Osakis Voices: Advice for buying a new vehicle
There are a lot of positive and important benchmarks we're hitting today with the U.S. economy, including, but not limited to, very low unemployment rates, employers adding jobs, increasing incomes and growing outputs. These factors certainly benefit us all, but we also all need to remember to be fiscally responsible with our personal incomes, as these periods of growth aren't guaranteed.
Part of having strong personal financial health comes from one's ability to make well thought-out consumer purchases, which include everything from your mortgage or your rent amount, the amount you spend on groceries or going out to eat to your method of paying for items that are a bit more than what you've got in your savings account. I think a very important part of that is the last item, so I think it'd best to focus on intermediate liabilities. A common liability among many people reading this will be automobile loans. A lot of us have them, but during tax season, when many of us are looking to receive a return (hopefully!), there is certainly those of us that want to purchase a new set of wheels with the extra cash.
So, you find yourself pulling into the dealer lot of your choice, peruse a few vehicles that catch your eye, and if you like the vehicle enough, you'll drive it home. Sounds like a simple process, but a big detail was left out in that scenario, mainly because it can easily be glossed over due to the excitement of a new vehicle, and that's how you will be funding the purchase of that vehicle. Financing a vehicle is a process that should not be rushed, because oftentimes you're making a three to seven-year commitment in a matter of a hour or so. That commitment includes you agreeing to make a payment (not typically a small one, either) each month, on time, along with paying fees and interest while money is borrowed out. Those fees and that interest add up, and the monthly payment can eat away at your ability to tuck money away into an emergency savings, a child's 529 plan or your retirement.
In fact, the ease of getting financing for a vehicle is leading to a big rise in subprime lending in the auto industry. Loans written to people with poor credit (sub 600 levels) are receiving loans with interest rates in the range of credit cards (I've seen 20 percent!) with nothing down, so people are already underwater on the value of the vehicle before they even leave the lot! This increase in subprime lending in the auto industry made up 39 percent of all auto loans written in 2015, up from 26 percent back in 2005. Approximately one out of every 20 vehicles on the road that have a loan against them are 90 days delinquent or more. That's repossession territory, which further damages your credit, and you lose what you've gained in payments that were made on the vehicle.
All this can be avoided if you take a step back and really look at what it is that you're signing up for. Make sure to ask yourself a few questions that can save yourself some headache down the road;
• What is this loan going to cost me?
• Am I still able to meet my savings goals with the purchase?
• Can I afford to pay this off within five years? Anything longer than that and you're going to have a tough time gaining any equity with your vehicle purchase.
After asking those questions, if everything still all makes sense to you, press forward and enjoy your new vehicle! This is also applicable with other intermediate debts, like boats, campers and ATVs. Just make sure you don't dive into the water without knowing exactly what lies within it!
Osakis Voices is a rotating column written by community leaders who share their thoughts in their field of expertise.