Really Bad Car Buying / Financing Advice

[AgeOfEnlightenmentSCP]

Dave Ramsey LOVES to talk about "stupid people" in financial trouble because they "can't do math". 

"There's a thing that you and I are dealing with in your money, and it's called math. We get ourselves into trouble when we don't do the math." - Dave Ramsey

And then he proceeds to give some pretty outrageously bad advice in which he can't be bothered with the math. Let's take cars- just as an example. Dave wants people in deep financial trouble to do some really dumb things when it comes to cars.

Should You Sell Your Upside Down Car?


Dave says yes, unequivocally. He tells people to sell "upside down" cars- cars which they owe more on the note than the car is currently worth. But is this a good idea? Dave's advice is to do whatever it takes to get rid of the upside down car, up to and including voluntary repossession, if you can't sell it yourself.

Voluntary Repossession An Option?

A voluntary repo is just like it sounds- you're turning in the car to the lender. In this situation, the lender auctions off your car (cheap), puts the money towards what you owe, and then you're still on the hook for the remaining balance- meaning now you don't have a car, but you still have to make payments. This is a terrible idea.

The Problem Is, You Still NEED A Car

So, you've sold the new thing- you're out from under it by hook or by crook. What now? You still need a car.

Consider Bankruptcy Instead

If you're in the kind of financial trouble where you cannot make your car payments, you may have no choice. However, an alternative (which Dave eschews) is to declare bankruptcy in an effort to reduce or even fully discharge all unsecured debt (debt like credit cards and installment loans that do not have collateral attached to them) and then affirm the debt you owe on the car-- and keep the car. YOU NEED A CAR. This last point is something Dave just doesn't acknowledge. Some of his goofier advice includes bumming rides from neighbors or using public (mass) transit. Unrealistic and idiotic if you ask me. Dave is also completely wrong about the need to maintain good credit- and if you're really up against it, bankruptcy is often a better and faster way to getting your credit back on track than having a repossession and years of bad credit as you struggle to shovel out.

Should You Cover The Difference?

Dave Ramsey also gives other advice which includes covering the upside down amount (the difference between what the car is worth and what you owe) including taking out a loan to cover the difference, and "saving up" to cover the difference by cutting your other budget items and making principal payments towards the car note to erase the upside down amount and ultimately pay the car off. I will admit, I haven't the foggiest idea why on earth anyone would obsess about the brief period of time that a car is worth less than what is owed. Here's the reality:

"Upside Down" Amount Is Theoretical & Inconsequential- Don't Worry About It

Unlike Dave's fantasyland where cars still "lose 30% of their retail value as soon as you drive them off the lot", we don't live in 1975 anymore. A nicely equipped entry level new car for a couple just starting out such as a Honda Civic, Toyota Corolla, or Nissan Sentra runs between $18,000 and $21,000 for the 2019 model year. A used 2018 Honda Civic EXL model I found online has an asking price of $18,500 with 28,750 miles. The same car brand new with 0 miles is priced at $19,818. 

Selecting a car like a Honda means you're getting a car that doesn't expire, so it doesn't matter if you're "upside down" at some point because the plan is to drive a car like this for 7 to 10 years or between 150,000 to 250,000 miles. 

Forget Dave Ramsey's REALLY BAD math, Finance & Keep Your Powder Dry

If you don't earn much, don't have a lot of cash laying around, but you can qualify for financing- go lease or finance a brand new car with a payment you can afford. Right now, on the aforementioned Honda Civic et al, you can get manufacturer's financing of between 2.9% to 3.9% or lease payments as low as $249. Take the offer. 

But why? 

Because you need a car. And if you don't have $20,000 laying around (and you shouldn't-- but why saving is stupid is a separate topic) the last thing you need is a "beater with a heater" that's going to need a $1,200 repair at the worst possible time. Driving an old an unreliable car is a luxury that people struggling financially cannot afford. They're for old guys with money, a garage, and the time and inclination to work on them. 

If you DO have $20,000 laying around-- and you actually believe that Dave Ramsey is right about a car depreciating 30%-- why on earth would you plow your $20,000 into one? For that matter-- why would you own one at all?

The answer is that you need a car. I can't repeat this enough. A car is freedom. A car is your ability to apply for and accept any job you can get. A car means being able to arrive early, and stay late, or get a second job. A car means being able to start and run a business. You can't achieve much in this country without a car-- because, in the words of writer, E.B. White, "Everything in life is somewhere else, and you get there in a car". 

So, since you know you need one- but you also know it's a necessary evil and not an investment- you should not plow a big pile of money into one. Finance it- or lease it (and DR greatly over complicates leasing-- it's just another way to finance a car) and get yourself reliable transportation and keep your cash in reserve.

So, if a car depreciates in value- and if money depreciates in value (it does), when is the best time to pay for a car? The answer: later. And money is cheap. You're losing purchasing power a lot faster than 2.9% a year- especially on durable goods like automobiles. So, get a 0 mile car, a nice new car warranty, the security of reliable transportation you don't have to think twice about-- and pay for that sun of a gun later-- a lot later. And don't panic if at some point you wake up in the middle of year one and you're "upside down". You're keeping that car 7 to 10 years or at least 150K miles. So, relax. It will be fully depreciated by the time you make that last payment (a payment you will make with dollars worth less than the purchasing power you obtained via financing 3, 5, or 7 years ago). 

