Joan wrote in asking: Can an 18-year old get a car loan?

Great question, Joan.

The initial hurdle is the legality of the loan.  Each state has laws about how old a person must be to enter into a contract.  I live in Massachusetts where the legal age is 18. You’ll have to check the laws in your particular state.

The second hurdle is the practicality of the loan.  Every loan company is (or at least should be) looking for your ability to pay off the loan.  You’ll need to prove that you have steady income that will enable you to pay off the loan.  In addition, you’ll need to pay for the other expenses that come with car ownership: sales tax, title and registration, inspection, insurance, gas, and maintenance.

It begins to make riding a bike or taking the bus sound like pretty good options.

You might want to approach car ownership by setting aside the amount of a car payment, say $300/month, until you have at least half of the amount of the car price.  Better yet, save up the entire amount and pay cash for the car.  You’ll have a lot more strength negotiating down the purchase price with a pile of cash on the table.  (Figuratively speaking, of course — never actually put a pile of cash on a table).

You should consider buying a used car.  New cars lose their value quickly, and used cars are much less expensive to insure. Choose one with a low theft rate, again to minimize the cost of insurance.

If the car dealer isn’t offering a good financing deal (they are these days, but it isn’t always the case), you can do better by bringing your own financing — that is, get a loan through your local bank or insurance company, they might have better rates.

Good luck, Joan, let me know if this answers your question.

Image credit: KaroliK at Flickr.

When you need a new car, how do you pay for it?

Most folks take out a loan and end up paying for years for the privilege of tooling around on new wheels.  But, hey you know you’re going to need a car eventually, right?  Why not start saving for it now, and when the day comes around you can either pay cash or at least reduce the amount you need to borrow.

Money set aside for a known future need (like a new roof on a house) is called a sinking fund.  Voila!  The sinking car fund.  Someday, when I live near water, I’ll have a sinking boat fund.

If you plan to buy a $50k BMW in 5 years, set aside $10k/year.  Put it in a savings account (not investment account), or at least in a safe investment-grade bond fund.  This is a relatively short time horizon, and the need for capital preservation is greater than the need for high return; otherwise, your BMW could turn into a Beetle (which is a cuter car IMHO).

You can finess the calculation by including the expected turn-in value of your current vehicle, the rate that cars are increasing in cost, and the expected rate of return on your savings account.  The important part is to start saving now, and minimize (or eliminate!) the amount you end up paying in interest.

Also, you are in a much better position to negotiate down the price if you’re offering cold hard cash.

In Massachusetts, excise tax paid on cars is deductible.  The registration fees paid to the state are not, but the excise tax paid to your town/city is.  The excise tax is $25 per $1000 of the car’s value, based upon the original MSRP and a factor that decreases with time:

• In the model year 90%
• In the second year 60%
• In the third year 40%
• In the fourth year 25%
• In the fifth and succeeding years 10%

Since the tax is based on the value of the car (and not the weight or other criteria), the Feds allow you to claim it it as personal property tax deduction on your Schedule A.

A recent proposal to stimulate the economy would pay car owners $1,500 – 4,500 to crush old, inefficient cars and buy a new one.  Let’s look at the economics and environmental impact of this initiative. Continue Reading »