During my online chats with readers, I often run out of time trying to answer all of the questions.
Recently there was an inquiry I wanted to take some time to address. It was about a young person’s first car purchase, something that comes up in almost every family.
Here’s the background: A 23-year-old has $3,000 saved and has chosen a used 2014 vehicle that costs $17,000 (no model specified). On his own, he qualifies for a $15,000 loan with a 9.9 percent annual percentage rate. With a parent co-signing, he qualifies for $18,000 with a 2.8 percent APR. His mother wrote, “I am willing to co-sign, as well as his dad, to get the better rate.”
He currently drives his mother’s 2000 car (no model specified).
“He has shopped for loans, done research on the model’s reliability, etc.,” his mother said. “The current 15-year-old car has a Blue Book value of less than $2,000 and needs a new transmission and some other work that will cost over $2,000.”
She added, “We looked at leasing, but he plans on keeping this car for 10 years. So buying seems like a better plan.”
So his mother wants to know: (1) Should her son use his $3,000 in savings for a down payment or keep the money to use for future repairs? (2) Is there anything she should advise him about the process?
My thoughts: I’m thrilled he rejected the idea of leasing a car. He’s thinking like most of his peers. Millennial Branding, a research and consulting firm, and Elite Daily, a news and entertainment Web site directed toward millennials, found that 71 percent of the young adults they surveyed prefer buying to leasing.
In defense of leasing, dealers often point out that monthly payments are lower compared with an auto loan. They argue that if you are going to get a new car in a few years, it’s better to lease. But all these arguments focus on the short term.
“In general, it makes financial sense for most to buy a vehicle, especially if you drive a lot of miles,” according to Consumer Reports. “The financial workings of leasing are so confusing that people don’t realize that leasing invariably costs more than an equivalent loan.”
So now that I’ve dispensed with that issue, let’s focus on a few things in play in this family’s financial decision:
● Parents co-signing. Don’t do it. Yes, I know your son can qualify for a cheaper loan. However, co-signing means you are on the hook for the loan — all of it. Yes, it sounds like your son is a good money manager. But understand this when you co-sign: You are not a backup borrower. Any late or missed payments can show up on your credit files. And because the loan is counted in your total outstanding debt ratio, it could bring down your credit scores and/or affect your ability to borrow.
● The $3,000. If he’s intent on buying a car, put all of the money toward the purchase price, which will bring down the interest costs. He could also make extra principal payments to further reduce his interest expenses.
If he hasn’t already, check to see if he could qualify for a lower rate by getting financing through a credit union, which often offers lower rates than banks. If he’s not a member of a credit union, which I recommend, he can see if he qualifies for one in his area by going to asmarterchoice.org.
After he gets the vehicle, he should immediately begin saving for future repairs.
But if it were me, I would take the $3,000 and fix his current car. Let’s say it only lasts another two years. That would still allow him time to build up his credit history, which would help in qualifying for a better interest rate if he decides to take out a loan. And he can keep saving for a hefty down payment by the time it conks out.
But best case, keeping the current car — without major repairs — would give him time to save up the cash to buy a car without getting a loan.
I know, you’re thinking: Won’t it take a long time to save up for a used $17,000 car?
He should spend the next 48 months making car payments to himself. If he saved about $354 a month for the next four years, he’d have nearly $17,000 — enough for a reliable used car. And he would be debt-free.
Readers may write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or firstname.lastname@example.org. To read previous Color of Money columns, go to wapo.st/michelle-singletary.