If you don't mind me asking...

I look at it this way:

$30,000 financed of 5 years at 6% will cost under $5,000 in interest.
$30,000 added to a 30 year loan at 6% will cost just under $35,000 in interest.

Even considering the deductibility of interest on your home loan, you're still losing money with the longer financing period, and, as stated above, putting more impact into a single monthly payment rather than diversifying your obligations in case of trouble.

 

I agree, turning short term car debt into long term house debt just doesn't make sense. Are you going to keep your car for the period of time that it affects your house equity? If you are contemplating a 30-year or 15-year re-fi and are thinking about throwing in the cost of your car, consider how long you'll own the car and how long you'll be paying for it (both interest and principal). On the other hand, if you get a variable home-equity loan, and are sure that your job is secure, and you're sure you'll be able to pay it off in 3,4, or 5 years, then go for it. Still a bit of a gamble, if your circumstances do change, you may have problems affecting both your house and car rather than just your car.

On the other hand, after years of experience with this car-buying thing, buying the Prius is the first time that I've ever paid cash for a car. Mostly because of the fragility of my job circumstances, I didn't want to have 2 car payments at the same time. We're paying on my wife's car (0% loan, though) through October of this year, and 2 car payments per month would have just been too much. So I saved up the purchase price while continuing to drive my 14-year old Honda Civic.

-Roger

 

Yes, a car loan, although usually simple interest rather than amortized arrears is amortized in a sense. You pay interest based on the daily outstanding principal balance. The difference is that an amortized arrears loan (typically mortgage) recalculates the interest due for a particular period, usually a month, as soon as a payment is made. After every regular payment or principal only payment an amortized arrears loan recalculates the interest due for a month's worth of interest. A simple interest loan accrues interest on a daily basis and then that interest gets paid to the lender when you make your payment. The surplus funds in your payment that are above and beyond the amount of accrued interest due are credited to principal and interest accrued until the next payment will be less because there is less outstanding principal balance.

So a simple interest loan can look and act like an amortized loan if your payments are always made by the same day each month (which can be done if you choose to use some kind of direct payment between your checking account and the lender such as TFS's e-pay).

But simply put, in any declining balance lending situation, you always pay most of the interest up front and least towards the end of the loan. If you get a loan and can make a larger payment than the minimum each month you will significantly reduce your early term interest exposure and shorten your loan term all at the same time.

 

i could go on forever about this topic but i don't have that kind of time right now... just a few thoughts.

our minimum monthly payment is 460 on a 5.5 year loan at 5.24 percent. we pay anywhere from just shy of twice that, all the way up to about 3x that amount each month, depending on what else we have going on in our lives. but we wanted the flexibility in case we needed it. we haven't needed it yet but because we pay so much the interest hit won't be that bad in the end.

i agree that debt causes stress. when i was in college DH and i would fight all the time because we had no money and lots of debt. it took a lot out of us. we're enjoying peace of mind now that we can meet all our basic expenses and go have fun every now and then.

however, like mike i will also gladly go into debt here and there to be able to enjoy life. take the past 2 weeks. i've been up north visiting with my family and friends, we're spending plenty of money, but damn it we're having a good time and it's a well-deserved and refreshing break to see all our loved ones. even though the trip will end up only costing a few hundred bucks, i'd gladly pay a lot more for this.

 

Kathleen has some very good points. However, a house isn't really an investment either. Let's put it this way, equity in a home can only be realized if the home is sold or if a loan is taken out. An equity loan or a cash-out refinance is either a new liability or a larger liability. As such a home with an outstanding loan on it is a liability and not an investment (it is costing you money and you are not realizing any gain). If you sold the home and took the cash, it would be an investment because hopefully the value of your house increased over time and you got more money out of it than you put into it including interest paid to the bank, however you now have no roof over your head. So, now you have to take the funds and go find another home, which in most situations is larger and more costly. In addition, the home you live in will always require improvements, maintenance and upkeep, thus further reducing its investment prospects since it continues to require your money to keep it viable. I.e. owning a home is always better than renting, but the investment quality of a home purchase can only be realized when the home is sold. A true investment has regular and realizable returns which can be monetized easily and reinvested or spent freely without further connection to the original investment.

