Car Loans

[Gatordoc50]

Probably about 80% of all folks can't pay cash in my area. .........

If people could delay gratification for a few years they could pay cash. I have always paid cash. Writing a check for 30000 plus is hard to do so I keep cars a long long time.

 

[Mulligan]

If people could delay gratification for a few years they could pay cash. I have always paid cash. Writing a check for 30000 plus is hard to do so I keep cars a long long time.

Most of my life I didn't have the money to pay cash for a vehicle. Now that I do, there is no way, I could ever do that because it would bring me to tears to let go of it. But on the other hand, I have never had a new car, nor had a car payment above $300 a month (4 year max) even when I had a 6 figure salary. When I eventually need another car, I will "punish" myself by taking it out of my monthly cash flow and thus have to reduce my fun money. Concerning OP, I would concur with the refi and to lower rate. Extending it out to a 4 yr loan, will help cash flow and the car still shouldn't be incurring any significant maintenance cost yet either during this time.

 

[FinanceDude]

Because they are all going broke paying % AUM fees to their advisors, right?

Not sure, but I see a TON of Lexuses and Mercedes and big BMWs, and a lot of those are $50,000+. so maybe that is eating up their cash........

 

[martyp]

I don't have a problem with a recent grad buying a cheap new car. It's just one of those life expenses along with funding an emergency fund and later paying for a wedding and maybe a house. Starting retirement savings now could be a good thing but . . . really . . . most people are not doing that this early in life. It wouldn't be the end of the world if she put it off for a couple of years.

I guess I would ask: What is an appropriate monthly car payment for someone with her salary? Probably lower than $450/mo.

 

[pb4uski]

+1

I don't see a new Ford Escape and a ~$15k loan as being a huge extravagance for a new college grad clearing $24k a year. The reason her payments are so high is because the loan term is only 3 years.

I'll probably get flamed for suggesting this, but if I were Rachel, I would offer to refinance the loan for my daughter (with me as the lender) on more reasonable terms (say 5 years at 4%) which would make her payments more affordable and in exchange ask that she take half of the savings and start saving in her 401k.

And I'd probably try to get her to agree to discuss any major financial decisions with me in advance, but good luck with that.

 

[clifp]

I'll be interested to see how she does in the next 6 months!
Thanks again for the sensible input and support to let her learn from this (I hope).

That all seems very sensible. To be honest if that is the dumbest financial thing your kids do, you raised some pretty smart ones.

Thanks for letting us know what you've decided. Lately I found myself not one wanting to throw my $.02 cause I often seen need members post a question or two and then disappear with no acknowledgement that any feedback was read much less had any impact.

 

[target2019]

I would pay off loan and refinance for her with no interest. I'd also let her know that I'm available for help with decisions. I wouldn't leave her with just the advice of the used car salesman.

In your situation it sounds like your decision is similar. Maybe her not asking for advice is a reaction to something in the past where she felt book smart, but lacking on the practical side.

 

[Walt34]

I'd pretty much leave it be as is but suggest, not insist, that she refi at a lower rate. If she said "no" I wouldn't argue about it.

The good news is what she did not do: Buy something wildly extravagant that she can't possibly afford, or stretch it out to 5 years of payments. Three years is long enough to write a strong memory of deprivation that will hopefully make her reluctant to do that again.

She's young, she will stumble a few times and learn from the scrapes and bruises of the consequences of her actions.

Later on they call that "wisdom and experience".

When I was 25 I bought an airplane that I could barely afford. I had a ball with it, but ate hot dogs to afford the fuel and maintenance. I don't regret it, but had I known then what I know now I doubt I would do it again.

Not sure if that's a good thing or not.

 

[cj1717]

+1

I agree, although she may never make the connection between the pain and the poor decision making process.

 

[travelover]

.........
When I was 25 I bought an airplane that I could barely afford. I had a ball with it, but ate hot dogs to afford the fuel and maintenance. I don't regret it, but had I known then what I know now I doubt I would do it again.

Not sure if that's a good thing or not.

Do you wish that your mom or dad had just paid for it?

 

[FinanceDude]

sounds like they are living beyond their means.

0% for 72 months has worked for GM...........

