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, 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 trip to the bank
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.
Bad advice and even worse math
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.