Recent college grad. Down payment on a house or car?

Question

So here's the situation I'm facing. I've recently graduated college but have been working for a while now. I've managed to save up around $10,000 aside for my "money to live" stash. And like most college grads, my current car barely runs and I'm going to need to get a new one here very soon.

We currently are renters. Rent is very cheap where I live. $400 a month for rent, electric, garbage, etc. But I would like to purchase a home within the next 2-3 years.

I've been looking at a car that's $27,000 total. I am able to finance the car at 1.9% for 60 months. My total expenses for a month including rent, credit card, student loans are well under half of my monthly salary. Even with a month car payment of $475 ($0 down on the car), I'm at about 50% of my monthly take home.

So my question is where should I put the money I've saved up? Should I go $0 on the car and bank the money towards the house or should I put the money down on the car and cut the interest I'm paying towards the car? Also consider that any money cut off my monthly car payment will go directly toward the house fund.

Answer 1

$27,000 for a car?! Please, don't do that to yourself!

That sounds like a new-car price. If it is, you can kiss $4k-$5k of that price goodbye the moment you drive it off the lot. You'll pay the worst part of the depreciation on that vehicle.

You can get a 4-5 year old Corolla (or similar import) for less than half that price, and if you take care of it, you can get easily another 100k miles out of it.

Check out Dave Ramsey's video. (It's funny that the car payment he chooses as his example is the same one as yours: $475! ;) ) I don't buy his take on the 12% return on the stock market (which is fantasy in my book) but buying cars outright instead of borrowing or (gasp) leasing, and working your way up the food chain a bit with the bells/whistles/newness of your cars, is the way to go.

Answer 2

Given the state of the economy, and the potential of a rough near future for us recent grads (i.e. on/off work), I would recommend holding off on large purchases while your life is in flux. This includes both a NEW car and purchasing a house.

My short answer is: you need a reliable vehicle, so purchase a used car, from a major dealer (yes this will add a fairly high premium, but easier financing), that is 4-5 years old, or more. Barring the major dealer purchase, be sure to get a mechanic to check out a vehicle, many will offer this service for a reasonable payment. As people point out, cars these days will run for another 100k miles. You will NOT have to pay anywhere near $27,000 for this vehicle. You may need to leverage your 10k for a loan if you choose to finance, but it should not be a problem, especially as you seem to imply an established credit history.

In addition to this, start saving your money for the house you would like to eventually get. We have no idea where you live, but, picking rough numbers, assuming a 2 year buy period, 20% down, and a $250,000 home, the down payment alone will require you to save ~$2,000/month starting now.

Barring either of these options, max out your money to tax sheltered accounts (your Roth IRA, work 401k, or a regular IRA) asap. Obviously, do not deplete your emergency fund, if anything, increase it. 10k can be burned through in a heartbeat.

Long Answer: I purchased a brand new car, right out of school, at a reasonable interest rate. Like you, I can afford this vehicle, however, if someone were to come to me today (3.5 years later) and offer me the opportunity to take it back and purchase a 4-5 year used vehicle, at a 4-5 year used car price, albeit at a much higher interest rate (since I financed), it would be about a 0.02 second decision.

I like my car, but, I'd like the differential cash savings between it and a reliable used car more. $27,000 is also fairly expensive for a new vehicle, there are many, very nice vehicles, for 21-23k. I still would not consider these priced appropriate to spend your money on them, but they exist. However, you do very much need a reliable vehicle, and I think you should get one.

On the home front, your $400 all inclusive rent is insanely cheap. Many people spend more than that on property tax and PMI each year, so anyone who throws the "You're throwing money away!" line at you is blowing smoke to justify their own home purchase. Take the money you would have spent on a mortgage, and squirrel it away. Do your own due diligence and research the home market in your area and decide for yourself if you think home prices have bottomed and will stay there, have further to go, or are going to begin to rise. That is a decision only you can make for yourself.

I'd add a section about getting expenses under control, but you said you could save 50% of your takehome pay. This is an order of magnitude above the average. Good job. Try doing 50% for 4 months, then calculate your actual amount. Then try to beat it.

Answer 3

Not long after college in my new job I bought a used car with payments, I have never done that since. I just don't like having a car payment. I have bought every car since then with cash.

You should never borrow money to buy a car

There are several things that come into play when buying a car.

When you are shopping with cash you tend to be more conservative with your purchases look at this Study on Credit card purchases.

A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash. And McDonald's found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash.

I would bet you if you had $27,000 dollars cash in your hand you wouldn't buy that car. You'd find a better deal, and or a cheaper car. When you finance it, it just doesn't seem to hurt as bad. Even though it's worse because now you are paying interest.

A new car is just insanity unless you have a high net worth, at least seven figures. Your $27,000 car in 5 years will be worth about $6500. That's like striking a match to $340 dollars a month, you can't afford to lose that much money.

Pay Cash If you lose your job, get hurt, or any number of things that can cost you money or reduce your income, it's no problem with a paid for car. They don't repo paid for cars.

You have so much more flexibility when you don't have payments.

You mention you have 10k in cash, and a $2000 a month positive cash flow. I would find a deal on a 8000 - 9000 car I would not buy from a dealer*. Sell the car you have put that money with the positive cash flow and every other dime you can get at your student loans and any other debt you have, keep renting cheap keep the college lifestyle (broke) until you are completely out of debt. Then I would save for a house.

