debt | Squirrelers

96 Month Car Loans are Insane

Have you ever taken out a car loan? I’ve done so once. It was years ago, and for a vehicle that I would be out of my ideal price range today.

This is because, as we get older, we are supposed to get wiser. Not everyone follows this pattern, and I know that I have my blind spots. But when it comes to taking on loans, I think I’ve progressed in my thinking. Unless I need to take on a loan, I would prefer not to. Paying cash for a car sounds ideal, and I say that knowing that the car I buy will be purchased more with needs in mind, instead of wants.

If you are going to take out a loan, I like the idea of trying to make it as short-term as possible. I took out a 3-year loan, and couldn’t wait to get it over with. 36 months of payments, tormenting my bank account 3 dozen times.

What about the notion of a longer-term loan than that? I’m not talking about 4 years, or even 5 years. I’m talking about 8 years! That’s right, there are 96-month car loans available!

Somebody please tell me why anybody needs to take out an 8-year car loan.

If a person really needs a car, why not get one for a modest price? One can get a car that gets the job done, going from Point A to Point B, for a few thousand dollars. Admittedly, I wouldn’t want to do that – but if one’s finances require this, then it can be done. If someone is really tight on cash, maybe it would require a loan to pay for such a car.

But not 8 years.

That’s the point – I can’t see how too many people have to take out loans of that duration. If that type of loan is required, then my guess is that car is too expensive, and you don’t need it. Simple as that.

There are plenty of things that could surprise people in life. Illness, job loss, or any number of things could surprise us and impact our finances. Why purposely put ourselves behind the proverbial 8-ball by taking out unnecessary debt obligations? While debt-free living might not be feasible for everyone, purposely making our lives debt-burdened is something I don’t get.

I wonder what goes through the mind of someone taking on an eight year loan. Probably things such as:

“Oh, I MUST have this car. It’s my DREAM car!”

Or, for the entitled person: “I’m not settling for some average car. I DESERVE a certain standard!”.

Or, for the Big Hat, No Cattle people: “I couldn’t imagine driving some used, no-name car. What would people think? I need to keep up my image”.

Really, at the end of the car loan, the thing will be 8 years old. Now, I’m a fan of embracing car longevity, and driving one a long time. My past experience going past 220,00 miles can attest to that! The only thing is, not all cars drive well for that long. A car 8 years old may not be all that useful at that point, and may not have much residual value.

Maybe there are people that need such a loan. I just can’t come up with a good reason why!

My Questions for You

Do you think the concept of the 96-month car loan is as silly as I think it is?

Have you ever taken on a car loan? If so, how long was the duration?

Student Loans and Senior Citizens?

By Squirrelers 12 Comments

Don't carry those loans late in life

Those of us who are interested in personal finance are aware of notion that student loans can be that proverbial monkey that people want to get off their back. A loan taken when young can take years to pay off, and keep a person in debt for a while.

We’ve talked about the value of college in debates on college vs. entrepreneurship, as well in a discussion on how education can increase wealth. One of the other factors in the equation, which we touched on in those posts, is the reality that student loans can be a real burden. Thus it’s important to choose schools and programs wisely, and consider ROI.

A recent article in the Washington Post actually brought this last point to light in a way that certainly caught my attention. According to the article, there are many people in their 50’s and even 60’s who are paying down student loans. That’s right: student loans can be a burden for senior citizens!

A chart in the online article indicated that of the student loans that are past due as of the 3^rd quarter of 2011, 12.1% were for people in their 50’s, and 4.8% were for people in their 60’s!

That’s really something else. Those debts just don’t go away. Now, to be sure, some of those people might have taken on loans later in life upon returning to school. That doesn’t make it any less unpleasant to have debt later in life though. But more eye opening is the notion that some people are still dealing with their initial round of loan obligations as they near retirement eligibility!

While I think that it can be said that a lot of debt is bad, student loans can be a more tolerable version of debt since it is being used to invest in one’s future and potential earning power. That’s different from buying an overpriced house or car. However, this goes to show that not all student loans are smart, and good loans can become bad if the repayments aren’t managed properly over the years.

To avoid such a situation, it seems like a good idea to strongly consider ROI when picking out a school and program. Unless a school is a world renowned name brand, such as an Ivy or Ivy equivalent, it seems like a really good state school might be a better investment than an expensive private school without the name brand. Does that make sense? Also, majoring in underwater basket weaving or some similar non-marketable endeavor is sure to wreak havoc with that ROI as well.

