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Pay off credit cards or buy a car with cash?

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Marierdh20
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Pay off credit cards or buy a car with cash?  Reply with quote  

I'm wondering which way to go.

We just sold my husband's truck for $15,500. We are also going to be receiving a tax refund of about $6,700. This leaves us with $22,200. We are trying to figure out whether to buy another car with about $12000 cash or do we pay off credit card debt and get a car loan? We have two credit cards with balances. $3800 (8.25%) on the one and $16,000 (9.9%) on the other. We are also moving in the fall and will need to set aside $5000 for that as we have no other money in savings right now. My husbands take home pay is $3500 a mth while mine is variable at $1400 to 1800 a mth dependent upon how many hours I get (I will most likely have a hard time finding a job when we move and so will need to live of his income until I find work.) We have one car payment currently at $409 (4.9%). I hate to get into another car loan, but we are having difficulty finding a car that will fit our needs in the $12000 price range. We need a commuter car for when my husband and I move to another state since he will need to commute to work quite a distance. I'm reluctant to purchase a car that has high mileage on it for this reason.

My husband wants to just buy a car with the cash we have as he is worried that since that is a fixed payment if we run into financial issues (after we move and I'm looking for work) we can forgo a payment or two on the credit cards. My position is that since the credit cards are higher interest wouldn't it make sense to pay off the one, pay down the other and get a car loan with a lower interest rate then we could focus on trying to pay down the one card that still has a balance?
What would you do or advise? My head is swimming! Shocked
Post Tue Feb 12, 2013 2:22 am
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oldguy
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quote:
We are also going to be receiving a tax refund of about $6,700.


Well, first why do you lend $6700 to the IRS for free when you are paying 9.9% to borrow that money? At 9.9% it cost you $670. Time to fix your W4's at work.

As for cars, you are falling into the same trap that many young people are in - too much car. The car has become a status marker over the past 20 years, people seem to think that only new cars are safe & reliable so they continually replace them. Modern cars provide 200,000 miles of relatively trouble-free service, yet many people trade before 100,000.

I would buy a safe reliable Japanese car that has less than 100,000 miles for about $5000 to $7000 and keep it to 200,000 to 250,000. (We've been buying new & replacing at 200,000 for about 35 yrs - our newest car now has 140,000 and we'll keep it for a few more yrs). According to AAA, over 90% of road calls are battery, tires, belts. And tires & brakes are the main safety items. You can replace all 4 for less than $1000 and be safe/reliable for 4 more yrs.

With the $22,000, I would use between $5000 & $7000 to buy a car and put the rest toward your $19,800 cc loan, clear the 9.9% note first.

As for the newer car with the 4.9% note - that's a good rate - and you can handle one moderate sized car payment ($409/m). What kind of car is it? Have you ever read that millionaires usually drive older cars? Now you know why. Very Happy
Post Tue Feb 12, 2013 4:37 am
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Sabu72
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I agree with nearly everything oldguy said in his reply. My husband travels 90 miles round-trip per day, 5 day a week and has 188,000 miles on his car (which we bought used for $10,000 about 8 years ago with 30,000 miles on it). Good maintenance is the key - don't skip oil changes or replacing wearing parts and a car will last 200,000 miles and then some.

The only disagreement I have with him is the credit card payment. While I totally agree with the theory of pay-off-cards-with-the-highest-interest-first, in your case I would payoff the $3,800 card AND CUT IT UP, then put the remainder toward the 16,000 card! The ONLY reason I say this is because it eliminates making two payments every month, and the difference between the interest rates on the card is small.

There are a lot of small details that are important to your financial situation - for example, how many more years do you have on your existing $409/mo. car payment? Two car payments can be difficult to maintain for extended periods of time, especially if you factor-in maintenance costs. If it is just another year, then you can probably swing it (as long as you give yourself a nice emergency savings cushion), but don't sign up for a long-term car note if you have another 5 years left on that existing one!

