Car Loans

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Rachel

Dryer sheet aficionado
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I am looking for some advice.

My daughter is 23, a college grad who is employed and living in a low-cost city. Her take home pay is $2000 monthly and she is just barely making it paycheck to paycheck. Of my two children, she is the less financially savvy and knows how to spend but not always how to save. Not for lack of advice! In my own defense, my son is the exact opposite and is a big saver and frugal.

The dilemma: she purchased a NEW Ford Escape about one year ago, to replace the hand-me-down heap I had given her (which I would have preferred she drive into the ground!). She took out a 36 month loan at 5.5% (the person who sold it to her was her boyfriend's father who owns a car dealership--but that is a whole 'nother story!!!). Her monthly payment is $458.51 which is about 25% of her take home pay. She has no emergency fund, and has not signed up for her company's naked 401(k). The only good thing is that she has no credit card or student loan debt (free ride for college tuition--yay! she's a smart girl in other ways) and can just barely makes her monthly expenses work (as long as there are no unexpected expenses).

So, any suggestions? I have the financial means to pay off the loan totally for her, which should enable her to start accumulating an emergency fund and eventually save for retirement. If I did this, am I enabling her? Should it be a loan? Should I let her wrestle with the monthly payment and risk having to give her a big bail out if she runs into a true financial emergency? Should I insist she sell the car and buy a used junker? I want to keep my sticky fingers off the controls but I am not sure I can stay completely out of this.

How does one help shape a financially sensible young adult when it comes to consumer debt?
 
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.
 
to pay or not to pay

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.
 
at least the term of the loan is only three years. to me that would be over in a blink.

I hate car loans. I hate car salesmen. And the worse car loan is the zero interest one.
 
It very much depends on your daughter and you know her better than we do. Our son graduated in 2007 with about $8k in student debt and got a job paying ~$24k /year. In order to help him get started in the right direction we bought him a 2nd hand small car as a graduation gift plus paid off his student loan, with him paying us back the $8k over 3 years, interest free.

In return he committed to contributing 6% of his salary to his 401k, which maximized his 1:1 company max. I know he still does this as we do his taxes together each year.

He paid us back in 2 years and is doing great. He just bought a replacement car after saving up the cash himself.
 
Alan, I doubt your son would have taken out a car loan for 25% of his net pay. Also, the OP's daughter doesn't have a company match on the 401(k), so she's not losing that free money. I still think the OP is best letting her daughter handle herself and the OP can always step in later if it gets ugly.
 
I think that giving adult kids money is a mistake. People don't fully mature until they are in their 30's, if even then. Part of the learning process is making mistakes, suffering the consequences and doing better next time. When you jump in and make it all better, you are depriving them of a learning experience and creating a false sense of consequences of one's actions - i.e. - if I screw up, Mommy will just swoop in and save my butt.
 
Coach her through a refi with better terms; possibly lower interest and longer term.

Unfortunately, she probably should have purchased a cheaper used car...
 
brewer12345 said:
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.
Click to expand...
+1

You might also consider suggesting to her how to go about refinancing to reduce her payments and using the difference to build an emergency fund and then save. Then step back to see what she does. If she takes positive financial steps you can then look for other ways to help. If not, there's probably not much you can do beyond subsidize every so often.
 
someguy said:
Alan, I doubt your son would have taken out a car loan for 25% of his net pay. Also, the OP's daughter doesn't have a company match on the 401(k), so she's not losing that free money. I still think the OP is best letting her daughter handle herself and the OP can always step in later if it gets ugly.
Click to expand...

True about my son, and I agree that tough love is usually the best advice.
 
ducky911 said:
at least the term of the loan is only three years. to me that would be over in a blink.

I hate car loans. I hate car salesmen. And the worse car loan is the zero interest one.
Click to expand...


Sorry to hear that you hate me but that's the way life is I guess.

When the manufacturer offers Zero % I would think that's the best loan, no?
What math do you use to say it's the worst? I don't like any car loan but not everyone can pay cash.

As for the OP I would recommend Brewers suggestion and refinance with Pen Fed at a lower rate. This will help your DD with a lower payment and maybe a longer term if she can't make ends meet.
 
Last edited:
We're all different, but I would offer to pay off the loan for her. Whatever that pay-off amount is becomes the new loan principle that daughter pays to you each month, interest free. Whether the monthly savings is $25, $10, or $0.46, she must devote that amount to automatic savings (savings bonds, Ally/ING savings account, etc.).
You'd be helping your daughter out, whil eteaching her a lesson in savings no matter how small the amount. Like I said, we're all different but that's my vote.
 