Now, let's contrast this with investment properties. They require maintenance and upkeep, they also probably have a loan associated with them, but the difference is that in a viable investment property situation you have free and clear earnings out of that property after principal, interest, taxes, insurance and maintenance reserve are accounted for. So, somebody else is paying all the expenses (the tenant) and you end up with free and clear money at the end of the day. That is an investment (refer back to the last sentence of the previous paragraph)!

As for myself, I do have a car loan right now with no intention to pay over the full term. I never had any plans to see the loan to term and pay all that interest. I put down about as much money as I could at purchase, which was a lot more than I hear most people putting down which made my loan small, the payments small and made it very easy for me to make principal payments with each regular payment.

My next car will be a cash purchase because I plan on saving and investing agressively for that purpose and for other long term purposes. Americans are addicted to needless debt because they are addicted to consumerism and consumer products.

Education is an investment if the experiences and credentials can be realized into a lucrative career. That depends on many things outside of an individual’s education, choice of majors or interests, economy, location, etc.

 

Home Equity credit lines do have the advantage of being a tax deductible expense, but the risk of securing the loan with your home, and the ever rising variable interest rates makes this route to borrow money IMO less preferable than a new car loan.

Credit Unions across the country give competitive rates, and usually offer the loan to any car less than 12 months old. If someone is looking for a good credit union, check out PenFed.org. If you are not military, it costs about $20 to join.

-- One more 'cash is king' guy in the crowd, who salutes everybody who buys Prius ! Going into personal debt for society's benefit, even if not specifically intended, is my kind of person.

 

Thanks jeromep.

 

You could also do a "regular" home equity. No variable rate. Tax deductible interest. Interest rate, of course, depends on how much equity you have.

Oh, and thanks for the props.

 

Nothing wrong with taking on a payment - just make sure you can afford it. And as mentioned elsewhere, avoid a loan that puts you "upside down" (you owe more than the car is worth).

Consider paying your future payment into a savings account for 6 months or so, to make sure you can comfortably swing it, before buying the car. Plus, that way, you have a nice little pile of cash for a down-payment.

That said, I paid cash. I hate monthly payments. Just a personal preference.

 

Living pay-check to pay-check and believing nothing could interrupt your cash flow might be the new American Way but living debt-free is a wonderful thing. Some think it's patriotic to live on the edge and therefore support the economy via consumer spending (that's bogus economics) but it's foolish to risk your future in pursuit of instant gratification.

My husband and I - we're both 48 - own our home. Dan purchased it 15 years ago with a 3/4 down payment. We paid cash for the sailboat and our cars and pay off credit cards every month. Why? Becase we hate GIVING hard-earned money away, in the form of interest, to creditors.

Borrowing supports the Banks. They're taking money every month without supplying any goods or lifting a finger in providing service. Usury used to be a crime.

Dan and I have no debt. Haven't for years. We owe no one, nothing. Zero, nada, zip. Every month after the bills are paid, the rest of our income is invested in the stock market, IRAs, "hard stuff" (property, bullion), or "soft stuff" (art, coins, other collectibles). Or saved for future, planned, purchases - cars, vacations, diving equipment, travelling to dive locales...

How did we mange to accomplish it? Just that; we've been managing our money since college because we wanted to comfortably retire one day. "Comfortably" will mean living where ever we want (Tuscany, Hawaii, San Juan Islands, Annapolis, France, Napa Valley are candidates), in a manner which gives us pleasure, and have enough to freely donate to charities worthy of support. Plus support Dan's aging parents, if it comes to that.

We've lived below our means since our first jobs. Still do. We could afford a brandy new 43 foot boat but we're happy on our classic (i.e., old!) 28 foot Saber. She "drinks six, eats four, sleeps two", the perfect size. We can kick off guests when their welcome expires. A Prius and a Honda Accord are in the garage instead of a Passat and Infinity. Our condo is just under 1,000 sq. feet, not one of the 3,000 foot units down the street.