The big thing I see is that getting a good foundation of financial knowledge when growing up, from a parent or guardian, can be invaluable to people. Signing up for significant debt shouldn’t be considered a rite of passage for everyone, when the idea for many of us is to work toward financial freedom.

Can you imagine not being able to buy a grandchild a toy, because you had to pay off your own student loan?

My Questions for You

Does this surprise you at all, that there are people out there in their 50’s and especially 60’s that are still paying off their own student loans?

What do you think a solution can be for these types of situations to be avoided?

Did you have any student loans at any time, and how long did it take to pay off? Or, if you still have them, when do you envision getting them paid off?

Is Most Debt Bad?

By Squirrelers 17 Comments

When you think of debt, do you get warm and fuzzy thoughts? Didn’t think so. Do you think of debt as something that you’d like avoid or work toward eliminating? This latter viewpoint seems to be the prerogative of many folks in the personal finance blogosphere, at least based on what I’ve read in numerous articles over the last several years.

A recent short article on Moneyland caught my attention, as it discussed the notion that more young people are leery of debt these days. Instead of viewing debt with the same mindset that their parents did, many are making decisions that reflect a greater reluctance to take on debt than prior generations. For example, making decisions such as living at home with parents or renting instead of going out and buying a place.

My take on this: Bravo!

Now, it’s probably true that instead of absolute fear of debt, it’s better to look at it objectively and realistically. It can be really bad, but at times debt can be a tool for getting certain things done – as well as an emergency safety net, dealing with totally unforeseen medical expenses, etc. Also, if there was no money to borrow, the business world would come to a standstill. So admittedly, debt does have an important role in the big picture.

That being said, however, for the average person out there, most debt is simply not worth taking on. There is something to be said for aspiring to debt-free living.

Here are some different thoughts on types of debt and their legitimacy:

Bad Debt

What do many people borrow to buy? Often times, it’s for consumer goods purchases. Buying clothes, electronics, furnuiture, etc. With such purchases, if we can’t afford to pay it off in full as soon as the credit card bill is due, it shouldn’t be bought. Carrying balances means that you shouldn’t have bought the thing in the first place.

What about cars? Are these worth taking out loans for? Well, probably not in my view. If somebody is solvent enough to have a decent emergency fund, then why not pay in full for a car? It doesn’t have to be a $25,000 new car if that’s not affordable. Why not get a functional $5,000 used car instead, if that’s what you can afford to buy in full.

I remember a guy I worked with over a decade ago who bought a brand new SUV despite being a few years out of college. He said he needed to buy it because he needed to feel like he “arrived”. Smart guy, otherwise. I’ve kept in touch with him, and he’s totally got his head on straight now. But back then, he made a decision that showed too much comfort with debt.

Borderline Debt

It’s safe to say that most home buyers, particularly first time buyers anyway, take on a mortgage. It’s just the way things are done. However, no matter what anybody says about tax deductions, the pride of home ownership, or things of the like – a mortgage is still debt. If you live in a dream home and finance it with a large mortgage, you will be working many hours and possibly years to pay for it. Sometimes it can be helpful to think about how time is money, and determine exactly how much we have to work to finance such dreams.

It seems to make sense that one should ideally buy something that fits legitimate needs in terms of space, location, schools, etc. Some debt is realistic in this case, but should be manageable with the goal of paying it off sooner than later. Trading up for a McMansion, luxury condo, etc – not sure about that if it requires extra financing versus what’s truly needed.

“Investment” Debt – To a Point, Anyway

Now, not all debt is bad of course. When people start questioning if college is worth it, I think that’s going way, way too far. It’s worth it, necessary, and needs to happen for most younger folks if possible. Such debt should still be minimized though, and choices can be strategically made to pick the right college based on quality and value. Then, this debt can be considered to be an investment in one’s future.

My thought is that burdening somebody with tons of debt to start out life is not ideal. But, since college is absolutely necessary for most people, why not view the choice of which college to attend as a strategic investment? You know, one that requires an analysis of costs and expected/potential returns. Perhaps it’s a matter of financial literacy, reframing the college decision, or thinking more pragmatically than emotionally.

