A little advice please...car loan related

Question

I have a car loan out that is $10,000. It's actually a personal loan at 10% interest rate. The vehicle is about 10 years old and has 135,000 miles. The KBB value is around $4,000. It's having transmission problems. Without going into details too much, I've put alot of money into this car the last few years and basically it needs a new transmission. Here is the problem: I need a new vehicle, not brand new, but I'm looking to buy a used car. I need a dependable vehicle with AWD because of where I live. The vehicle is a must for work purposes. There are many options here, but I'm not sure what to do that makes the most financial sense. Please help!

I have $5k savings. I make $1,000 per two weeks. My expense are this loan at $350 and rent $500 for everything. No other bills besides gasoline ($200/month) and food ($100/month).

Answer 1

Let's assess the situation first, then look at an option:

1. You make about $2,167/mo - I'm assuming this is take home, not pre-taxes (which may lead me to the danger of an assumption). If it's $1,000 every 2 weeks pre-taxes, then the numbers will be different.
2. Car loan outstanding is $10,000 @ 10% paying back $350/mo - By my math that puts you with about 33 months of payments left until you're done.
3. Housing costs are $500/mo
4. Fuel is $200/mo
5. Food is $100/mo

This leaves you with about $1,017/mo in cash flow, provided you spend money on nothing else (entertainment, oil changes, general merchandise, gifts, etc.) So I'd say take $200/mo off that as "backup" money. Now we're at $817/mo.

Question: What have you been doing with this extra $800/mo? If you put $600/mo of that extra towards the 10% loan, it would be paid off in 12 months and you would only pay $508 in interest. If you have been saving it (like all the wisest people say you should), then you should have plenty enough to either pay for a new transmission or buy a "good enough" car outright.

10% interest rate on a vehicle purchase is not very good. Not sure why you have a personal loan to handle this rather than an auto loan, but I'll guess you have a low credit score or not much credit history.

Cost of a new transmission is usually $1,700 - $3,500. Not sure what vehicle we're talking about, so let's make it $3,000 to be conservative.

At your current interest rate, you'll have paid another $1,450 in interest over the next 33 months just trying to pay off your underwater car.

If you take your old car to a dealership and trade it in towards a "new to you" car, you might be able to roll your existing loan into a new loan. Now, I'm not sure when you say personal loan if you mean an official loan from a bank or a personal loan from a friend/family-member, so that could make a difference. I'm also not sure if a dealership will be willing to recognize a personal loan in the transaction as I'd wager there's no lien against the vehicle for them to worry about. But, if you can manage it, you may be able to get a lower overall interest rate. If you can't roll it into a new financing plan, then you need to assess if you can afford a new loan (provided you even get approved) on top of your existing finances. One big issue that will affect interest rates and approvals will be your down payment amount. The higher it is, the better interest rate you'll receive.

Ultimately, you're in a not-so-great position, but if your monthly budget is as you describe, then you'll be fine after a few more years. The perils of buying a used car is that you never know what might happen. What if you don't repair your existing car, buy another car, and it breaks down in a year? It's all a bit of a gamble. Don't let your emotions get in the way of making a decision. You might be frustrated with your current vehicle, but if $3,000 of repairs makes it last 3 more years, (by which time your current loan should be paid off), then you'll be in a much better spot to finance a newer vehicle. Of course it would be much better to save up cash over that time and buy something outright, but that's not always feasible.

Would you rather fix up your current car and keep working to pay down the debt, or, would you rather be rid of the car and put $3,000 down on a "new to you" car and take on an additional monthly debt? There's no single right answer for you. First and foremost you need to assess your monthly cash flow and properly allocate the extra funds. Get out of debt as soon as reasonably possible.

Answer 2

Suggested way to make the decision to repair or buy: Figure out what it will cost to repair your car. (If necessary, pay a garage to evaluate it "as if your daughter was interested in buying it".) Then think about whether you would pay that much to buy a car just like yours but without those problems.

If the answer is yes, fixing it us probably your most cost-effective choice, even if it is a big bill.

If the answer is no, consider a used car, and again have the mechanic check it for any lurking horrors before committing to buy it. That avoids the "proprty-line tax" where a new car loses a significant percentage of its value the moment it leaves the dealership. An almost-toy car us virtually indistinguishable from a new car, costs much less, and realistically has about the same expected life span.

I bought a new car once -- at about $300 over the dealer's real (as opposed to sticker) cost, since I was willing to take the one he was stuck with from the previous model year. (Thank you, Consumer Reports, for providing the dealer's cost info and making this a five-minute transaction.) If it hadn't suffered flood damage I'd probably still be driving it, and even so I sorta regret not pricing what it would have cost go completely replace the engine. If you really plan to drive it until it is completely unrepairable, you may be able to justify a new car... But realistically buying a one- or two-year-old car would have been a better choice.