Maybe debt addiction is real. Fight your addiction! Get help and get your finances healthy. Pursue happiness, not instant gratification.

 

Amen! I was begining to think we were the only frugal ones around. We're the same train track. Hopefully the express line.

 

I was not ready to purchase a new vehicle when I bought the Prius but my mother could not get into my truck. Truthfully I have financed most of my cars. First I was a single parent working as an LVN and working toward my RN. Then in later life I have chosen to take on a lower paying RN position in the social services field that has a flexible schedule. I think many people take on debt because they have no other choice in todays world.
My 4.9% sounds good but $536 is the highest car payment I have ever had. I am hoping to pay it off before the end of the loan. Even though I gave up 1.9% on the truck, I also gave up 14mpg so I still think I have come out ahead.

 

Whoa! Decided to do a short search using "debt addiction" and came up with the following.

***

http://www.debtorsanonymous.org/

From their website.
"Signs of Compulsive Debting
1. Being unclear about your financial situation. Not knowing account balances, monthly expenses, loan interest rates, fees, fines, or contractual obligations.

2. Frequently "borrowing" items such as books, pens, or small amounts of money from friends and others, and failing to return them.

3. Poor saving habits. Not planning for taxes, retirement or other not-recurring but predictable items, and then feeling surprised when they come due; a "live for today, don't worry about tomorrow" attitude."

4. Compulsive shopping: Being unable to pass up a "good deal"; making impulsive purchases; leaving price tags on clothes so they can be returned; not using items you've purchased.

5. Difficulty in meeting basic financial or personal obligations, and/or an inordinate sense of accomplishment when such obligations are met.

6. A different feeling when buying things on credit than when paying cash, a feeling of being in the club, of being accepted, of being grown up.

7. Living in chaos and drama around money: Using one credit card to pay another; bouncing checks; always having a financial crisis to contend with.

8. A tendency to live on the edge: Living paycheck to paycheck; taking risks with health and car insurance coverage; writing checks hoping money will appear to cover them.

9. Unwarranted inhibition and embarrassment in what should be a normal discussion of money.

10. Overworking or underearning: Working extra hours to earn money to pay creditors; using time inefficiently; taking jobs below your skill and education level.

11. An unwillingness to care for and value yourself: Living in self-imposed deprivation; denying your basic needs in order to pay your creditors.

12. A feeling or hope that someone will take care of you if necessary, so that you won't really get into serious financial trouble, that there will always be someone you can turn to."

***

Wow. I guess there is such a thing as debt addiction. Who wouldda thunk?

 

I totally agree that if you can swing it being debt-free is a wonderful thing.

But waiting for things and assuming that you have the time to wait may not always be the best way to live.

I was in a bad plane crash 4 years ago. Flew my 1946 Cessna into clouds and then into a hillside. The fortunate placement of some trees allowed me to survive. The most terrifying part of the ordeal was seeing how the wide-eyed NTSB investigator couldn't stop shaking my hand in the hospital. I was *lucky*.

So let's say things didn't work out and I was saving for that vacation with my family. If I was in a place where I could reflect on that how would I feel about all that money I saved?

I grew up in the thick of the cold war and always assumed we'd get 'nuked eventually, so I guess I don't have a lot of faith in the future. I pay off my credit card each month but I have a mortgage and a car loan and I don't lose a minutes sleep worring about them.

Oh, I got a bare-bones Prius and put $7,000 down on it so my 60 month 5.49% loan would be $300. That's the amount I feel comfortable paying for a car each month and so that's the way I played it. Love the car and if things shouldn't work out for me one day on the road maybe it will save me more than money.

 

Wow!

You've just provided direct evidence of my outlook on debt.

There's no guarantee there will be a tomorrow.

Of course, that doesn't mean you should go out and charge up all your cards into the wind.

I believe in successful debt management, and in the philosophy that, ultimately, when I die, I want to die owing as many people as much money as I possibly can.

 

And that's the OTHER side of the spectrum...

I'm for a fine mix somewhere in between, and believe in successful debt management.

