] you should spend no more than $5,000 toward your next vehicle.

Marlon, divide your annual salary by 10.  That is the limit on how much you should spend toward a vehicle.

Financing after bankruptcy

You also mention the fact that you just had your bankruptcy discharged in December, 2009 and are wondering how long you should wait.  I am assuming you mean how long you have to wait before you can be considered for additional financing for yet another vehicle.  I have a couple of things to say about that.

  1. Can you finance? Financing purchases may be what caused your bankruptcy in the first place.  You said you were making payments on the 99 Cougar and that March 1st will mark 1 year worth of payments, but you also stated your debts were discharged in December.  Did that discharge not include the auto loan for Cougar?  Do you still owe on the Cougar?  If so then the last thing you should be thinking about is financing another vehicle.  If the Cougar is unsafe AND unpaid then you need to focus on getting that debt settled ASAP… THEN you can begin saving money toward another used vehicle.
  2. How long until you can finance? Although a bankruptcy can remain on your record for up to 10 years, its effect on your credit can begin to lessen the day after the case closes.  As long as you handle your finances responsibly from here forward, your credit will improve sooner than you might expect.  How soon you will be available for financing depends on how responsibly you handle your credit from here on out.
  3. Rebuild your credit. Your credit has taken a hit and needs to be nursed back to life.  If your debt to income ratio (the measure of your monthly debt payments to your monthly gross income) is raised too high too fast your credit will never improve and you’ll find yourself back in financial trouble but without another bankruptcy net to fall into.  If you must borrow, do so a little at a time.

Here’s what I would do Marlon:

I would not finance another vehicle.  You mention the Cougar is not safe.  If the Cougar is not beyond repair then do whatever necessary to get it operating safely.  Will new brakes make it safe?  Then get new brakes.

If it is beyond repair then do the following:

  1. Find alternate transportation (friends, bicycle, bus, etc.)
  2. Cut out all unnecessary spending.
  3. Save extra money toward your next used vehicle.

Do this as long as your situation will allow, or until you have enough money saved to buy a vehicle in sound operating condition.  You can find such vehicles for as little as $1,000 if you know how to look.  Also, remember not to spend any more than 1/10th your yearly salary on the vehicle.  So if 1/10th your salary is $5,000 – then shoot for somewhere between $1,000 and $5,000 for the vehicle.

What do you think?

What would you do if you were in Marlon’s shoes?

If you need debt help or personal finance advice – Ask Matt Jabs.

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Debt Testimonials – Rethinking Interest Paid Moves Fred Into Action!

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When is the last time you sat down and really evaluated your debt, calculated your total interest amount paid toward all loans, and truly established a proper relationship with your debt?  For my buddy Fred… that time is now!

“Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.”  – Romans 13:8

Fred called me the other night to talk finance.  Always the lover of money talk, I quickly perked up my ears.  Fred recently sold his house, is in the market to buy a new house, has a large chunk of money saved, but has a high rate auto loan that he just started to really examine – which was the main reason he was calling.

Here is Fred’s story and what he decided to do…

Fred’s Debt Repayment Testimonial

You know that new car mistake?  Yeah… I fell for it a couple of years ago.  I was on my way home from work when I decided to stop by the Ford dealer – and there it was:  A Black Mustang GT with red leather interior, V8, and 5-speed trans – a car guy’s dream!

Long story short, I drove it home that night.  I think I had about $7 and change in my pocket, but financing wasn’t a problem.  They took my Grand Prix on trade, which I still owed on, and they just rolled it in to the new payment.  Rolling the old car in to the new loan really was not the best thing to do; especially considering the car wasn’t worth what I owed on it, not even close, but that Mustang had me in a bad case of the wants!

Don’t get me wrong , what a great car!  But I live in Michigan and Mustangs are not the best winter car out there.  So there it sat in the garage – all – winter – long – with me making $500 monthly payments, plus insurance.  I did that for just over 2 years, then recently started really considering the interest I was paying...