 

[MasterBlaster]

I guess I would ask: What is an appropriate monthly car payment for someone with her salary? Probably lower than $450/mo.

The head of General Motors mentioned that people tend to spend around 5% of their gross income directly on cars and car payments. Insurance, gas, maintenance were not included in the 5%. So if you make $50k, for example, then I suppose an appropriate monthly payment would be just over $200 a month, and so on.

 

[pb4uski]

The head of General Motors mentioned that people tend to spend around 5% of their gross income directly on cars and car payments. Insurance, gas, maintenance were not included in the 5%. So if you make $50k, for example, then I suppose an appropriate monthly payment would be just over $200 a month, and so on.

I have trouble reconciling 5% of annual income for payments with what today's cars cost. Seems to me like no one would be buying new cars if they were limiting themselves to 5% of annual income. In other words, $200 a month isn't going to buy much.

 

[MasterBlaster]

I have trouble reconciling 5% of annual income for payments with what today's cars cost. Seems to me like no one would be buying new cars if they were limiting themselves to 5% of annual income. In other words, $200 a month isn't going to buy much.

well for someone who makes $50k, 200 a month will buy you one of the cheaper economy cars or a late model used car after a good sized down-payment/trade-in.

It goes without saying that the high-end cars take a good income to support. Either that or you become car-poor driving a car that's really above your means.

 

[jazz4cash]

+1

I don't see a new Ford Escape and a ~$15k loan as being a huge extravagance for a new college grad clearing $24k a year. The reason her payments are so high is because the loan term is only 3 years.

I'll probably get flamed for suggesting this, but if I were Rachel, I would offer to refinance the loan for my daughter (with me as the lender) on more reasonable terms (say 5 years at 4%) which would make her payments more affordable and in exchange ask that she take half of the savings and start saving in her 401k.

And I'd probably try to get her to agree to discuss any major financial decisions with me in advance, but good luck with that.

I agree w/ PB4. 4% is a favarable arrangement for both parties. I think a 3 or 4 yr term is a good choice.

 

[Walt34]

Do you wish that your mom or dad had just paid for it?

I knew better than to ask. Dad had passed away by then and Mom would have laughed at the idea.

 

[Rachel]

I did some investigating on the percentage of monthly income that "should" be devoted to transportation expenses (looking at several budgeting models on the internet). Including gas, car insurance, tolls and (optional) car payments as a whole, 10-15% of take home pay seems to be the consensus.
On a monthly income of $2000 my daughter should be spending no more than $300 for all of the above. I believe her insurance runs to $80 a month and gas is about $60-70 so basically she is in hot water even with a re-finance. There will be a fiscal lesson in tightening the belt no matter what!
I am curious if that 10-15% estimate seems reasonable to others on the forum?

 

[pb4uski]

I think the 10-15% makes sense later in life when one is earning more and well established but at her age at entry level pay I would expect it would be more. I don't recall what my car payment was at that age but I do recall that my car was my most valuable asset.

That said, if your DW's insurance is $80, gas is $65 and car payment is $460 then the total is about 30% of her take home pay so it does seem quite high. A lesson learned no doubt.

 

[travelover]

I knew better than to ask. Dad had passed away by then and Mom would have laughed at the idea.

Smart mom.

 

[ChrisC]

Really tough crowd here, but I would have taken care of the car. We've never been helicopter parents but through a combination of steady parenting and good fortune, all kids have been all launched with no real financial ties to us. But there are several items that we have financed in launching them in the world: (1) an undergraduate education at public college rates, (2) a reasonably priced car after graduation to replace the beat-up, hand-me-down vehicle we lent them in high school that they eventually took to college and later drove to the ground, one or two years after college graduation, (3) and a wedding or downpayment on a home purchase.

In any event, I'm planning on living a good life in retirement. My kids are very responsible adults -- and I doubt they'll ever ask us for money to fund their lives or dreams, but I prefer to give them whatever they need while I'm living as opposed to simply leaving them a big estate when my wife and I are no longer around. They can mooch off of me for all the little things they want (which generally means picking up the tab at an expensive restuarant) though they insist on carrying their own frieght for the most part.