 

First off, let me just say that wow-you really are lucky. That was quite a crash, from the looks of it. Glad you came out of that wreckage alive...any injuries?

I have ~2 months of payments left on my dental credit card at 0% interest (had some extensive dental work done last year), a mortgage, and that's it. Soon I will have a car payment of ~$550/month. I had allocated just over $600/month to cover it, so it fits into my budget perfectly without me having to do the paycheck-to-paycheck thing. I did order package #8 because this is the first car I'm buying new and I don't want to miss out on all the 'goodies'. I saved up a few thousand for the downpayment as well. I will have a 60-month loan but intend on paying it off in the 48-60 month range, or sooner if that can be achieved.

My husband and I are looking to start a family in the next year or 2, and I needed a larger vehicle than my 10-year old 2-door Saturn, as well as something more reliable and safer. I was drawn to the safety features of the Prius, as well as the gas milage and emissions...I know I could buy a similarly sized car for less, but the Prius really appeals to me. I've been drooling over it since August, so I know it's not just a short term infatuation. If I'd ended up getting something else, it just wouldn't have been the same-I'd be wishing I'd sprung for the Prius and merely 'putting up' with whatever vehicle I was driving. All right, I'll shut up now.

 

Yikes! Glad to hear you are okay after the crash. That's the problem with adventurous passions like sailing, diving, climbing, racing (of all sorts), flying, skydiving - they just might kill you. I accept the risks associated with mine and try to minimize the chances of something bad happening but accidents do occur.

I'm sorry I gave the impression that Dan and I had our lives on hold. We have to work until investments can fund our retirement but we're plenty active in the meantime.
Long dive weekend in the Florida Keys last month, hosted a family dinner for Thanksgiving and a New Years Eve party (complete with kazus for Auld Lang Syne, champagne, and confetti and balloons), barrel tastings at the local winery and a friend's housewarming this weekend, submitting the first chapter of my novel to a short story contest in February (wish me luck!), planning ten days in Napa in March, week-long meander up to Newport RI for a wedding in August, couple week-long sails on the Chesapeake in 2006, investigating a return to Tuscany for three weeks of driving (and drinking and eating) in 2007.

A Jesuit in college told me that a person couldn't begin to live until he or she had faced their own death.

Dan was more frightened than I when I had a breast biopsy last year. Everything was okay but perhaps the time we spend together now is more precious because we got a lesson on the transitory nature of life.
We kiss and hug goodbye every morning, miss each other during the day, look forward to having dinner together in the evenings. Weekends are reserved for getting into trouble, together! I tell him I'd rather be with him than any other person in the whole wide world. He says I'm the most beautiful woman in the world, even though my hair is falling out and gravity is winning.

If he finds out I'm telling you this, Dan will divorce me for revealing un-manly things about him. Or he'll insist on driving Foxy every day and leave me the Honda Accord.

There's dreaming, then there's planning. Dreaming is fine, if you want to waste time. Planning takes work but it's the only thing that gets you anywhere.

 

I was in the hospital for 5 days. The MRI scan only showed 'soft tissue damage', so nothing got broken. I was back at work in 2 weeks (with a cane) but it took about 18 months for all the damage to heal. My pride took a little longer.

The FAA guy said that he saw aircraft with half the damage of mine where everyone on board died. My plane broke apart in such a way that the hot parts went one way and the fuel another so there was no fire. I also wound up hitting the ground on my side (the cockpit had pretty much disintergrated) so the G forces were applied across my whole body. I woke up with my Icom hand-held radio right by my side which made it possible for me to radio for help. Clearly, someone was looking out for me on that day.

Two months later 911 happened and a lot of decent people weren't so lucky. So every day for me now is a bonus and each morning I look up at the sky and smile.

Flying is a lot of fun and I still do it. But it's not very tolerant of mistakes.

Jim

 

Yep, if extroverted activities were totally safe, they wouldn't call it 'adventure'.

I think we agree. Life needs a mixture of dreams and planning. I've probably skimped on the planning side in my life and am now trying to make up for it (retirement saving comes to mind).

You and Dan sound lucky to me, too.