This topic came to mind after my little sister (Dana), a millennial as well, came to me and told me that she wanted to get a car loan. She said she found a way to finally have her own car instead of using my second car whenever it was available. She wanted freedom… the freedom we’ve all been dreaming of since we were old enough to get our permit and dream of the day we finally owned our own car. At that time, it didn’t matter if the car was crappy and falling apart or not. We would have taken anything!
If you are wondering why I have two cars, feel free to comment below and I will address it. Otherwise, read on bulls!
Fast forward a few years
We are now fully licensed drivers and are driving our parents’ car. At this point, we are sick of having to share a car and want our own. And not just ANY car, we want something nice. Something that will earn just enough respect from our peers (no one wants to buy an old clunker with 190,000+ miles at this point). So, what do we do?… we start going on car sites and start searching different model cars, prices, miles etc… we look to see how nice the inside is (is it clean… are there any rips on the interior fabric? If so… NEXT!).
Anyway, back to Dana. She must be subconsciously doing this without realizing it. We all do it (until reality kicks in). The problem however is that she is just like the rest of us millennials.
As Millennials, we aren’t the greatest long term savers
I mean, we tend to save well when we have to but it’s usually for a short time period. After we reach the amount we were trying to save, we then immediately spend it on what we were saving it for. We like to make impulsive purchases without thinking about our finances.
That new iPhone x+ that just came out… I must have that! I don’t really work out but that new fitness tracker that came out is in style, I should get one tomorrow, I’m sure I will be into working out once I get it! The list goes on and on. To read more about millennial spending and saving habits, check out these two articles, one from Forbes and the other from trend-chaser.
We have easy access to credit than ever before
Many of us have multiple credit cards and can easily put these purchases on that Bank of America or Citi credit card and justify it by saying:
well at least I am getting credit card points so I am being financially responsible.
Related: Visit the above link on credit card points where Katie from LifeSheLives.com goes into more detail on how to use credit card points so that you get the best bang for your buck!
When we get those points, we blow them away on useless purchases instead of using them wisely. We could be paying off our cards with the points or wait to use them for when they can REALLY come in handy (not to go on amazon and buy those brand-new Beats headphones).
Dana is only an average saver like the rest of us. Her bank account is also average like the rest of us meaning, she has no real savings. She doesn’t have enough to buy anything more than a clunker (which she doesn’t want).
So, what’s her solution? She decides that applying for a car loan is the next best thing. Dana finds that she is approved for an $8,400 loan at a nice 2.99% APR. All she has to do is put a 20% down payment and all is good. Dana was then told that her payments would be $149/ month for 48 months and because the amount didn’t seem like much to her, she was sold!
If I want a loan for $8,400, why do I need to put a down payment?
Why can’t they just give me the $8,400 and adjust my monthly payments so that after 48 months, I have it all paid off?
Well, we can tackle this topic on another day. For now, understand that a car loses its value over time. The bank then tries to protect itself from possible losses such as the car losing its value faster than the monthly payments can accumulate.
If you want more on this topic, come back later and there may be an update/article with a more thorough explanation.
Dana is smart and realizes that she will need to pay for her car insurance ($385/ month). Note that the car insurance is high because she is still considered a young and relatively inexperienced driver (less than 7 year of driving history) and lives in a major city. Now, her annual cost (insurance and car payments) is about $6,408 a year! This will be the cost for the next 4 years (over $25,000 in 4 years)! Most people would go ahead, get the car and start making those monthly payments equating to roughly $534 a month.
Try to think ahead
If you don’t think ahead, this could get you into some trouble. Depending on where you are in terms of graduating, you may think that this amount is o.k. but you didn’t consider other possible future expenses. For example, you graduate next year and need to start paying those school loans that were differed while still at University. Those loans will come due and could be an amount of $200/ month (if you are lucky). They also could be as much as $500/ month or more if you are unlucky. If during that time, you were unable to secure a full-time job paying you enough to continue to afford that car, you’ve ended up putting yourself in financial trouble.
So, as you plan on getting that car loan, analyze your current monthly spending. Also, analyze any possible future spending between now and when the loan is due. If you default on the payments, the bank has a right to repossess your car. They will take it, sell it at auction, and write down their losses.
What would be a more financially responsible decision would be to not take a loan. Instead, purchase a much cheaper car (one that will last you about 2-3 years). This will also allow you to pay less in insurance costs. A $3,000 car will not cost as much to insure as an $8,400 car. So, the monthly insurance payments will also be lower. Furthermore, the type of car is important.
Don’t go buying an old Mercedes, BMW or any luxury like vehicle
If you do, you will be paying more in maintenance costs because those cars are not like Hondas or Toyotas. They don’t run for ever with relatively minimal maintenance costs. in fact, they are quite the opposite.
Tip #1: How to further lower your insurance premium
If you want to save even more on insurance costs and you live in a major city but go to school outside of the city, do the following:
1). Let the insurance agent know that you spend more time at school
2). Let the insurance agent know that the car is outside the major city more often than not
This will also drastically lower your insurance costs.
If you live outside of a major city but go to school in a major city, you can still make an argument for having your “residence” be outside the major city. It doesn’t hurt to try because you may be able to save $100/month or more from this method. I was able to save $1,500 a year by simply switching my “residence” to my University. That is where the car spent most of its time during the year (it was a very easy argument to make). For Dana, her savings were about $1,300 for the year by switching to her school address. She also decided to purchase an older car that she would keep for a few years. This allowed Dana to benefit even more since her insurance costs were further reduced.
Tip #2: Get basic coverage for a clunker
When I was in school, I bought my car for $1500. It was meant to last me 2 years where I would then have enough money saved in the bank and buy a better car. That way I wouldn’t need to get a loan. I was able to save a good amount that I decided to keep the car for all 4 years because I enjoyed watching the savings grow (yes, the car lasted me that long but I donated it to the junkyard after 4 years).
For my insurance coverage, I chose the most basic plan. This plan covered everything in case of an accident except for my car. So, if the car got damaged and it was my fault, I would have to pay out of pocket. In 4 years, I got into one accident where a lady rolled into me in a parking lot. Because it wasn’t my fault, I was written a check by the lady’s insurance agency.
Being a Millennial Bull
The check was for $1,800 (no lie)! She had hit the driver’s side of my car and the door was bent inwards. This made it so that the window on the driver’s side was unable to be rolled down (it was manual windows). I took the money, and put it in my bank account. I didn’t bother fixing the car because the amount was more than what it was worth. That was one of the best accidents I’ve ever been in!
To reiterate, I was fully insured, the only thing that was not insured was collision for my car. If anything serious happened to me, I was still covered for that. To me, this is the type of financial gamble that makes the most sense because my maximum losses were capped at $1,500 (the cost of the car). Without knowing it at that time, I was already behaving in true millennial bull fashion!
If you enjoyed this read, check out my other article on “How To Pay Off Your Credit Card Without Interest Charges“. Its a great read that talks about ways you can be interest free for 21 months or more while paying off your debt.
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The shortcut to financial freedom is hard work, determination and perseverance!