Cash Flow Matters

When you're just starting out, or you're struggling- there's nothing worse than not having a reliable car-- except not having a reliable car, having no reserves, and very little disposable income. A low car payment on a nice new reliable car is better than a "beater with a heater" and no reserves. Killing yourself to pay cash for everything- especially an unreliable and unpredictable mode of transportation- is a waste of your time, energy, emotions.

You need a car you can take for granted and all that energy you would put into this ridiculous traditional advice about money (because we don't have money- they're printing it faster than you can earn or save it), you should put into snowballing your INCOME, not your debt.

[Deleted]

Well, I agree that walking away from the loan is stupid- unless maybe he's talking to someone making minimum wage who got themselves roped into a 6-year car loan with $700 monthly payments?   Maybe there the idea is to wipe the slate clean rather than pay and pay for years.  They still do need another car, though.  And is any written-off portion of the loan considered taxable income?  I'm not sure on that.

And the problem of being upside down is not just theoretical.  Ask my son who's settled personal auto physical damage claims.  If you haven't bought "gap insurance" that upside down amount becomes real money if your car is totalled.

We will have to agree to disagree on buying a nice, shiny new car.  I'm widowed and live alone so I can no longer call DH to come and get me if the car dies.  DS lives 3 hours away.  I NEED dependability.  I haven't bought a new (current model year) car since 1991 and the ones DH and I have bought off-rental from Enterprise have been great.  When the unhappy day comes that I need to replace my current one, that's where I'm going.

[AgeOfEnlightenmentSCP]

Jul 19, 2019 14:29:54 GMT -5 @athena53 said:

Well, I agree that walking away from the loan is stupid- unless maybe he's talking to someone making minimum wage who got themselves roped into a 6-year car loan with $700 monthly payments?   Maybe there the idea is to wipe the slate clean rather than pay and pay for years.  They still do need another car, though.  And is any written-off portion of the loan considered taxable income?  I'm not sure on that.

And the problem of being upside down is not just theoretical.  Ask my son who's settled personal auto physical damage claims.  If you haven't bought "gap insurance" that upside down amount becomes real money if your car is totalled.

We will have to agree to disagree on buying a nice, shiny new car.  I'm widowed and live alone so I can no longer call DH to come and get me if the car dies.  DS lives 3 hours away.  I NEED dependability.  I haven't bought a new (current model year) car since 1991 and the ones DH and I have bought off-rental from Enterprise have been great.  When the unhappy day comes that I need to replace my current one, that's where I'm going.

My understanding is that loan forgiveness-- including "charged off" debt is taxable. I settled an account some years back, and I got 1099'd for it.

On your second point, yes- but that problem would manifest itself if the insured had paid cash. Under-insured can be remedied.

The reason I suggest for lower income and people just starting out to go new is they can't really afford a reliable used car. Dave even calls it "a beater with a heater". He's suggesting what is perhaps a far bigger financial trap than a predictable $200 to $300 per month. And if they qualify for used car financing, the difference in interest rate is high enough to offset the $1,000 to $3,000 "savings" for the 30,000 mile car vs. the 0 mile car.  What people just starting out, or in situations where they aren't earning enough need is more income. They don't need the worry and headache of a "beater with a heater".

[AgeOfEnlightenmentSCP]

By the way-- I drive a 2012 Civic EXL for work. It has 105K miles on it. I am not planning on replacing it anytime soon. I needed $3,200 or so in maintenance and repairs on my 1997 with 213K miles on it in the summer of 2012, so I decided I'd rather put the money towards the next one. I looked at a used one- a 2010 for $18K with 23,000 miles on it, but ended up going with a $22K new 2012 model at the time because I got .9% financing-- point nine.  Dave forgets the new car is WORTH MORE than the old car, by the way. That .9 is free money. Anytime I can use someone else's money for free to make a purchase I'm going to make anyway- I do it. Made the last payment on my 2012 when it was due- and not a minute sooner. You don't pay off debt you're not paying anything for.

[Tiny]

 

Dave Ramsey also gives other advice which includes covering the upside down amount (the difference between what the car is worth and what you owe) including taking out a loan to cover the difference, and "saving up" to cover the difference by cutting your other budget items and making principal payments towards the car note to erase the upside down amount and ultimately pay the car off. I will admit, I haven't the foggiest idea why on earth anyone would obsess about the brief period of time that a car is worth less than what is owed. Here's the reality:

 

I have known people who "rolled" 5K or more from one car to the next 7 year car loan on a 10 year old car!!!!  So, a 15K 84 payment loan on a 10 year old car (the payment was an  affordable $200 or so a month.) .      So, how long is the "brief period' this car is upside down   And what happens when the car starts to need maintenance (maybe "expensive" maintenance?)    What happens when that $200 a month payment AND the necessary gap insurance/car insurance costs eat up alot of one's low wage income??    I strongly suspect the scenario above does not end well.... unless the buyer is a DIY car fixer enthusiast and isn't putting alot of miles on the car.        

I think the OP is overlooking predatory lending....    