This recent WSJ essay came to mind when I saw your question.
I had a car loan when I started out that had payments more than my rent at the time.
Believe me, that was the best lesson I could have EVER gotten, as I practically starved to keep the payments up. I did have to refi (all by myself) to drop the payments to a more manageable level but lengthened the term.
Suffice it to say my well-earned lesson has paid off handsomely in the years' since. I've never again owned a car that I didn't pay cash for.
Opting Out of the 'Rug Rat Race' - WSJ.com

Instead, it seems, the most valuable thing that parents can do to help their children develop noncognitive skills—which is to say, to develop their character—may be to do nothing. To back off a bit. To let our children face some adversity on their own, to fall down and not be helped back up. When you talk today to teachers and administrators at high-achieving high schools, this is their greatest concern: that their students are so overly protected from adversity, in their homes and at school, that they never develop the crucial ability to overcome real setbacks and in the process to develop strength of character.

You want her to be a more financially responsible person? Let her learn her lessons and gain "grit" at the same time. YMMV.
 
My suggestion is to have her ask her BF to chip in any money she needs...


I would not bail her out... but help her to refi IF she asks or mentions anything about borrowing money....

I would not give her any money.... or refi the loan myself...

Yes, an expensive lesson for her, so do not blow it by teaching her another lesson that dad will bail her out for her dumb mistakes....
 
This is a tough love crowd Rachel :)

Sort of Suzie Ormond en masse.
 
You can't demand anything. Suggest the refi, even give her the information to get started with it. At her income level she should be contributing to a Roth IRA (or Roth 401k if offered), especially since there is no company match for the 401k. I'd like to see 15%, $3,600, go into the Roth yearly.

If you would like to do something, get her started with the Roth IRA (invested in a target date fund for simplicity). You might offer to match her contribution dollar for dollar, so she could max out the Roth. Or make an initial gift to get the Roth IRA started and offer to match additional contributions after that. If she does the refi she will have something to contribute. I'd also put a time limit on those matches, like the next three years. That might light a fire under the refi, and avoid a long-term dependence.
 
Thank you

Thank you to all who responded, and for the excellent advice.
By a landslide, "tough love" was the verdict, followed by some assistance to refinance at a lower rate/longer term. I liked the idea of making it easier to fund her Roth account (she contributed during the last 2 years of college when she had summer earnings but it was a measley amount each year).

Here is what I have decided to do:
1. Suggest (not tell) that she refinance the loan to 4 years/lower rate and let her research it and do the paperwork. I will shut my mouth about her decision to buy a new car with a loan even though I have to bite my tongue hard.
2. Tell her that I am confident she can find ways to trim her spending once she has refinanced, and use those savings to start an emergency fund.
3. Until she has built a bit of a cushion for emergencies, I will make a contribution this year to her Roth and next year will match her dollar-for-dollar. I don't think she should try to put her own money into a Roth this year until she has an emergency fund.
4. Let her know that I have her back in case of a dire emergency (medical etc) but that I know she can figure this out.

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).
 
mystang52 said:
We're all different, but I would offer to pay off the loan for her. Whatever that pay-off amount is becomes the new loan principle that daughter pays to you each month, interest free. Whether the monthly savings is $25, $10, or $0.46, she must devote that amount to automatic savings (savings bonds, Ally/ING savings account, etc.).
You'd be helping your daughter out, whil eteaching her a lesson in savings no matter how small the amount. Like I said, we're all different but that's my vote.
Click to expand...

You assume that the daughter will indeed keep paying. I suspect if the OP does what you suggest that the daughter will start missing payments cause something comes up as it always will.

The real lesson here is that cars are really expensive (especially new) and perhaps there are better choices for your hard earned money. Pretty much everyone goes through the pricey car thing at some stage in their life.

The other point I would make here is that the interest is the much smaller part of the car payment. The much bigger part is actually paying for an expensive car. So even if the daughter gets the interest rate down to 2 % it will still be a large payment.
 
MasterBlaster said:
........... The much bigger part is actually paying for an expensive car. So even if the daughter gets the interest rate down to 2 % it will still be a large payment.
Click to expand...


Shhhh....my pension depends on people like this.
 
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