Comments on: The Low-Interest Debt Debate

By: The Bear

The Bear — Fri, 03 Apr 2009 14:17:28 +0000

Excellent dialogue, everyone! Being able to take part in debates like this is what makes America great.

Based on my philosophy of handling money (which many of you will recognize as being closely aligned with Dave Ramsey), Trent made the following errors in judgment by going into debt to purchase a new vehicle:

1) Purchasing a new vehicle. Based on the average depreciation of a new vehicle the money wasted is like rolling down your window and throwing out a $100 bill every week. Used cars that are 3-5 years in age are your best bet. I purchased a used Taurus in that range six years ago for $2,000 and have driven it to/from work 40 miles a day with no added expenses other than regular maintenance and new tires. During that time I’ve taken the $300/month average vehicle payment and saved it towards my next vehicle purchase. Based on the large hit against your net worth that a new vehicle causes, I don’t believe anyone should purchase a new vehicle unless they have at least a million dollars cash in the bank.

2) Going against God’s advice about debt – many places in scripture (ie-Proverbs 22:7) God advises against going into debt. Not that it’s a sin, but it’s just good solid advice. God is a very smart being, smarter than the rest of the world put together and then some. Heed his advice and you will prosper and have financial peace like no other!

Trent, thank you for being wiling to share.

By: Janet

Janet — Mon, 30 Mar 2009 13:41:36 +0000

I do not agree with any argument that going into debt on a new car is a good idea if you do not have to. My husband and I recently bought a newer vehicle. Our van was paid off but the parts were getting hard to find and we decided to upgrade. We went around and found a 2003 Dodge Caravan with only 100,000 km (about 55,000 miles) on it and was in perfect condition. We negotiated it to $6,500.00 (about 3,000 off). We then wrote a cheque on it and bought it. In the meantime, we arranged with the Bank to take the money from our savings and arranged a pay-back of $300.00 a month on it (the same as if we had borrowed the Bank’s money). The benefits are that first you pay back any money you took from savings so the money is replenished, second every time you put money back you are again earning rather than paying interest on it, and third if you do get into a tight situation with extra bills, there is one payment you don’t have to make and there is credit available if you absolutely have to have emergency funds available. Another benefit too is that if my husband gets sick and is unable to work that is a payment we will never have to worry about.

By: Karen

Karen — Sun, 29 Mar 2009 22:36:08 +0000

I feel as though financing items that depreciate is a bad idea. If it depletes your savings, then I guess you have no choice but to finance the auto. At least you bought a reliable brand that should hold some of it’s value.

By: suzanne

suzanne — Sat, 28 Mar 2009 15:02:52 +0000

Debt= principal payment and interest payment
Interest payment= money you are “shredding”

I believe interest payments are in order if you are purchasing
something that appreciates in value. A vehicle is not an asset
as is it falls in value as time goes on.

By: Lynne

Lynne — Sat, 28 Mar 2009 03:50:07 +0000

While I can appreciate the reasons some of you have on the loan option, I tend to operate on the “can’t stand having debt over my head” mode. We didn’t have a lot when I was growing up and being in debt is particularly scary for me. My husband and I were overwhelmed when we got out of college and started a business. I hated being that far in debt and I never want to feel like that again! Now, I make an extra monthly payment on the house debt. We never carry a balance on a credit card, yet we use 2. We worked hard on paying off our cars and worked our way up to new ones. While some think there are good reasons for taking out a loan, I just sleep better at night knowing that ours are paid. To each his own, but this is me. If my emergency fund is not enough, I can sell or take out a loan on them at such a time so that I won’t have to touch the home equity. I have an asset and extra money sitting in the bank is not a temptation.

By: Sharon

Sharon — Sat, 28 Mar 2009 00:27:26 +0000

I mean the original post on buying the Prius in the first place.

By: Sharon

Sharon — Sat, 28 Mar 2009 00:07:46 +0000

Wanzman, try reading the original post. Trent has BOTH funds.

By: Dariaclone

Dariaclone — Fri, 27 Mar 2009 23:51:28 +0000

I am late to follow this story and thread, but the way I look at it is that “something debt is the less risky option.”

We did a similar thing earlier this year. I just like having extra cash on hand, especially in this economy.

Smart choice.

By: Erin

Erin — Fri, 27 Mar 2009 16:46:59 +0000

I used to think this way. But now I think that the more monthly payments you have, the fewer choices you have in life when you want to make a chance. Yes, this car savings could be viewed as a supplemental emergency fund. But say that something serious happens, say your wife gets laid off, and can’t get a new job for quite a long time. You go through your emergency fund, your “supplemental” fund, and then you are still left with $x a month in a car payment. If you hadn’t financed the car you wouldn’t have to worry about that car payment.