[Tiny]

Jul 19, 2019 15:04:59 GMT -5 AgeOfEnlightenmentSCP said:

Jul 19, 2019 14:29:54 GMT -5 @athena53 said:

Well, I agree that walking away from the loan is stupid- unless maybe he's talking to someone making minimum wage who got themselves roped into a 6-year car loan with $700 monthly payments?   Maybe there the idea is to wipe the slate clean rather than pay and pay for years.  They still do need another car, though.  And is any written-off portion of the loan considered taxable income?  I'm not sure on that.

And the problem of being upside down is not just theoretical.  Ask my son who's settled personal auto physical damage claims.  If you haven't bought "gap insurance" that upside down amount becomes real money if your car is totalled.

We will have to agree to disagree on buying a nice, shiny new car.  I'm widowed and live alone so I can no longer call DH to come and get me if the car dies.  DS lives 3 hours away.  I NEED dependability.  I haven't bought a new (current model year) car since 1991 and the ones DH and I have bought off-rental from Enterprise have been great.  When the unhappy day comes that I need to replace my current one, that's where I'm going.

My understanding is that loan forgiveness-- including "charged off" debt is taxable. I settled an account some years back, and I got 1099'd for it.

On your second point, yes- but that problem would manifest itself if the insured had paid cash. Under-insured can be remedied.

The reason I suggest for lower income and people just starting out to go new is they can't really afford a reliable used car. Dave even calls it "a beater with a heater". He's suggesting what is perhaps a far bigger financial trap than a predictable $200 to $300 per month. And if they qualify for used car financing, the difference in interest rate is high enough to offset the $1,000 to $3,000 "savings" for the 30,000 mile car vs. the 0 mile car.  What people just starting out, or in situations where they aren't earning enough need is more income. They don't need the worry and headache of a "beater with a heater".

Have you looked at/priced used cars and financing? There's a glut of newer used cars. You can get a 3 year old used "higher end" model vehicle for the same price as a brand new low end same model vehicle OR a brand new "lower end" car (think hyundia or kia subcompact commuter car) .

It sounds like you are saying if you CANNOT afford a 15K  3 year or younger used vehicle - you should go all out and buy a similiar but new 20K vehicle?  
Why would you buy more car than you can afford??   That's bad advice all around. 

If someone has $300 a month - I'm not sure what quality of brand new vehicle they can afford. $300 a month will get you a used quality vehicle. And the vehicle will NOT be at the end of it's life when the loan is done. (well, as long as you aren't driving 30K miles a year....) 

You are also making some assumptions about the income of people who need reliable cars...  $11.00 an hour * 2080 yearly work hours = $22,880.00 per year.   That's less than 2,000 BEFORE payroll deductions per month.   Housing is typically 1K per month Utilities/phone $300 per month.  $300 car payment and then $100 per month for insurance - and that's $1700 gone... and you haven't put gas in the car or bought beans and rice.      It's probably alittle easier if making $15 an hour...  Even at median income of 50K per year - I would think a $500 a month expense for a car (loan, insurance, gas) takes a pretty big bite out of one's disposable income. 

[raeoflyte]

Jul 19, 2019 15:04:59 GMT -5 AgeOfEnlightenmentSCP said:

Jul 19, 2019 14:29:54 GMT -5 @athena53 said:

Well, I agree that walking away from the loan is stupid- unless maybe he's talking to someone making minimum wage who got themselves roped into a 6-year car loan with $700 monthly payments?   Maybe there the idea is to wipe the slate clean rather than pay and pay for years.  They still do need another car, though.  And is any written-off portion of the loan considered taxable income?  I'm not sure on that.

And the problem of being upside down is not just theoretical.  Ask my son who's settled personal auto physical damage claims.  If you haven't bought "gap insurance" that upside down amount becomes real money if your car is totalled.

We will have to agree to disagree on buying a nice, shiny new car.  I'm widowed and live alone so I can no longer call DH to come and get me if the car dies.  DS lives 3 hours away.  I NEED dependability.  I haven't bought a new (current model year) car since 1991 and the ones DH and I have bought off-rental from Enterprise have been great.  When the unhappy day comes that I need to replace my current one, that's where I'm going.

My understanding is that loan forgiveness-- including "charged off" debt is taxable. I settled an account some years back, and I got 1099'd for it.

On your second point, yes- but that problem would manifest itself if the insured had paid cash. Under-insured can be remedied.

The reason I suggest for lower income and people just starting out to go new is they can't really afford a reliable used car. Dave even calls it "a beater with a heater". He's suggesting what is perhaps a far bigger financial trap than a predictable $200 to $300 per month. And if they qualify for used car financing, the difference in interest rate is high enough to offset the $1,000 to $3,000 "savings" for the 30,000 mile car vs. the 0 mile car.  What people just starting out, or in situations where they aren't earning enough need is more income. They don't need the worry and headache of a "beater with a heater".

I don't know...we bought a handful for $500 - $2000 cars back in the day.  Drove them for 6 months for a couple years and sent them to the scrap yard when they were too expensive to fix.  Still better than a car payment imo.  (We had 1 car payment too, which was okay at the time, but we both NEEDED cars, and 2 car payments would have been incredibly difficult on what we made those early days.  AAA rescued us a few times, but more from flats or lost keys than damaged cars. 