Finally I would read this Dave Ramsey book, if I would have read this at your age, I would literally be a millionaire by now, I'm 37.

*Don't buy from a dealer Find a private sale car that you can get a deal on, pay less than Kelly Blue Book. Pay a little money $50 - 75 to have an automotive technician to check it out for you and get a car fax, to make sure there are no major problems. I have worked in the automotive industry for 20 + years and you rarely get a good deal from a dealer.

“Everything popular is wrong.” Oscar Wilde

Answer 4

Don't buy the new car. Buy a $15k car with $5k down and a 3 year loan and save up the rest for your car.

A $500/mo car payment is nuts unless you're making alot of money. I've been there, and it was probably the dumbest decision that I have ever made. When you buy a house, you end up with all sorts of unexpected expenses. When you buy a house AND are stuck in a $500/mo payment, that means that those unexpected expenses end up on a credit card.

Answer 5

As a car guy, I wouldn't spend 27 large on anything that wasn't "special" - you'll be looking at for at least the duration of the loan and for me it'll better be very special lest I get bored with it during that time. But that's just me.

If you want a transport appliance - spend around $5k-$7k on a decent used vehicle, pay it off within a couple of years or less and keep throwing money at your downpayment.

Now if you have any student loan debt, buy a $3k car, learn how to fix it if necessary and pay off the millstone, err, student loan ASAP.

Answer 6

I'd suggest buying a used car for cash, car loans are a bad idea. I bought my last car a few years ago for $8k off of craigslist, and it is still running great. Make sure you get a car checked out by a mechanic before buying (usually they'll drop it off at a mechanic you want to have take a look, or perhaps just go with you).

My general rule is to not take out loans for anything which decreases in value. So a home mortgage would be fine, a car loan is not a great plan. Buy cash, and save for the next purchase. If you buy a decent used Corolla (or other small import car), you can get it for $8k, it will likely last a few years at least. That could end up costing you less than $200 per month total, or less. Much better deal in the long run.

Answer 7

That sounds like way too much for a car! I suggest you get a used car that only has a few years on it and is in mint condition. Not only are they cheaper to purchase, they are also the cheapest to insure.

Answer 8

When I was in that boat a few years ago, I went for the car first. My thoughts:

If I get the car first, I'm guaranteed to have a car that runs well. That makes it more convenient to commute to any job, or for social functions. I ended up dropping about $20k into a car (paid cash, I don't like being in debt). I chose to buy a really nice car, knowing it will last for many years to come - I'm expecting to not replace it for about 10 years from the purchase. I would urge you to consider paying in full for the car; dumping $20k+ is a lot, and there are plenty of nice cars out there in the $10-20k range that will work just fine for years to come. One benefit of paying in full is that you don't have a portion of your income tied into the car loan.

The main reason I chose not to go for the house first had more to do with the difference in commitment. A home mortgage is a 30-year commitment on a large chunk of your income. With the job market and housing markets both currently working against you, it's better to wait until you have a large safety net to fall into. For example, it's always recommended to have several months worth of living expenses in savings. Compared to renting, having 6 or more months of mortgage payments + utilities + insurance + property taxes + other mandatory expenses (see: food, gas) comes out to a significant amount more that you should have saved (for me, I'm looking at a minimum of about $20k in savings just to feel comfortable; YMMV). Also, owning a house always has more maintenance costs than you will predict. Even if it's just replacing a few light bulbs at first, eventually you'll need something major: an appliance will die, your roof will spring a leak, anything (I had both of those happen in the first year, though it could be bad luck). You should make sure that you can afford the increased monthly payments while still well under your income.

Once you're locked in to the house, you can still set aside a smaller chunk of your income for a new car 5-10 years down the road. But if you're current car is getting down to it's last legs, you should get that fixed up before you lock yourself in to an uncomfortable situation.

Don't be in too much of a hurry to buy a house. The housing market still has a ways to go before it recovers, and there's not a whole lot to help it along. Interest rates may go up, but that will only hurt the housing market, so I don't expect it to change too much for the next several months. With a little bit of sanity, we won't have another outrageous housing bubble for many years, so houses should remain somewhat affordable (interest rates may vary). Also keep in mind that if you pay less that 20% down on the house, you may end up with some form of mortgage interest, which is just extra interest you'll owe each month.

Answer 9

I generally agree with the sentiment in many other answers that $27K is more I would personally spend on a car if I were in your position.

Having said that, the following assumes you are already intent on buying that car. Even if you change your mind, I think the general ideas still apply.

• If you don't already have an emergency savings buffer, your first priority should be to start building this up. You want to be covered for at least a few months if you lose your job, or something unforseen happens. After buying your own place, you will want to increase this buffer (to account for things like repairs, etc.).
• Depending on when you plan on buying your own place, you will likely want to start putting money away for a down payment. You can buy a car or pay the minimum on a loan, but based on current lending standards you absolutely have to have a liquid down payment to get a mortgage, so plan ahead for this.
• Your next priority should be to work towards paying down debt, starting with the ones that cost you the most in interest. Based on your question, I am guessing that is your school loans (since they are likely above 1.9%). Make sure you take possible tax deductions into account when you calculate your actual rate.

Answer 10

Buy a car. Unless you definitely know you are living in the area for a good long time, avoid buying a house and get a car instead.