I would also suggest looking in your area for a credit union - often you will find that they offer fantastic rates on auto loans - we purchased a new truck 2 years ago at 4.9%, and refinanced it last year with our local credit union for 1.9%, as a result, more of our payment each month goes into the car instead of the banker's pockets!

Just don't put yourself in a position where you can barely afford two car payments and wind up using credit cards to pay for all the small incidentals in your life - they add up quick and that hole is a tough one to dig out of! Like oldguy said, buy a less expensive, reliable car and take good care of it - if you have to finance part of it, that is fine, just keep your payments manageable - and make paying off those credit card debts your #1 priority!
Good Luck!
Post Tue Feb 12, 2013 5:41 am
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littleroc02us
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First off you say that 12k won't buy you a reliable car. I think that's just an excuse to justify buying a new car. Hope that wasn't to harsh. You can easily find a reliable car for 5-8k in cash that has around 50k miles. Toyota makes the corolla and mitsubishi makes the galant that easily fall within that price range. As for an EF fund I would take 5k and set that aside not to be touched. That leaves around 10k left of your money.

As for your current car payment. How much is it worth according to kbb and what do you owe, why not use some of the 10k to pay off the loan and to buy another used car for around 5-8 k.

What this does is frees up $409 a month and you owe nothing on cars, with 5k in the bank for emergencies. Now you start paying down debt like crazy and eliminate that headache. Good luck!

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Tue Feb 12, 2013 4:31 pm
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Marierdh20
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Thank you for the advice!  Reply with quote  

Thank you all for your wonderful advice! We decided to purchase a 2009 toyota Corolla with about 58k miles on it for about 13,500 otd. We honestly were not able to find a used vehicle with mileage under 80K for under $14K. Trust me, we looked! The used car market where we are is booming since we have folks that drive over from another state and buy cars tax free. (MO to IL) I was not comfortable with buying a car with more mileage than 60K because he'll be doing bumper to bumper highway driving when we move and we do a lot of long distance traveling by car, plus this car has to last us until it's dead. LOL!

Oldguy- what do you recommend with W-4's? I had a scare this past tax season thinking I would owe to the state because I filled out my W-4 wrong. Also we have a 2010 Toyota Rav4 that has the payment. I'm paying on that until 2016 but will probably look to pay that off before then. I HATE car loans. As to our debt we are going to pay off the smaller card for now and then apply any other payments to the higher card balance. We are way to old (I feel) to be in this position and I want to be further ahead than we are. My husband is AD military and I'm a registered Dental Hygienist. I want to be debt free with money in saving's when he retires in 6 years, so we have a lot of work ahead of us! I think I'm going to hang around these forums and glean some good advice and info!

Thanks again!
Post Wed Feb 13, 2013 4:11 am
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oldguy
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Good job on both the Corolla and the Rav4, both are known for their reliability and long life, both will go past 200,000 miles.

quote:
W-4's? I had a scare this past tax season thinking I would owe to the state


lol - I do the opposite, I make sure that I owe the state on April 15. And the Fed. I'm surprised by the attitude of young people, I've read that the average fed tax refund is $3000. Why do people like to overpay their withholding by over $3000 and then wait until Spring to get their $3000 refunded back to them? And then they seem happy that their refund is large? (lol - I blame our schools.)

In any case, emotion is a poor substitute for arithmetic. You use 'scare' to control taxes, you use 'HATE' for your car loan decisions, you use 'urban legend' to buy cars (80,000 miles is bad, 60,000 is good?). That was true in the 1960s but modern cars do way better.

As for your 'debt free' goal, that's not really a very good goal. Much of my wealth came from borrowing capital inexpensively (on our rental houses and cars) and using that capital to work for us to build our wealth. So I would never prepay a 4.9% loan, instead I would use that money to earn more money.
Post Wed Feb 13, 2013 3:00 pm
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