[AgeOfEnlightenmentSCP]

It sounds like you are saying if you CANNOT afford a 15K 3 year or younger used vehicle - you should go all out and buy a similiar but new 20K vehicle?

Why would you buy more car than you can afford?? That's bad advice all around.

I'm saying that it's a multidimensional problem being attacked from only ONE perspective rooted in an irrational fear of debt. I'm saying that if you CANNOT afford a 15K 3 year or younger vehicle, then you should buy a vehicle you CAN afford- one that fits your monthly budget with no surprises. Because what you really can't afford is the risk.

And believe it or not (GASP!) if you can afford the monthly payment (and it's not stupid-- we're not talking a Mustang GT at 12%-- we're talking about the SAME sensible car, factory new, full warranty, with cash reserves still intact), you can afford it. The Dave Ramsey types have a myopic focus on debt while ignoring value, safety, reliability and probably more important than anything when you don't have a lot to work with: MONTHLY CASH FLOW.

Money goes where attention and energy flow. Believe it or not, the quickest way to get stuck in debt forever is to focus on nothing but your debt. Dave Ramsey gets the occasional idiot caller that make $500K a year as a couple and owe $5 million because they have his and hers Range Rovers, a boat, and a summer home at the lake. But the vast majority of people that I hear call the show need to put all their time, energy and attention into INCREASING THEIR INCOME.

Even if you believe his teachings, he applies them to the point of absurdity. His company doesn't take credit cards. First of all, money is fungible- and I'd be willing to bet people that order his stuff using their debit card who are in trouble-- probably charged something else so they could do it. Second of all, if his stuff is that good- when is the best time to get started? That's right. So, charge it. It's $120 bucks. And for Dave to say no to getting started now means he doesn't really believe what he teaches, the debit card thing is a cynical gimmick, or he really just doesn't know how to do the math.

I think he probably does believe his schtick- though his everyone's an idiot approach is psychological projection (he was a SERIOUS idiot with money-- according to him. And no, it wasn't because he was overleveraged in real estate-- he was overleveraged personally), and his myopic focus on debt is reactionary- and not rooted in the principles he claims to teach.

[Deleted]

Despite being plagued with a bunch of car issues in the past two months, I still don't buy I'm better off with a car payment.  I've had 3K worth of car bills this year, but that is on 3 vehicles and 2 had none last year at all.   

Plus, it's not just the payment.  New cars have to have full coverage insurance and in our state cost more to get tabs on every year.  I was paying almost $400/year annually for tabs on my truck when I had it (worth 30K).  Ten year old and older vehicles are a flat $35/year.   Car insurance on a new car for my DS?  Good lord.  I can't imagine.  We got a full coverage quote on an 8 year old Corolla and it was $200/month.  His 97 Camry that I paid $500 for?  $60/month.  I've put $900 in it in the past 13 months.     So, new car, at least an extra $1700/year to insure and an extra $350/year for tabs on top of that 3K in payments.  That's a lot of repairs....  

[Deleted]

Aren't you a multi-billionaire by now?  You should be the way you've been talking the past 15 years.  Why not go buy out Dave Ramsey and run your own show?  

[Tiny]

Jul 19, 2019 16:19:09 GMT -5 AgeOfEnlightenmentSCP said:

It sounds like you are saying if you CANNOT afford a 15K 3 year or younger used vehicle - you should go all out and buy a similiar but new 20K vehicle?

Why would you buy more car than you can afford?? That's bad advice all around.

I'm saying that it's a multidimensional problem being attacked from only ONE perspective rooted in an irrational fear of debt. I'm saying that if you CANNOT afford a 15K 3 year or younger vehicle, then you should buy a vehicle you CAN afford- one that fits your monthly budget with no surprises. Because what you really can't afford is the risk.

And believe it or not (GASP!) if you can afford the monthly payment (and it's not stupid-- we're not talking a Mustang GT at 12%-- we're talking about the SAME sensible car, factory new, full warranty, with cash reserves still intact), you can afford it. The Dave Ramsey types have a myopic focus on debt while ignoring value, safety, reliability and probably more important than anything when you don't have a lot to work with: MONTHLY CASH FLOW.

Money goes where attention and energy flow. Believe it or not, the quickest way to get stuck in debt forever is to focus on nothing but your debt. Dave Ramsey gets the occasional idiot caller that make $500K a year as a couple and owe $5 million because they have his and hers Range Rovers, a boat, and a summer home at the lake. But the vast majority of people that I hear call the show need to put all their time, energy and attention into INCREASING THEIR INCOME.

Even if you believe his teachings, he applies them to the point of absurdity. His company doesn't take credit cards. First of all, money is fungible- and I'd be willing to bet people that order his stuff using their debit card who are in trouble-- probably charged something else so they could do it. Second of all, if his stuff is that good- when is the best time to get started? That's right. So, charge it. It's $120 bucks. And for Dave to say no to getting started now means he doesn't really believe what he teaches, the debit card thing is a cynical gimmick, or he really just doesn't know how to do the math.

I think he probably does believe his schtick- though his everyone's an idiot approach is psychological projection (he was a SERIOUS idiot with money-- according to him. And no, it wasn't because he was overleveraged in real estate-- he was overleveraged personally), and his myopic focus on debt is reactionary- and not rooted in the principles he claims to teach.

