Wednesday, January 9, 2008

Arming yourself: The car

This short series will likely consist of between 4 - 5 posts spread out over the course of several months. All will deal with ways to aggressively solve your money problems. Some of them are designed more for your mental well being than anything, which is admittedly a big part of the problem. But some of them will be a bit more practical, while others take a more "out of the box" approach.

If you're in the process of paying off your debts there is bound to be a point where you are capable and willing of switching into an aggressive mode to finally put those outstanding balances to rest. When you enter into this arena you're going to need a couple of tools of the trade to grease the wheels of economics.

Up until now you've managed your budget to varying degrees of success, you've cut your expenses back and you're monthly payments are starting to tip above the minimums. Now is the time to start bringing the hurt to those scary numbers.

A tool often over looked by those within financial crisis is the car. A car loan will likely be the second largest loan the average person will take out during their life time next to a home mortgage.

Both loans are typically secured debts, unsurprisingly. Simply put, a secured loan is one you enter into wherein some form of collateral is offered. This is to assure the lender that if you are unable to make successful payments, they have a shiny new toy they can resell to pay off your delinquency.

Because of this fact, the car and home mortgage are payments that likely take precedent over everything else in your life. For good reason, too. You don't want to lose your car or your home and you don't want that terribly ugly "repossessed" mark on your credit report.

But wouldn't it be nice to knock one of them out of the park? Paying off a $250,000+ home loan while you're in the hole is likely impossible. But car loans are a different story. It's substantially less than a home loan.

Depending on your model, credit score, interest rate and payment plan your monthly payments can average between 200 to 500 dollars every month. If you were able to reclaim that money, it's just like getting another job. You have an extra $6,000 a year to throw at your creditors.

So, do just that. If it's within your means and the remaining balance on your car isn't sky high, focus on it. Pay it off as soon as you can. When your monthly statement comes in, tack another $100 onto each check you cut. Even more if it's even remotely feasible.

And after it's paid off, drive it until the wheels fall off.

A lot of people are programmed to start shopping for a new car after their old one is paid off, or heaven forbid, before their old one has been completely paid off.

Sometimes this is necessary. Often it is not. Car loans are relatively short term, typically only 2 or 3 years. This is not the life time of an automobile. Chances are the dealer you trade it to is going to resell it to some poor guy after it's been cleaned and tuned up.

This is the point where people sigh and say: "But I won't have to worry about repairs on a new car.."

Which is a very valid point. But if you pay off your car completely and it is fully in your name, you don't have those ugly monthly payments any longer. You have less debts attached to your name, and thus your credit score increases.

So, as long as your repairs do not meet or exceed your previous monthly payments, you are saving money. You can then use that extra cash to pay off some of your other debts

Shelling out $500 to a repair shop may seem like a lot, but you're likely not going to be doing that every month. And since you have direct control of the vehicle, if for whatever reason it begins to cost more in maintenance that you're comfortable spending, you're completely free to trade it in for a new one.


Anonymous said...

nice chatting with you. :)

good tip. but keep fuel efficiency in mind. a super old car is going to eat a lot more gas than a new car.


MommySecrets said...

Oh, it's such a battle knowing how long to drive semi-old cars. I'll probably never drive a brand new car again (too much lost money when driving off the lot), but I need some advice on when to throw in the towel and sell the older cars!


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