 

[Mulligan]

I did some investigating on the percentage of monthly income that "should" be devoted to transportation expenses (looking at several budgeting models on the internet). Including gas, car insurance, tolls and (optional) car payments as a whole, 10-15% of take home pay seems to be the consensus.
On a monthly income of $2000 my daughter should be spending no more than $300 for all of the above. I believe her insurance runs to $80 a month and gas is about $60-70 so basically she is in hot water even with a re-finance. There will be a fiscal lesson in tightening the belt no matter what!
I am curious if that 10-15% estimate seems reasonable to others on the forum?

I had to learn the hard way too! I had to have a camaro back in the 80s out of college. My payment was about $215 a month, average in gas, insurance, and prop. tax i was up to close to $400 a month and my take home was around $950 a month. What was crazy was I was still able to save about $50-$100 a month. Cheap beer, cheap food, and cheap dates, cheap rent kept me financially above water.

 

[eytonxav]

Really tough crowd here, but I would have taken care of the car. We've never been helicopter parents but through a combination of steady parenting and good fortune, all kids have been all launched with no real financial ties to us. But there are several items that we have financed in launching them in the world: (1) an undergraduate education at public college rates, (2) a reasonably priced car after graduation to replace the beat-up, hand-me-down vehicle we lent them in high school that they eventually took to college and later drove to the ground, one or two years after college graduation, (3) and a wedding or downpayment on a home purchase.

In any event, I'm planning on living a good life in retirement. My kids are very responsible adults -- and I doubt they'll ever ask us for money to fund their lives or dreams, but I prefer to give them whatever they need while I'm living as opposed to simply leaving them a big estate when my wife and I are no longer around. They can mooch off of me for all the little things they want (which generally means picking up the tab at an expensive restuarant) though they insist on carrying their own frieght for the most part.

I am more in your camp and that of PB4 vs the tough love majority. I think starting out in this day and age is much different than when I came out of school, and I have no problem providing a little boost for my kids, although neither one of them expect it or ask for it.

 

[mystang52]

I am more in your camp and that of PB4 vs the tough love majority. I think starting out in this day and age is much different than when I came out of school, and I have no problem providing a little boost for my kids, although neither one of them expect it or ask for it.

+1 (or is it +2?)

 

[Texas Proud]

I am more in your camp and that of PB4 vs the tough love majority. I think starting out in this day and age is much different than when I came out of school, and I have no problem providing a little boost for my kids, although neither one of them expect it or ask for it.

The reason why I am not in your camp (or the others who want to help out) is that the OP never mentioned that his DD has ASKED for any help...

The decision she made might be just great for her... she might not think she is struggling... her bills are being paid, she is eating, she has a roof over her head... where is the problem

Sure, he sees her struggling.... and still thinks of her as his little girl who he needs to help.... but she is a grown woman.... her decisions have consequences... she needs to LEARN that they do and not be taught that dear ol dad will bail me out at the first sign of trouble....

Most of us tought love folks have suggested that he give her advice... this, as they say, can be a teachable moment.... so what do you wish to teach, dad will bail me out of my stupid decisions or spending beyond your means can be tough I vote for #2....

 

[Finance Dave]

I agree with the sentiment below that she is an adult, don't enable her by trying to "fix" this for her. Be prepared for her to ask for help...that's when you'll have to give the tough love and say no....or as Dave Ramsey says...any help I give you will be tied to actions that I would approve of. For example, if she ends up with a $20,000 debt, tell her that you'll pay $400/month only if she gets a 2nd job and pays $800/month...showing she's serious about getting rid of it and that she's learned a lesson. Demand proof of her payments before you make yours. Do not co-sign any loan for her.

I would avoid dictating actions. Drop the word "insist" from your vocabulary. She is an adult now and you should treat her like one. If you don't she will be looking to you for support for years to come.

If you think she would have the discipline to keep saving the difference in payments instead of blowing it, you could suggest that she refinance the car loan. Pen Fed offers sub 2% rates for as long as 5 year terms.

I would just let her learn an expensive lesson.

My thought would be to let her work through her decisions on her own. If something minor to moderate comes up, a little suffering on her part would probably be a good lesson learned. If something truly major comes up, or something less major and after a real effort she is in danger of sinking, then you can always step in. But if you step in right away, that sets a precedent, and as they say, you can't unring that bell.