Ah, there's the problem.   Most people don't know what they can afford.   Well, actually they do - they can afford say $200 a month - and if that means they roll an old 5K loan into a new loan  on a 10yo used car for a $200 a month payment --- it means the car is affordable.      

I'm not a big Dave Ramsey fan (I do agree with his basic principles - those Baby Step things - with a caveat that the goal is to outgrow them financially and move on better thinking/habits/money use to grow wealth).    So, I'm not that invested in hacking apart his advice.   I assume at the "mission statement" for his business is to provide entertainment.  And as such he's gotta have some contentious ideas.   

I think he should harp more on the fundamentals of cars and on the math (and on the financial commitment that is a car) but that doesn't really make for good entertainment.    

[AgeOfEnlightenmentSCP]

Jul 19, 2019 17:42:13 GMT -5 minnesotapaintlady said:

Aren't you a multi-billionaire by now?  You should be the way you've been talking the past 15 years.  Why not go buy out Dave Ramsey and run your own show?  

Zillionaire, to be precise. And I have tested the podcast waters a bit and it's just too much darn work. I didn't work this hard and build the life I have to tether myself to some show. I thought about pre-recording a bunch of episodes-- but these kids today are insufferable. They expect everything to be on Periscope, FB Live, and everywhere else LIVE all at once. Forget it. I just want to fish, play golf, race my car-- and maybe make a few posts here now and then.

[AgeOfEnlightenmentSCP]

Jul 19, 2019 17:50:23 GMT -5 Tiny said:

Jul 19, 2019 16:19:09 GMT -5 AgeOfEnlightenmentSCP said:

I'm saying that it's a multidimensional problem being attacked from only ONE perspective rooted in an irrational fear of debt. I'm saying that if you CANNOT afford a 15K 3 year or younger vehicle, then you should buy a vehicle you CAN afford- one that fits your monthly budget with no surprises. Because what you really can't afford is the risk.

And believe it or not (GASP!) if you can afford the monthly payment (and it's not stupid-- we're not talking a Mustang GT at 12%-- we're talking about the SAME sensible car, factory new, full warranty, with cash reserves still intact), you can afford it. The Dave Ramsey types have a myopic focus on debt while ignoring value, safety, reliability and probably more important than anything when you don't have a lot to work with: MONTHLY CASH FLOW.

Money goes where attention and energy flow. Believe it or not, the quickest way to get stuck in debt forever is to focus on nothing but your debt. Dave Ramsey gets the occasional idiot caller that make $500K a year as a couple and owe $5 million because they have his and hers Range Rovers, a boat, and a summer home at the lake. But the vast majority of people that I hear call the show need to put all their time, energy and attention into INCREASING THEIR INCOME.

Even if you believe his teachings, he applies them to the point of absurdity. His company doesn't take credit cards. First of all, money is fungible- and I'd be willing to bet people that order his stuff using their debit card who are in trouble-- probably charged something else so they could do it. Second of all, if his stuff is that good- when is the best time to get started? That's right. So, charge it. It's $120 bucks. And for Dave to say no to getting started now means he doesn't really believe what he teaches, the debit card thing is a cynical gimmick, or he really just doesn't know how to do the math.

I think he probably does believe his schtick- though his everyone's an idiot approach is psychological projection (he was a SERIOUS idiot with money-- according to him. And no, it wasn't because he was overleveraged in real estate-- he was overleveraged personally), and his myopic focus on debt is reactionary- and not rooted in the principles he claims to teach.

Ah, there's the problem.   Most people don't know what they can afford.   Well, actually they do - they can afford say $200 a month - and if that means they roll an old 5K loan into a new loan  on a 10yo used car for a $200 a month payment --- it means the car is affordable.      

I'm not a big Dave Ramsey fan (I do agree with his basic principles - those Baby Step things - with a caveat that the goal is to outgrow them financially and move on better thinking/habits/money use to grow wealth).    So, I'm not that invested in hacking apart his advice.   I assume at the "mission statement" for his business is to provide entertainment.  And as such he's gotta have some contentious ideas.   

I think he should harp more on the fundamentals of cars and on the math (and on the financial commitment that is a car) but that doesn't really make for good entertainment.    

Well, yeah- there is a point at which people are just plain stupid. However, my advice to idiots has never been to idiot proof your life because you're an idiot- it's to grow up, and become slightly less stupid today than you were yesterday. I've been an idiot. I used to deliver mulch with a truck to the end of people's driveways- and that was so much better than any job I ever had that I thought I was big league-- or bigly. Take your pick. He's also completely wrong on the math concerning "If you just pay cash for a car (losing all that investing power) so you don't have a car payment, you can then invest the money you otherwise would have paid on cars and you'll be a millionaire"...

Dave says the "average" car payment is $475 (though we've had some pretty expensive vehicles including two Honda Odyssey minivans and a Honda Pilot (which we happily lease right now for $390 per month with $0 down- though we did have to pay the sales tax- in cash) and we've never paid anything like $475 per month- but whatever, we'll accept that for the sake of argument. He says you start with $2,000 car and upgrade every so often (I'm personally not putting my wife and kids even in the best case scenario $2,000 car from Dave's imagination) and eventually you're driving a very nice car with no monthly payment. Dave's plan makes no mention of repairs or maintenance of said $2,000 jalopy-- to say nothing about your personal safety and those you love- I don't know as much about money as Dave claims to know, but I do know it's tough to get rich if you're dead. At least if you listen to Dave, you'll have a term life insurance policy, but I digress...