I sold my house about a month ago and even in this market I was able to get a few bucks out of it.  Combining the earnings from the house with what I already had saved brought my savings up to around $70k.  Now we are currently looking for a new house.  While it would have been great to use most of the savings toward a down payment, the Mustang loan started bothering me more and more.  After rethinking the fact that my bank was only paying 0.25% interest on my $70k, but I was paying 8.8% on the Mustang ($341.08 towards the principal and $158.92 in interest), what I needed to do suddenly became very clear.

On October 21st, 2009 I paid $19,414.66 on the Mustang, the finial payment!  We still have over $50k left to put towards a down payment on a new home, and now that the auto loan is gone we can build our savings back at a much faster rate.  Also, by paying off the loan I am basically putting that 8.8% interest in my pocket which makes the savings grow that much faster.

There are many reasons to pay off your car, and today I can give you 19,414.66 of them… and boy does it feel great!

Way to go Fred!  Congrats man.

What About You?

Do you need to sit down, calculate your monthly interest amount paid, and make a few steps toward improving your financial situation?  Now is the time people, and you are the only person who can set your finances in order.  By paying off the 8.8% loan, Fred reclaimed over $150/month in interest payments and is now essentially earning 8.8% on that money over the next 4 years (life of loan).  What kind of money does that calculate out to?  $3,451.05 – This is the amount Fred saved by paying off his loan early.

Now not everyone has a $70k bankroll sitting around to work with, but this story should pique your interest (no pun intended) to at least pay extra payments toward your loan principle.  Even a small amount toward extra principle payments will save you much more than you may first think.

It’s time to roll up your sleeves, get motivated, and get ready to destroy some debt!

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DFA is passionately dedicated to helping people break the bondage of debt and work toward financial freedom using biblical principles.

Cash For Clunkers Ending Monday – Toyota and Honda profit much more than Ford and GM

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The reality of Government money for your gas guzzling junker is coming to an end!  If you’re into that sort of thing you better act while there is still time…

If you are planning to take advantage of the possible $4,500 new car credit the U.S. government rushed to make available, you may want to hop in your clunker and buzz that gas guzzler straight over to the nearest dealer sooner rather than later.

According to a recent announcement by U.S. Transporation Secretary Ray LaHood – the $3 billion government sponsored — taxpayer funded — CARS program, dubbed “Cash for Clunkers” will be coming to an end this coming Monday, Aug. 24, at 8pm EST.  Lahood also offered this blurb in his “wind-down” strategy:

As of 6 AM on Thursday, more than 450,000 transactions have been submitted by dealers, representing a total of about $1.9 billion.  This represents approximately 2/3rds of the $3 billion allocated to the Department of Transportation to operate the CARS program. Based on conservative estimates of valid deals transacted under the program, DOT has projected that the program will be able to continue to accept new submissions until the Monday deadline, consistent with the statutory authority of the program.

Unlike the first time the cash for clunkers program ran out of money, this time it appears the end has truly arrived.

Just like any other government program, there have been a few hiccups along the way.

  • Many are upset over the fact the junkers have to be destroyed.  There has not been a solid explanation for this to date and that lack of transparency has led many to believe the motivation is less than honorable.
  • Though the cars are selling like hotcakes, government money is not flowing back into the dealerships at the same speedy rate.  Fronting money has become such a problem that some dealers have been forced to withdraw from the program completely due to lack of funds.
  • Charitable organizations that normally benefit from the donation of older vehicles are suffering because of the unprecedented wastefulness of this government program.

Despite all the problems, the cash for clunkers program can’t be all bad… right?  Somebody had to benefit… right?

Who benefited most?

According to statistics, although the Ford Focus was the top vehicle purchased, the next 4 in line were the Toyota Corolla, Honda Civic, Toyota Prius, and Toyota Camry.  This means the bulk of consumer money went to companies based largely outside of the U.S. economy.  The varying roles each of these companies play in our economic recovery would make for an interesting debate… and one I’m sure many Americans would love to hear!

Though demands for vehicles from GM and Ford are lower than those of their foreign counterparts, both American auto giants have bolstered production to meet the increased demands — which many fear will be short lived.  How long will this production hike last? No one knows for sure, but many agree the predominate sound heard at auto dealerships after the Monday deadline will be the peaceful chirping of crickets.

Whether or not you believe the C.A.R.S. program is profitable or just another example of wasteful government mismanagement, if you are looking to participate you better get moving!