Your Questions About Save Loan

Joseph asks…

Saving for car… down payment and loan term?

I currently have a 2004 Chevy Cavalier with about 100,000 miles, but it isn’t going to last too much longer. I’d like to save up for a 2007-2009 Honda Civic. I don’t want to get anything with a ton of miles, so the car will probably cost around 12,500 – 13,500 for the sticker price. I have good credit, I just don’t have a lot of things ON my credit. What kind of interest rate would they give me? 10-15%? Also, what would be a good down payment (to keep monthly payments low) and how about the loan term? I was thinking $4,500 down and 60 months. Is 60 months too long? Mainly concerned with the down payment and loan term, so if you could give your opinions, I’d appreciate it.

If it matters, I work 36 hours a week and go to school full time (paid for my financial aid)

John answers:

It’s impossible to say what interest rate they will offer with the info you’ve provided. 10-15% is the range for not great credit, but that may be right if you don’t have a lot of history. The more you put down, the less the monthly payments. A good rule of thumb is to put down at least 20%, so $4,500 sounds good. A car payment should not be more than 20% of your take home pay. I would do some research and take a practice run to see what you can really afford. Calculate the additional costs of this new car including insurance (free quotes available online from many insurers, having a loan will require full coverage), gasoline, regular maintenance, etc. For now, I would assume 20% of take home pay equals the loan payment. Start putting that extra amount in savings every month now. Not only will you find out if you can afford that amount, but it will increase your down payment. It’s also smart to apply for a loan at multiple places including your bank and the dealership to see who offers the better deal. If you apply within a certain time period (I think a week), all the credit inquiries are counted as one for your credit report. Applying at one, then waiting a few weeks to apply somewhere else could hurt your chances of approval at the second place. I don’t think 60 months is too long because Honda’s are known for reliability.

Robert asks…

Save, Pay off Loans or Spend?

Hello,

Which option (or combination of options) would be the best financial move for me? I have about $10k in the bank, which gives me a satisfactory emergency fund, so I am starting to look towards what to do with it.

1. I have about $5k in student loans with an 8% interest rate left over from my Master’s degree. Currently I have been making triple-payments. If I have the cash- should I just pay it all off?

2. I would like to buy a house in the next few years. I do not ‘need’ to buy a house and I am content in my rental, but I feel that my rental payments could be building equity instead of just paying the landlord. I would be looking at houses in the low $200’s- so I have a lot more saving to do for the down payment. I have heard ‘NOW’ is the time to buy and would qualify for about $300k for a mortgage, but I would not feel comfortable with that payment.

Other information about me:
-Age 26
-Credit Score- above 800
-Single, no children
-About $200 for a car payment, no other debts
Thanks for your response, how will saving for a down payment of a home come in- I don’t want to wait 5 years before I get into a house. Plus, although it is not the most frugal, it’s important to me to drive a newer car, so I don’t plan on ever not having a car/lease payment.

John answers:

8% return on investment is a no-brainer. Pay off the student loans. Keep the remaining $5k as an emergency fund. Then, start making triple payments on your auto loan.

Sandra asks…

How in God’s name does anybody save up for a down payment on a house?

The average price for a home I want, of the size I want (3 bed 2 bath) in my hometown that I intend on staying in is around 215k. A 20% down payment would be 43,000 dollars. How does anyone save up that kind of money? My husband and I pinch our pennies till they bleed and I feel like we are going nowhere with saving up. We don’t have cable, but we do pay 8 bucks a month for Hulu. We have a Virgin mobile phone to share and a 45 dollar plan. Wifi is free with the building. Rent is 1043 and the cheapest in our neighborhood. Student loans are 175 a month (drops in a bucket to what it could be, but that is still an entire bi weekly paycheck of mine). No cars. No health insurance. No eating out. No buying food that isn’t on sale. Only meat is ground chuck, which we eat three times a week. Peanut butter, tap water, and ramen are our food staples. Don’t pay for daycare, parents help out. No vacations, closest we had was a day trip to the beach that someone else paid for. I save every 5 dollar bill I get. But I still feel like we are going nowhere. Our combined income is 27,000 a year before taxes. I don’t even want a big house, a little rancher style is what I want and would prefer. We have been saving for 8 months and we only have 585 dollars. How could we ever afford a home? And in 5 months when I turn 21, I will have a 401k and contributions to think about. How do people do it, please share your secrets and advice!
We intend on increasing our income well before we buy a home, but homes do not sell here for less than 110k, and that is in the “buddy system and rape whistle” neighborhoods.
Monte if we were both working full time, we could make more. But my job is part time and so random that I can’t find a 2nd job. I’ve been trying though.