So, he says investing that $475 per month for 30 years will give you $1.6 million because the stock market always and forever returns 12 percent per year every year, year in and year out- that's the average-- according to Dave.

So, assuming you survive the sting of "beaters with heaters" beginning with a $2,000 POS, Ramsey forgets only part of the $475 payment is interest. The other portion is the principal amount. DR Cultists need to set aside the principal amount each month in their goofy envelopes (earning nothing on the money) so they can pay cash for the next car, right? Right.

Here’s the math: A $26,000 vehicle financed at a horrendous 4 percent interest for 60 months gets you close to DR's "average" car payment number: $478.83. Total interest will amount to about $2,700-- and keep in mind, this is double what I'm seeing for well qualified buyers, and WAY more than a lease of a $26,000 car- which might be the way to go if all you can scrape together is enough for a $2,000 car. There are NO $2,000 cars in any plan I'd "help" anyone with. But again- I digress...


Using the median monthly interest at one year intervals- the interest paid monthly in years one, two, three, four and five is $80, $64, $47, $29, and $11 respectively.



Dave uses 5% commission- so, subtract that (he says funds with upfront commissions are the cheapest over time) - I vehemently disagree with this, but that's another topic. Forget about fees and taxes which he glosses over accusing weirdos like me of getting "analysis paralysis" when we talk about them- through these numbers in the hopper and we come up with...drum roll please...

$3,941. 

Here's where I'm going to talk about the subject DR calls the key to not being broke: math. He says if we just "do the math" we won't do stupid things like finance cars. I think driving a $2,000 "beater with a heater" is stupid- to the extreme. But again...not to get sidetracked (yet, it IS an important point- the money you spend for a car isn't money you're burning in the fireplace. I know this is tough- but try to grasp it: YOU ARE GETTING VALUE from an automobile purchase. And YOU GET WHAT YOU PAY FOR-- mostly, there is a such thing as a stupid purchase. I mean people buy organic. So, there's that.)


Dave isn't even in the ballpark. If you always have a car loan, and the interest payments are invested at 12% per year for 25 years (remember the premise- it's been invested for 5 years already) the investment balance is roughly $171,000. 

If car purchases are more along the lines of my suggestion-- once every 10 years (four years longer than average), and you don't die in some beater when the tie rods go and you flip it with your whole family into the ditch, or you don't lose several jobs because "car trouble" causes you to be late and miss work and other opportunities, your grand total is $828K-- slightly off the $1.6 million you were expecting.

The fact of the matter is that Dave has no demonstrable experience with money other than the money he's made as the world's #1 information marketing company employing every protestant pastor in America as part of his sales force. He has been offering financial advice for decades in spite of having no demonstrable qualifications to do so. He hides behind the fact that he's a "ministry" or at least a "non profit"-- which is a misnomer that fools a lot of the financially un-savvy. It's ALL business-- because at the end of the day, whether you're forced to spend it all or not, you gotta bring in money to run an organization. He does, however, have a network (which I'm sure pay him) of "ELPs" or "Endorsed Local Providers" who are actually licensed-- but they're all steeped in DR's teachings-- and very happy to sell you investments with upfront commissions, I'm sure.

[Deleted]

DR isn't making up the $475/month average car payment.  He's actually a little low if you look it up anywhere.  Most places are saying $550.

www.lendingtree.com/auto/debt-statistics/

[AgeOfEnlightenmentSCP]

Jul 19, 2019 21:44:25 GMT -5 minnesotapaintlady said:

DR isn't making up the $475/month average car payment.  He's actually a little low if you look it up anywhere.  Most places are saying $550.

www.lendingtree.com/auto/debt-statistics/

Yikes! That's damn near a mortgage payment (for a starter home). It's also roughly a $32,000 car-- which I am NOT recommending.

[Deleted]

Jul 19, 2019 17:50:23 GMT -5 Tiny said:

I'm not a big Dave Ramsey fan (I do agree with his basic principles - those Baby Step things - with a caveat that the goal is to outgrow them financially and move on better thinking/habits/money use to grow wealth).

That's my feeling about Dave Ramsey. He's great for the people with out-of-control credit card debt and those who can't separate wants from needs. I think he does a lot of good. He's not for me; I love my Fidelity 2% cash-back credit card (which I pay off in full every month) and I have (gasp!) a mortgage in retirement (15-year, 3% fixed rate).

The OP talked about increasing income; when I think back, I don't know how that would have been possible for me, other than maybe job-hopping more (and maybe I should have done that). For many people, taking on a service-sector side job isn't possible because they don't give you regular hours. They just want you there when there's enough business to justify it. So, it's hard to add to a 9-to-5 job. Getting more education? That could help but there's a monetary cost. Fortunately, the career I had paid well- over $100K/year for at least the last 25+ years of my career. Certainly you can get into deep financial trouble even at that income level, but I focused on saving and living below my means, and retired comfortably at 61.