I can see your reasoning, but I still think you would have been better off not incurring debt.

By: Informer

Informer — Fri, 27 Mar 2009 14:24:37 +0000

I didn’t have time to read every comment, so forgive if mentioned, but there’s a key reason *not* to pay a car in full: it’s a depreciating asset. Yes, it’s good to have the money out there, earning interest and at the ready for hot financial prospects. But you miss the much more obvious reality – you put your $28k into that car and it’s all gone and depreciating, plus you are paying that interest on the loan. Why do this? First, I’d not buy the car brand-spanking new. You can buy a certified used or a nearly new vehicle with some depreciation in there. If you have to have new, try fleet pricing via outlets like Costco. But to plunk down the full bank on it smells funny to me. Yes, you could earn money on it. But think, will you be driving it in five years – a Prius? I doubt it. Something new will be out there. Think 3 years, sell, recapture what you can of its value and move along to the next ‘nused’ vehicle.

By: reulte

reulte — Fri, 27 Mar 2009 13:50:54 +0000

What a diatribe of discordant voices! And how very interesting, too.

I’m debt-free and have a general fund (ie for future house purchase, vacations, expensive whatevers, cars and additional emergency if requred), an emergency fund, a savings accout as well as enough credit on those empty credit cards to buy anything I need.

Under the circumstances of the economy as they now stand I can fully understand why Trent purchased (1) new and (2) financed. I also believe he has explained it sufficiently clearly. In fact, he has explained it to my satisfaction that I am likely to do the same thing later this year (when I will be in the car market) if conditions are similiar. In fact, he may have saved me hours of my own research.

Wanzman and other people who work at a bank — I don’t work at a bank and your conversation is over my head even as conversationally as you are writing (no, please don’t explain further– I get the gist – “debt-evil, Trent-bad”) but his point is that with the cash he didn’t spend on the vehicle (using a loan, instead) he has the freedom to do with that cash whatever he needs/wants to do … including pay off the loan instantly or incrementally if the future is not as expected. He is paying (in interest) a fee he feels is fair for having the cash in hand — which is more valuable to him. He has a schedule of payments and how it (probably) affects each monthly budget he sets up. Further, its not as if he plans to spend the money he didn’t use on the car on an immediate first-class trip to Paris with a side jaunt thru Spain. I suspect Trent will continue on his frugal way, making decisions based, not on some dogmatic approach to personal finance, but with careful consideration and thought.

Its what I like best about TheSimpleDollar.

By: wanzman

wanzman — Fri, 27 Mar 2009 12:59:02 +0000

@ Sharon:

But he also chooses to write about his decisions in detail on a public blog with a comments feature. The point of a blog is not to write about something and have 100 robots immediately write a comment agreeing with you.

The point is to learn from different perspectives.

“Folks, Trent has BOTH an emergency fund AND a car savings fund. He has the money to cover the car and the emergencies, but wants some in reserve to pay for a replacement for a dying truck.”

You are wrong. If he had enough car savings, he would have paid for this car, still had an emergency fund, and still been able to meet future needs.

Based upon what we have all read here, it seems that he had car savings to replace his truck, but not pay for this prius, which is the vehicle he just pulled the trigger on.

Lay off, ok?

By: Sharon

Sharon — Fri, 27 Mar 2009 03:02:21 +0000

Folks, Trent has BOTH an emergency fund AND a car savings fund. He has the money to cover the car and the emergencies, but wants some in reserve to pay for a replacement for a dying truck.

Lay off, ok? He makes decisions for himself, not for you. You aren’t obligated to make the same decision. And Virgil, calling Trent a “doucher” is a) offensive and b) uncalled for. When you do that, you make YOU look like an immature person incapable of rational and reasonable discourse.

By: Stacey

Stacey — Fri, 27 Mar 2009 02:22:03 +0000

So, do you hear that Trent? Zannie and I want to know where you’re getting the 3%. Please add our question to your next mailbag. Thanks!

By: Zannie

Zannie — Thu, 26 Mar 2009 23:40:27 +0000

Dude, people are uptight.

Look–financing the car is a reversible decision. If one day Trent and his wife decide that they want to be rid of the debt, then they take that vehicle savings account of theirs and they pay the rest of the loan off.

Personally I am debt-free and generally cringe at the idea of loans, but this scenario honestly doesn’t bother me at all. As long as they don’t go underwater on it and always retain enough in their vehicle savings account that they could pay it off if they decided it was best to, big friggin’ deal.

