You paid too much for your car

    I know I did. I love Nina -- that's what I call my 2003 Nissan Altima. But I was kidding myself when I thought I could afford her.

    I traded in my very first car -- a green Mazda Protege -- to get Nina right before I moved to Los Angeles. "Little Car" -- my Protege's name --  had no power. I had to turn off the air conditioning to get the car over 65 mph!
    I figured for a cross country drive and lots of driving in Cali, Little Car wasn't going to cut it. I'm also 6'1 and Little Car was just that. I needed more room.
    I've never been one of those people who needs a shiny new car every few years. It doesn't matter to me so long as it's comfortable, reliable and looks good. I said to myself, I'll get a bigger car with power and keep it until the wheels fall off.
    I negotiated with the dealers for three days to get Nina -- well, not negotiate, but beg for a lower monthly payment, which means nothing as I'll explain. I spent a week going to car dealerships looking at similar brands and models, but the Altima just stuck in my head. That's the car I wanted. I was going to get a 2004 Chevy Malibu because of the huge rebate offer, but it was an ugly car. Sorry. I didn't like it and I didn't care how good a deal it might have been at the time.
    Long story short, I bought Nina. Broke as a joke I charged the $1,000 downpayment (I know it was dumb, but see how much smarter I am now!) and got $350 monthly payments.

    If I had known then what I know now...

    Michelle Singletary, who writes "The Color Of Money" column for the Washington Post just wrote about this problem. Read the column here.
    She writes:

New-vehicle loans over 60 months accounted for nearly 55 percent of loan originations, according to the Consumer Bankers Association's 2006 Automobile Finance Study. Used-vehicle loans over 60 months accounted for 40 percent of originations.

In 2000, five-year or longer car loans made up just 22 percent of all such lending.

Have people lost their financial minds?

"It is to a certain degree a sign that people are stretching," said Fritz Elmendorf, vice president of communications for the Consumer Bankers Association. "It does raise the question of whether people are buying more car than they can afford and should they put the brakes on their car-buying behavior.

    I took out a 60-month loan to get the monthly payment I could swallow. But now Nina is worth about $2,000 less than what I owe on the loan. I checked on Kelley Blue Book's Web site (www.kbb.com). The low value is primarily because of the mileage (driven cross country twice, to Las Vegas from Los Angeles twice, up and down the California coast and every other weekend to D.C. to see my guy).
    Why is it bad to be upside down on the loan (besides the obvious)?:

"Upside-down." That's a term used to mean your loan balance is higher than the value of the asset that secures the loan, in this case your car. With a longer-term loan, the car's value declines faster than the loan balance. That certainly is not a good position to be in if you want to trade or privately sell your vehicle. Oh, and you had better pray you don't get into an auto accident and the car is totaled. If it is, you won't get enough of an insurance payment to pay off the loan.

    See what I mean? I should be all right because I plan to keep Nina until the car simply isn't driveable anymore. I had no plans to trade her in or sell her and now I have little choice.
    When Nina finally goes "kerplunk," and it's time for her to sleep in that scrap metal heaven, I'll get a new car and no more than a 36-month loan. If I can't handle the payments, then I can't afford the car.

    Lesson: Never choose a car based on monthly payments. Instead, decide what you can spend IN TOTAL on a car. Negotiating monthly payments just masks the cost of the car -- which is likely more than the car is worth and more than you can afford.
    Single Ma has an amazing post on her blog about finding a car and negotiating a good price. It takes research, perserverance and nerve, and it's worth it. Read the post here.
    If you can't figure out just what you can afford, start with the basics -- a budget. Then, there are a ton of calculators on the Internet that can help you figure out the true cost of a car. Check out these pages at Edmunds.com, Bankrate.com, and kbb.com.

    Lesson: If you can't afford to pay off a car in 3 years, than you can't afford the car.
    Think of a new car loan as credit card debt. The higher the debt, the longer it takes to pay it off. The less you can afford to pay on the debt, the longer it takes to pay it off. If a car dealer comes to you with a price that you need 60 months to pay off instead of 36, then the debt is too high and you can't afford to take it on.

Drive happy. DH

Comments

[mapgirl]

I'm sorry you had to learn the hard way. I got my 2001 Nissan Altima (old style) in late 2000. I got a 3 yr lease on it at $325/mo with no money down, then bought it out 6 months early b/c of the mileage charges. My folks helped with that, then I got a 3 yr loan on the balance. My folks thought I was a little crazy to do that, but my payment was the same as the lease and I was used to paying it. I paid it off now, and that payment now goes to the mortgage! woo hoo!

[Finance crash-test dummy]

You are correct in the advice you are giving here about living within your means when buying a car.

Our employees (I'm the Bursar at a private college)are often after Novated Leases and are adamant they would rather stretch themselves over 5 years instead of look for something a little cheaper and pay it out within 2-3.

I always try to win them over but they usually don't want to listen. Maybe I will point them to your post.

[Les]

This is exactly why you shouldn't "charge" that new computer, either. In less than 3 months the computer could not be sold for even a third of the price you got it for, while you're still paying down less than you can possibly imagine on the principal and being socked with up to 30% in interest fees. I learned that lesson the hard way. Twice. (Some people don't drive - but we buy a new computer every second year...!)

[lpkitten]

i was in the same position as you when i bought my car after i graduated college. i had no money and oodles of credit card debt so instead of buying a clunker i decided to buy a nice, reliable car that i could keep for a long time. i put the down payment on a credit card and signed up for a 5 year loan. BUT i have been able to pay it down in the past two years (the car loan was part of my original $30,000 debt which is now down to a little over $3,000).

[leanne]

I can completely understand paying too much for a car! Ugh! I leased my 2000 Honda Civic, then after 3 years, I decided to change the lease to a loan. Had been paying $310/month for 3 years, then got a loan for over $15,000. Happy to say that next month it will FINALLY be paid off and I will not have ANY debt remaining! And now that the car is 6 years old, thankfully I only have about 60,000 miles on it so at least it is low miles and should last for quite awhile still. Live and learn!