[phil5185]

""So, he says investing that $475 per month for 30 years will give you $1.6 million because the stock market always and forever returns 12 percent per year every year, year in and year out- that's the average-- according to Dave."""

That's what I do - the last time that I paid cash for a new car was in 1985 (interest was 15% at that time). Since then I have financed our cars 100% - ie, zero down, 60 months of payments.  I get the results that Dave suggests - except that my average return is about 11%/yr, not 12..

As for junker, used car, new car - that's a separate debate.  As long as you can get inexpensive rates (<5%), you will do better by 100% financing. And leave your own money invested at 11%/yr.

[Deleted]

Jul 20, 2019 8:48:23 GMT -5 phil5185 said:

""So, he says investing that $475 per month for 30 years will give you $1.6 million because the stock market always and forever returns 12 percent per year every year, year in and year out- that's the average-- according to Dave."""

That's what I do - the last time that I paid cash for a new car was in 1985 (interest was 15% at that time). Since then I have financed our cars 100% - ie, zero down, 60 months of payments.  I get the results that Dave suggests - except that my average return is about 11%/yr, not 12..

As for junker, used car, new car - that's a separate debate.  As long as you can get inexpensive rates (<5%), you will do better by 100% financing. And leave your own money invested at 11%/yr.

The people Paul are saying should get car loans are the ones with no money.  They're not keeping the money invested at 12% or 11%.   They're just going into debt.  

[raeoflyte]

Jul 19, 2019 22:45:11 GMT -5 AgeOfEnlightenmentSCP said:

Jul 19, 2019 21:44:25 GMT -5 minnesotapaintlady said:

DR isn't making up the $475/month average car payment.  He's actually a little low if you look it up anywhere.  Most places are saying $550.

www.lendingtree.com/auto/debt-statistics/

Yikes! That's damn near a mortgage payment (for a starter home). It's also roughly a $32,000 car-- which I am NOT recommending.

What do homes cost where you live?

[tallguy]

Jul 20, 2019 10:40:09 GMT -5 raeoflyte said:

Jul 19, 2019 22:45:11 GMT -5 AgeOfEnlightenmentSCP said:

Yikes! That's damn near a mortgage payment (for a starter home). It's also roughly a $32,000 car-- which I am NOT recommending.

What do homes cost where you live?

Apparently a helluva lot less than where I live!

[Deleted]

I don't do gaslighting, so I will ignore that aspect.

I drive a $2K SUV that replaced a $1400 Olds sedan we got 100K miles and 10 years of driving even with 2 teen drivers.

The only thing the Olds ever needed was one minor repair, tires, and brakes. Best car ever.

My SUV is a POS and going to the dismantlers via Cash for Clunkers if I can get it down to the area where it can be turned in. I'll get $1500 for it. 

My SUV needs new suspension, tires, a windshield, a side mirror, and the back window latch replaced. It also has some sort of starter binding and transmission issue no one has been able to figure out. It's in no way worth the costs to fix, just the suspension is over 1K...

I'll never own a new car again or one with payments. But, my next vehicle will be lower mileage because I need 4WD and want something I can rely on out away from civilization. I go back and forth between wanting a truck with a camper shell or a larger SUV like a Suburban that I can comfortably sleep in.

[swamp]

I want to know where this 12% return is.      

Yes, i know the YM tagline of "invest for the longterm" and 30 year averages, but I've been invested for about 20 years now, and I don't think I've seen that return.   

[Value Buy]

Jul 22, 2019 11:15:39 GMT -5 swamp said:

I want to know where this 12% return is.      

Yes, i know the YM tagline of "invest for the longterm" and 30 year averages, but I've been invested for about 20 years now, and I don't think I've seen that return.   

I am happy with the rule of 72.
Anything above that is cake and ice cream thoughts for the average investor.
The rule of 72 will make just about anyone happy. Or should.

[tallguy]

Jul 22, 2019 11:23:12 GMT -5 Value Buy said:

Jul 22, 2019 11:15:39 GMT -5 swamp said:

I want to know where this 12% return is.      

Yes, i know the YM tagline of "invest for the longterm" and 30 year averages, but I've been invested for about 20 years now, and I don't think I've seen that return.   

I am happy with the rule of 72.
Anything above that is cake and ice cream thoughts for the average investor.
The rule of 72 will make just about anyone happy. Or should.

What?  That makes no sense.  All it means is an idea of how long it takes your money to double with a given interest rate.  If you get a 2% rate it will take 36 years.  Why would you be happy with that? 

[bookkeeper]

I drove a 2007 Cadillac sedan I purchased for $5000.  The car had a few repairs, window motors and a few other small items.  I had the car for about 5 years when the suspension was needing parts.  I traded the car to my neighbor for $1800 credit at his store.  He needed a beater for one of his employees.  Meanwhile I purchased a 2015 Nissan from the dealer.  Purchase price was just under $20,000.  Full warranty, had a few miles as a service loaner, got the car in the color I wanted.


I did the math on what I spent on the Cadillac per year of ownership and I figure if I keep this Nissan for 10 years, my cost per year will be about the same as driving the beater car.  And, I get to drive a new car.  I am on year four, without any repairs.  Full coverage insurance is more money, but it is the Comprehensive coverage that costs the most on my bill.  Hail storms are more common than car wrecks where I live.


