credit Archives - Page 2 of 3

Auto Financing After Bankruptcy – Marlon Answered

01.17.2010 by Matt Jabs //

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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.

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.
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.
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:

Find alternate transportation (friends, bicycle, bus, etc.)
Cut out all unnecessary spending.
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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Credit Financing and Deferred Billing – Kate Answered

01.15.2010 by Matt Jabs //

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

Should Kate risk financing furniture?

Yesterday DFA reader Kate asked:

“Last night I was discussing with my friend about buying furniture at Rooms To Go. They are always advertising this amazing no interest, no payment deals and I am in the market for something for my dining room. She mentioned to me that as long as I paid off the furniture before the allotted time, it was a great deal. However, if I had any balance left after the advertised period, not only would I be charged interest on the remaining balance but on the full price of the furniture. Of course, I would make monthly payments to ensure I didn’t pay any interest, but it made me think that I needed to be careful on the amount I spent.”

Promotional credit financing

What Kate is referring to is called “deferred billing” and/or “promotional financing.” Basically the seller will offer either deferred billing, deferred interest, or both for a specific promotional time period. Interest on such purchases typically accrues from the date of purchase and is then charged to the account if the balance is not paid in full before the promotional period expires.

Like many other financing offers, these waters should to be tread with caution.

Here’s what I would do Kate:

Firstly, be aware of the purpose of these creative financing programs: they remove barriers to buying. Marketers put it this way, “Promotional financing makes higher-priced items more affordable to a greater number of potential buyers.”

From the marketers point-of-view, just because someone doesn’t have the money now doesn’t mean they can’t buy. Appealing financing terms are offered to turn browsers into buyers.

So the question to ask yourself is… should you buy the furniture now, or would it be wise to save money and then buy the furniture?

If you actually do have the money saved (which I don’t think you do), you could use their free money for the span of the promotional period and let your money continue to earn interest. But if you do not have the money saved then you should be careful not to presume upon your future ability to earn. For example, what happens if you lose your job during the promo period? If you cannot find an alternative income source you run the risk of not being able to pay in full before the deferred billing and interest kick in, thus consuming any savings you originally may have had.

If you save the money then buy you delay your purchase, along with your gratification, but reduce your risk and increase your likelihood of a positive ROI.

Saving money, then buying will allow you to wheel and deal with your wad of cash – Dave Ramsey style. You won’t have to worry about losing your job and not being able to pay for the furniture. Also, if you save a specific amount you are limited to spending that specific amount, which takes care of your second concern of spending more than you should.

To combat the delayed gratification and temptation monsters, go to estate sales, garage sales, and 2nd hand stores for temporary furniture while you save for the new. This is not the modern American way… but it may just be the wise financial way. Who knows… you may end up liking your “temp furniture” so much that you no longer desire new furniture… then you can use the money you were saving toward something else!

What do you think?

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

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

Is The $6,500 Homebuyer Tax Credit Retroactive for Existing Non-First Time Home Buyers?

11.06.2009 by Matt Jabs //

Many people want clarification on exactly who is eligible for the new $6,500 homebuyer tax credit. Read on to see whether or not you qualify.

Here are two more recent posts on the matter:

The measure deals primarily with extending and expanding the homebuyer tax credit along with unemployment benefits and business tax credits.

A question looming large on the minds of a lot of many people is whether the $6,500 homebuyer tax credit will be retroactive or not. Meaning, if you purchased your home before the inception of the tax credits, are you eligible for a credit?

Unless Congress has a sweeping change of heart, to the discouragement of many American home owners the answer is NO. As I mentioned in an article earlier, the wording in the bill goes like this, “shall apply to residences purchased after the date of the enactment of this Act.” According to the bill the credit is being expanded to include a $6,500 tax credit to non-first time home buyers who purchase between November 7th, 2009 and May 1st, 2010.

So Exactly WHO gets the $6,500 credit?

Non-first time home buyers who have lived in their previous residence for at least five out of the last eight years but are selling that home and buying a new home by May 1st, 2010. The new home must be used as a primary residence.

And Exactly WHO gets the $8,000 credit?

First time home buyers who purchase a home before May 1st, 2010. The new home must be used as a primary residence.

Please note that… any home owner who sells the newly purchased home or ceases to use it as a primary residence within three years of the purchase date must repay the credit. And in both situations the yearly income limits are $125,000 for individuals and $225,000 for couples.

Why Not Make the Homebuyer Tax Credit Retroactive?

When considered from the perspective of why the legislation was enacted in the first place, not extending the tax credit to existing home owners makes perfect sense. They originally extended the credits to new buyers with the purpose of stimulating the housing market. Simply passing the credit on to everyone who has purchased in the last five years would be disastrous and is quite unfeasible.

Will This Stimulate the Economy?

Ultimately the decision to extend these credits was made in order to further stimulate the housing market by encouraging existing home owners to sell their current residence and buy again. Will this have the effect they are hoping for? What do you think?

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