My Questions For You:

Do you see as I do, that most debt is truly bad and unnecessary, other than a few of the specific examples I noted above (medical, limited home, smart college choice)?

Do you think that this recent aversion of debt by young adults is a good thing for our society as a whole? Or, is it irrational and has it gone too far?

Sometimes we Have Rainy Days – Even with Money

By Squirrelers Leave a Comment

The following is a guest post

Where you live, surely it rains at least sometime of the year, right? Well, maybe if you’re in one of the most arid places on the planet, wet weather may not apply to you. But for most of the rest of us, we know that inevitably there will be rain and some bad weather here and there. That concept might also apply to our finances.

Our lifetime of money management doesn’t always include sunny days, so to speak, where everything happens in perfect form. Just like with the climate in most locales, there are some times where things are “rainy” and don’t go according to how we want them to go. Just as we handle bad weather by having jackets, hats, umbrellas, etc – we need to handle bad things happening financially. Whether it be a job loss, divorce, health issue, accident, or some other malady – things happen.

This whole conversation about bad weather/bad life events might not sound super positive at first glance, but it’s really not a negative viewpoint either. It’s neutral. And, it’s realistic. There are inevitably some challenges that we might encounter in life when it comes to money, even if they seem far fetched and we can’t quite predict what will happen.

Statistically, there have to be probabilities out there about people dealing with some kind of issue. While any one problem might have a very tiny likelihood of happening, the odds of something happening are certainly a bit higher, right? It makes sense.

That’s why it’s important to save for a rainy day. You know the rainy days will come. If you plan properly, you can be able to handle many conditions, even if not all. This means that we should:

Make sure that we pay ourselves first by saving
Try to maximize the gap between income and expenses
Put aside enough for a true emergency fund – say, 9 to 12 months if possible
Accumulate more than we think we need

The latter is particularly important. Many people think short-term, and don’t anticipate problems or other needs beyond the day-to-day. Maybe some goals are taken into account, but not life events and other issues. It makes sense to think holistically, and realize that our needs change in life – and often in terms of needing more money that we would otherwise anticipate. Managing our money along those lines seems to make sense.

What do you think?

Do you think most people truly, adequately save for the proverbial rainy day? Is this general concept something you think about?

Emotions, a Mortgage, and a New Baby: What Would You Do?

By Squirrelers 44 Comments

Money isn’t everything, no question about it. Sure, it’s definitely important. Very important. However, there are times when emotions come into play and take over decision making.

A recent example of this is a story that was related to me by one of my friends, who in turn was talking about some people he knows (who I met only once, briefly). Anyway, this friend who told the story is the same guy from Squirreling Gone Wild #19, who encountered a waiter who flattered female customers in order to secure a higher percentage tip. As you might recall, my friend basically pointed out to his wife that the only reason a waiter asked her for her ID when she ordered a drink was simply to make her happy and get money out of her later when the bill came. Comments ranged from a female reader saying “If your friend was my husband, I would totally smack him”, to a male reader saying “We all know women want to look younger and why shouldn’t we flatter them a bit if it makes life easier. Everybody is happy, it’s a win win situation”

Good times, indeed 🙂

Anyway, back to the new story. In this situation, he relayed the story about a couple that he and his wife were friends with. This couple had a baby last year, and were first time parents. My friend’s wife knew the female in the couple for many years, which is how the two couples got to know each other in first place.

The issue at hand is that the woman who just became a mom quit her job, and now the couple has been having financial problems. I mean, problems to the point of not being able to pay their mortgage. Yep, that bad. It’s gotten to the point where they’re facing foreclosure, according to my friend.

So, how did this happen? Well, first of all, both husband and wife were making very good salaries, each over $100,000 per year. The wife made a bit more than her husband, and had gone quite far in her career up until her late 30’s. Sounds promising, right? Well, they had previously bought a very nice home that was based on both people working. Since she stopped working, they were running a deficit.

Then, the guy had to take a pay cut at work. Other expenses mounted, they didn’t make any changes (like selling nicer cars and replacing with cheaper ones) in assets, but they did cut back some expenses. Regardless, these otherwise smart and successful people quickly found themselves in a financial quagmire. What really hurt was that their house plummeted in value even further.

My question was clear: If they had bought the house based on 2 incomes, why in the world would she quit her job knowing this?