For what it's worth, we keep one newer car and one dependable older truck.  I had car payments for years, because I had to.  Now I prefer to pay cash and move on.  I have other money invested, a car payment isn't going to move my dial very far one way or another.

We need to replace our truck in the next few years.  That will be a bigger bill to pay.

[Tiny]

Jul 20, 2019 11:00:09 GMT -5 tallguy said:

Jul 20, 2019 10:40:09 GMT -5 raeoflyte said:

What do homes cost where you live?

Apparently a helluva lot less than where I live

In Paul's defense, if his area of Florida is like the area I'm familiar with --  there are plenty of trailer homes, 700 sq ft houses and the occasional 700sq ft or less condos  in Florida that sell  for 80K or less.     PITI and HOA fees would be about $600 on one of them.   Some of these are in 55+ communities and some of them are in basically "low income housing projects" communities.   There are alot of low pay jobs in area of Florida I'm familiar with.  The people with money aren't usually natives/don't have jobs in Florida - they came with their money from somewhere else.  

[AgeOfEnlightenmentSCP]

Jul 20, 2019 10:40:09 GMT -5 raeoflyte said:

Jul 19, 2019 22:45:11 GMT -5 AgeOfEnlightenmentSCP said:

Yikes! That's damn near a mortgage payment (for a starter home). It's also roughly a $32,000 car-- which I am NOT recommending.

What do homes cost where you live?

You can get a decent starter house - 3/2 attached two car garage - for between $180K and $250K on the high side. The median home price (median listing price is $444,650) is much higher, but we're talking starter homes. 

And there are plenty of condos and trailer homes nearby for MUCH less than this.

[AgeOfEnlightenmentSCP]

Jul 22, 2019 11:15:39 GMT -5 swamp said:

I want to know where this 12% return is.      

Yes, i know the YM tagline of "invest for the longterm" and 30 year averages, but I've been invested for about 20 years now, and I don't think I've seen that return.   

Because kind of like the mythical Dunn & Bradstreet "study" he likes to cite which "proves" people spend 14% more when they use credit cards than when they use cash or a debt card, he made it up. In fact, it used to be 17% (not kidding). The man's a doofus.

[AgeOfEnlightenmentSCP]

Jul 22, 2019 10:40:22 GMT -5 @rockhounder said:

I don't do gaslighting, so I will ignore that aspect.

I drive a $2K SUV that replaced a $1400 Olds sedan we got 100K miles and 10 years of driving even with 2 teen drivers.

The only thing the Olds ever needed was one minor repair, tires, and brakes. Best car ever.

My SUV is a POS and going to the dismantlers via Cash for Clunkers if I can get it down to the area where it can be turned in. I'll get $1500 for it. 

My SUV needs new suspension, tires, a windshield, a side mirror, and the back window latch replaced. It also has some sort of starter binding and transmission issue no one has been able to figure out. It's in no way worth the costs to fix, just the suspension is over 1K...

I'll never own a new car again or one with payments. But, my next vehicle will be lower mileage because I need 4WD and want something I can rely on out away from civilization. I go back and forth between wanting a truck with a camper shell or a larger SUV like a Suburban that I can comfortably sleep in.

That cash for clunkers bs is still going on? I might just start buying $500 SUV's and turning them in.

[AgeOfEnlightenmentSCP]

Jul 20, 2019 6:55:28 GMT -5 @athena53 said:

Jul 19, 2019 17:50:23 GMT -5 Tiny said:

I'm not a big Dave Ramsey fan (I do agree with his basic principles - those Baby Step things - with a caveat that the goal is to outgrow them financially and move on better thinking/habits/money use to grow wealth).

That's my feeling about Dave Ramsey. He's great for the people with out-of-control credit card debt and those who can't separate wants from needs. I think he does a lot of good. He's not for me; I love my Fidelity 2% cash-back credit card (which I pay off in full every month) and I have (gasp!) a mortgage in retirement (15-year, 3% fixed rate).

The OP talked about increasing income; when I think back, I don't know how that would have been possible for me, other than maybe job-hopping more (and maybe I should have done that). For many people, taking on a service-sector side job isn't possible because they don't give you regular hours. They just want you there when there's enough business to justify it. So, it's hard to add to a 9-to-5 job. Getting more education? That could help but there's a monetary cost. Fortunately, the career I had paid well- over $100K/year for at least the last 25+ years of my career. Certainly you can get into deep financial trouble even at that income level, but I focused on saving and living below my means, and retired comfortably at 61.

I'll agree that to someone who is a complete idiot with their money, DR sounds really smart. And I do listen on occasion and when I hear what some of these people were doing before the stupid DR stuff they're doing now- well, yeah- of course they feel like winners by comparison. 

And I get that if you have $25,000 in consumer credit card debt eating you alive at 29%- that is your best investment. You'll never do better than to pay that off. But I cringe when I hear these people talking about killing themselves to pay off their 30 year mortgage at 3% in five or seven years. And sometimes I wonder if DR even hears himself. If you can get 12% all day every day in the market- why wouldn't you just put that money in the market instead of making double or triple mortgage payments?