I think perhaps the people who think this decision will be his utter ruin are the people who are still deeply in debt and can’t see past the evils it has brought to their lives. The reason debt is slavery is because it reduces the choices you have available to you–but that’s only if you cannot meet the obligation. Trent and his wife have the money with which to meet the obligation, so it’s not slavery to them. It may be a different choice than you think you would make if you had the cash, but that doesn’t make it a harbinger of disaster.

But I do still want to know where this 3% interest rate on savings comes from.

By: Diane

Diane — Thu, 26 Mar 2009 23:26:43 +0000

Whoa – All I can say is this certainly is a hot-button issue! Loads of response…

Whether you agree with Trent’s decision or not, discussion is good and hearing other people’s views is educational.

Still, it would be better if everyone could maintain a bit of respect in expressing their opinions…

By: Nelson

Nelson — Thu, 26 Mar 2009 22:08:55 +0000

@ Virgil comment #78- Dude, you nailed it.

I love how this doucher has justified going into debt. This is the same guy who counts his toilet paper sheets, makes his own laundry detergent, and who won’t let anyone go to starbucks or out for lunch because all those things cost precious money. Even though I think those arguments are incredibly unrealistic, I’ll admit that from a purely dollar and cent view, they make sense.

But then Trent goes and finances a new car, justifying it with some crap about having money around for “opportunity costs” and other related b.s. The fact remains that he’s paying interest every single day to finance this car. This is personal finance 101- DON’T PAY INTEREST FOR A LIABILITY!

As for having the extra cash on hand to have an extra emergency fund, that’s just garbage too. How much of an emergency fund do you need? Assuming the car cost 30k, do you really need an emergency fund of 30k PLUS whatever else you’ve set aside? How much do you spend every month?

Besides, isn’t the easier decision to take the GUARANTEED return of 4% by paying off the car? Remember, this 4% is paid for by after tax dollars, so the actual return approaches the 5% range. Also note that the 2.5% that can be earned by savings is taxable, and therefore has an after tax return in the 2% range. The spread isn’t 2%, it’s more like 3%. That’s 50% more for all of you math challenged readers.

3% of 30k is $900 a year! I saved you $900 in 2 minutes! You make your own laundry detergent to save some stupid small amount of money. The hypocrisy of the situation boggles the mind.

As for the credit report crap, let’s kill that garbage right now. I have one (count it, one!) credit card and my fico score is 792. You know what really helps your credit? Paying your bills on time. People overcomplicate credit reports big time.

To borrow a line from the Simpsons- I can’t believe you people are swallowing this tripe.

By: almost there

almost there — Thu, 26 Mar 2009 21:40:30 +0000

wanzman, I agree debt is evil most times. But if one uses it wisely it can save one money. I always have cash in reserve to pay off any debt I incure. I could pay off all my debts and still have cash left over. I learned as an enlisted and officer navyman averaging income of 10K per year over 21 years how to be frugal and not get caught short. One must just satisfy the needs and decide if the wants justify the expense. Please explain how low interest rate debt below inflation is not worth taking when the money paid back in the future is worth less than what was borrowed.

By: wanzman

wanzman — Thu, 26 Mar 2009 21:33:43 +0000

You all might be surprised from my comments, but…

As I mentioned I work for a bank. I would actually prefer that everyone have absolutely as much debt as they could afford to service each month. It’s better for my bank, and in turn, better for me.

I know how much money debt wastes though…but I do not feel sorry for people. They have just as much opportunity to learn about money and finanace as I do.

They either choose not to learn, or they choose to ignore what they have learned in order to pursue the lifestyle they have always dreamed about.

They try to obtain in 5 years what it took their parents a lifetime to obtain.

By: wanzman

wanzman — Thu, 26 Mar 2009 21:26:22 +0000

@ almost there:

Trading high interest credit card or card debt for lower interest HELOC debt might seem like a good idea..

But what if…

You default on the HELOC….then they can take your house.

If you default on an auto loan, they can take there…ok. If you default on a credit card…they can’t really do anything.

Trading unsecured debt for debt secured by your house is dangerous at best…and disastrous at worst.

“And, whenever one takes loans to pay off higher interest loans it can be the sound thing to do.”

Here is another idea, instead of trading debt for debt, how about just working to pay them off completely.

People spend so much time shuffling their debt around….if I could get a lower rate I could do x…or if I refinanced I could do x…yea, yea, the truth of the matter is, it’s still debt.

If you owe $40 grand at 10% and refince your house at 4%, YOU STILL OWE $40 grand!!! No matter how sweet of a rate you got….you still owe it.