My friend agreed and had the same thought, but said that the woman had apparently just ‘found her purpose’ when becoming a new mom, and just simply lost her desire to work at all. I can understand how this might happen with some people. Now, as I mentioned previously, she made over $100,000 annually. Apparently she was a real go-getter and fast riser at her workplace.

Then, I thought about it, and came up with an alternative: Why not sell the house and downsize, cut expenses, and work together to live a more simple, frugal life? After all, the pursuit of money isn’t everything! This way, she can be happy as a stay at home mom and abandon her career entirely as she wants to do, and they can then live within their means and live on less.

Apparently, she didn’t want to leave their home that they brought the baby home to, and desperately wanted to try to maintain the same life. Her idea was that her husband would work harder at his career and focus on being the main breadwinner, while she could take care of things at home. Sounds very traditional. However, I didn’t see how they could keep the same house and lifestyle while losing a little more than half their income.

Remember, they bought the house with a loan based on 2 incomes. If they had some foresight and thought about this ahead of time, this would have never been a problem. They could have potentially done it successfully, going from a 2-income household to a 1-income household. Some people can do it, right? But again, they didn’t plan ahead with a more modest purchase but rather, had already taken on debt based on both people working.

My friend said that the husband in that relationship capitulated to what his wife wanted, to make her happy for the reason that she just had a baby. Clearly, that didn’t turn out so well.

We talked about how on earth this could happen to otherwise bright people. We both thought that there is no way we would ever handle a situation like that. Since the house was purchased based on 2 incomes, we both agreed that we’d absolutely either:

Insist that the wife works after maternity leave is over for the short-term at least, while trying to find a job that’s part-time – in order to create a win-win where she spends more time at home yet the household finances don’t get destroyed; or,
Immediately put the house up for sale and move into a much less expensive place, while cutting expenses and living a more modest lifestyle. Pronto. This way, she can be happy by not working anymore, and they can at least stay afloat financially.

The other guy clearly didn’t do that, and now their whole family is suffering. He’s apparently frustrated, and so is she.

My Questions for You:

What do you think about this couple’s decision-making? Do you think the guy did the right thing by letting his wife do exactly what made her happy, even though they bought the house based on 2 incomes originally?

Do you think that the 2 suggestions that my friend and I had are appropriate, or are they insensitive? Consider all factors – financial and emotional. Please feel free to be direct and take a strong stand if you wish!

Debt Consolidation – A Step Towards Consolidating Your Life

By Squirrelers Leave a Comment

The following is a guest post

Few things are seemingly as straight-forward as debt consolidation. And yet, few are as controversial and misunderstood. The consolidation of debt has been praised by some as a simple and highly effective tool to allow borrowers with problematic debt levels to avoid the hardships, psychological pressure and severe long-term effects of a bankruptcy. At the same time, it has been criticised by others for offering a false sense of safety and fooling borrowers into schemes which could have them paying more than they originally had to. If applied carefully, however, and overseen by a serious and recognised debt management company, debt consolidation will not just consolidate your finances – but may end up consolidating your life as well.

What is debt consolidation to begin with? Simple: Debt consolidation combines various smaller loans into a single loan. Imagine, for example, a situation where you owe money to ten different creditors. By going through a debt management company, you can replace these smaller loans with a lump sum payable to the debt management company, who will, in turn, forward the money to your creditors. Debt consolidation will also change the structure of the initial payment scheme: Monthly rates tend to go down as part of debt consolidation and loans are becoming more long-term. The effects on the overall height of the loan are ambiguous: In some cases, an effective debt management agency will be able to drive down the debt. In other cases, lower monthly payments and a more long-term approach will have to be compensated for by a higher overall loan.

Be it as it may, there are obvious advantages to debt consolidation. If you are able to pay off some, but not all, of your debt each month, then debt consolidation can help you avoid having to enter bankruptcy or applying for an IVA procedure. Also, debt consolidation simplifies your life and thereby allows you to focus on what is essential: Working on generating the income required to meet your obligations. It saves you important time and makes your life less complex. On the other hand, it goes without saying that simply turning your short-term debts into long-term ones is not a solution as such. This is why debt consolidation only makes sense if you are sincerely committed to paying off your debt.

Whether debt consolidation is a factor for the good at least partly depends on your choice of debt management company standing by your side to provide you with the right advice.