Paycheck Chronicles

Car Payments Can Be A Pain

In my financial counseling, I see a few main areas where a family's spending is out of balance with their income.  The two largest areas are debt repayment and car payments.  Car payments can be a huge problem if they are too large, or extend for too long.  If they are too large and for too long a term, it can be a complete disaster.

Cars, unfortunately, have gotten expensive.  We all desire safe, reliable transportation, and that's not unreasonable.  However, even a smaller sedan, like a Volkswagon Passat or Mazda3 will cost nearly $20,000 new.  If you have a larger family and need more room, then even a basic mini-van starts around $25,000.  This can mean a large payment and/or a long term.  Start looking up the car spectrum and a new BMW 5 series or Lincoln Navigator will set you back about $60,000.  Shazaam!  Seriously makes me wonder why I see so many of these luxury cars driving around base.

Most financial experts recommend that if you must finance a vehicle, you try to keep your payment term to less than three years (36 months).  A three year loan for $20,000 is going to cost nearly $600 per month, depending on your interest rate.  That's a lot of money!  A three year loan for $60,000 will cost $1,700 a month.  Even people who don't have a good handle on their money will recognize that is unaffordable, leading them to a longer term loan.  Stretch that $60,000 out to six years (72 months) and you've lowered the payment to a still unaffordable $885 per month.  Under certain circumstances, you can get loans up to 8 years long.  I'm sorry, but that is ridiculous.

The thing that is most challenging for most people is to know what they can afford in a car payment, and to know that they will be able to afford that payment for the term of the loan.  As you get into longer loan terms, the chances of your situation changing increase.  The military member could leave the service, the military spouse could stop working, you could PCS overseas (even to a place where you can't take the car), a child could become ill, you could have triplets and not fit in the car anymore!

There is plenty of wisdom on how to avoid these problems:  pay cash for your cars, buy used, drive them forever.  However, sometimes a car loan is a necessary evil.  There are four basic strategies for making sure that the car loan you want is going to work for your family.

Can You Afford It?

This requires the most pre-planning, and longest time stretch, but it is the best way to ensure that you can actually afford a potential car payment.  Starting today, put the amount of your desired car payment into the bank each month.  Set up a special account, and treat it as a bill.  How does it feel to make that payment each month?  Does it make you wonder how you are going to pay for groceries, or is it no problem?  Once you've made 12 consecutive payments, on time, without a problem, you can be fairly confident that the payment will work within your family's spending plan.  If that payment is uncomfortable, start looking at alternatives.  A huge bonus is that you'll have 12 months worth of car payment saved up for a down payment or an emergency fund.

Look Critically At The Future

Consider the length of loan you want to use, and then look at your family's current and future situation.  Is ETS or retirement near?  You really, really want to pay off that loan before you leave the service.  Is it at all possible that you might marry or have children during the next three or six years?  That awesome Mustang is a lot less fun when you're trying to get two kids into car seats.  Are overseas orders a possibility?  Let me tell you, driving an Escalade in the streets of Naples, Italy is a recipe for disaster.  Obviously, we can't all predict the future accurately, but we must try.  And learn from my mistake:  that enormous station wagon you buy with child number one will be way too small when you have child number four just five years later.

Consider Alternatives

If you have any doubts about your ability to maintain a car payment over the required number of years, then you will be helping yourself a ton if you consider less expensive alternatives.  Could you drive a beater for a year until you know where your next set of orders will send you?  Could you still buy a new car, but choose a  less expensive model to lower your payments and/or term?  Buying nearly-new can be heaps cheaper than actually new and might make the car of your dreams be the car of your budget as well.

Car payments can truly make or break a family's spending plan.  An affordable car payment with a reasonable term can be a great help in securing the right vehicle for your family's needs.  A six year loan for $800 per month can be disaster if it doesn't fit with your income, or your income drops for any reason.  I regularly see families who could manage their car payment before some change in their lives, but are in big financial trouble now and the car payment has become a huge problem.

Car loans can be useful tools, or they can be dangerous weapons.  It is so painful to see people who are suffering because of a car payment that

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