John answers:

You save it by tucking money away for the down payment.

Your problem is that you don’t earn enough money to buy a house.

If a $175 student loan payment eats up a 2 week pay check then you are seriously underpaid or underemployed & you need to remedy your income problem before you’re able to buy a house.

Edit:
you need a plan. First your over paying on your rent. I understand you’re stuck where you are but seriously almost 1/2 of your monthly income is going to rent when it should be more like 1/4 of your income should go to rent.

You have not debt except your student loans that’s good.

I like the 60/40 plan. You live on 60% of your income & the remaining 40% is split this way:
1/4 to entertainment fund (your hulu payment comes out of this)

1/4 to emergency savings. This is for emergencies only. You’ll want at least $1000, I recommend $1000 for each adult or one month’s salary which ever is more as a minimum. Eventually you will build this fund up to 6 months salary or 9 months expenses.

1/4 to retirement. Since you have student debt, I recommend you use this fund to pay down your student debt. Your $175 minimum will come out of your 60% & this money is the extra money you’re going to add to the minimum to pay off the student debt early. When your student debt is gone then you can start saving for retirement

so you don’t have to start saving for retirement yet. You will do your retirement more good by getting rid of your debt first.

1/4 to long term savings. This is where your down payment for a home comes from.

So your sample budget will look like this:
with a 27k annual salary you have about $2250 a month.
You have $1350 to pay your rent, monthly bills, groceries & student loan minimum (that’s the 60%)

now the 40% ($900)
1. You have $225 for your entertainment fund. Your hulu payment comes out of this. If you don’t use the full amount then you can roll it over into the next month.

2. You have $225 to put towards your emergency fund.

If you will save to 1 month’s salary in this account then you can put fully funding the emergency fund on hold & use this money to either help pay down your student debt (so you’ll be putting an extra $450 on that student debt instead of an extra $225) OR you use this fund to speed up your progress on saving for your down payment on the home you want (so you’ll be saving $450 for the down payment instead of just $225 a month)

3. You have $225 to put with your $175 student loan payment

4. You have $225 to put away for your home down payment. After 12 months that will be $2700 added to the $585 you already have then you’ll have $3285 towards that $43k you will need.

This is just a start. As your income increases then your budgets for these catagories will increase & you’ll see the money accumulating faster.

Your biggest problem right now is that your rent is way too high for the income you make. You’re paying $1043 where you should be paying $562. If it’s just not possible for you to live somewhere more in line w/ your income which will free up a lot of money for you then you just have to bite the bullet & be on a tight budget until you can increase your income.

Susan asks…

Pay off student loan or save for house?

I plan to buy a house in 3 years.

I still owe 120k in student loan. They carry various interest rates:
40k at 2.8%
16k at 3.5%
40k at 4.8%
the rest at 6.8%

I plan to pay off the loans with high 6.8% interest, but keep the ones with low interest rates (2.8, and 3.5%). I am not sure what to do about the ones at 4.8%. Better to pay them off or save for house?
– Student loan interest is not deductible for me.

– I can still manage to buy a house in 3 years even if I pay off the loan in question. Whether to pay it off just affects the size of mortgage.

John answers:

Pay off your student loans! You are losing thousands of dollars in the interest charges, nip those loans in the butt first! The faster you pay this all off, the more money you can put into a house you buy. You don’t have to just settle on one house for the rest of your life.

Here’s what you should do: Pay of the loans, then shop around for a house you can afford and are prepared to sell it when you can afford a home you would really like. This will give you time to save up some money for your dream house, and allow you to pay off your student loans as well :)

Hope this helps!

Carol asks…

Pay off Student loans or Save?

My husband and I combined have about $90,000 in student loans. Our current household income is just over $100,000. In the next 3-5 years we would like to purchase rental property. My question is this, Should we pay off our student loans or put the money toward saving for a down payment?

Other financial information, we have a mortgage that we currently pay 1484.00 a month. Two Car payments, One is 243.00 and the other is 424.00. We both have a credit card, we however do not carry a balance on them.

John answers:

Unload the debt first. These will directly impact your debt to income ratio and lower your buying power. Saving for a larger down payment might balance that out, but you will pay way more in interest than you will every make in savings.

Lenders typically set a cap on debt to income around 30%. If you have 100k in income, that leaves about 2500 per month to cover your fixed bills. That only leaves about 400-500 per month for your purchase of rental property (unless you can show future income from the property)

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