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  • Our car loan is officially paid off – in less than two months!

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    I am thrilled to report that our car loan is officially paid off. We took out the loan in the middle of March, so we’ve paid it off in less than two months!

    How did we do it? The most important thing we did was buy a car that we could easily afford. We also negotiated a great price. And, we saved up for the purchase. All of this meant that the loan wasn’t a very big loan. And it helped to have good credit, so that we could get a loan with a great rate.

    As for paying off the loan itself, we basically snowflaked all available funds toward the loan. The funds included the amount we had been saving monthly for the car purchase, the amount that I normally would have transferred into our savings account, our tax refund, our tax rebate, and some additional small amounts of income that trickled in during the last two months.

    Considering we took 4 1/2 years to pay off our last car loan, I’m extremely pleased that we were pretty much able to meet my 2008 financial goal of paying cash for a new car.

    What’s our next financial goal? Stay tuned . . . I’ll share that with you soon.

    Our car buying experience – Part Two: Financing and the Trade-in

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    Read Part One: The Negotiations and Part Three: 5 Lessons Learned.

    Financing
    As soon as we got serious about buying a new car, I started looking into financing options. I checked the rates at all of our banks, including credit unions, as well as Nissan’s rates. Nissan offered 3.99% with a $1,000 rebate or a $1,250 rebate with no dealer financing. When I went through USAA’s car buying service, I discovered that they had an online auto loan application with 4.99% financing, so I applied online and was approved within minutes. I simply printed out an electronic check to take to the dealership. (Note: The 4.99% rate was for online applications only, and required automatic payments set up with a bank account.)

    When we got to the dealership, I intended to put down a hefty down payment of over $10,000 on my credit card (which I pay off in full each month) – but I was told that they only will charge a maximum of $5,000 to a credit card. The money for the down payment was sitting in our liquid CD account, which is generally highly accessible. However, it takes a day or two for funds to be transferred into a different account. I considered giving the dealership a check and asking them not to cash it for a couple of days, but rather than risk bouncing the check, I opted to finance a greater amount than I had originally intended. Once the loan was completed, I set up an electronic principal payment that brought the loan amount down to the amount I wanted it to be in the first place.

    Setting up our financing through USAA was super easy, and gave us a net gain over dealership financing because of the additional $250 rebate. The dealership, knowing that a check from USAA would never bounce, had no problems with the set up. In fact, the only hiccup occurred because we registered the car in both our names, but the loan was in my name only. Marc had to sign a release before the loan could be finalized.

    The Trade-in
    We had a 1997 Honda Accord EX sedan to trade in. I looked up the trade-in value at Kelly Blue Book and Edmunds.com, and also spoke to a friend’s husband who’s knowledgeable about used cars. Edmunds’ low value was about $2600. KBB’s low value was about $3500. My friend’s husband said we could expect to get about $4000 to $5000 in a private party sale, and about 30% less than that from a dealer.

    The first time I mentioned the trade-in to the salesman was the morning of the day that we were going in to buy the car. All of the negotiations were done at that point, and I made a final call to confirm that the car was actually at the dealership before we drove out there. I decided to mention at the end that we’d be bringing in the Honda, and I could detect a bit of perturbation in the salesman’s voice when I did.

    But when we arrived at the dealership, everything went fine. We test drove the new car, agreed that we wanted to buy it, and the salesman went over the Honda, then left us in his office while he took the papers over to the appraiser. Based on the numbers I’d collected, I was prepared to negotiate for $3000. It was still a shock, though, when the salesman came back with an offer of $2300. Marc and I looked at each other and prepared to leave – we’d agreed before arriving at the dealership that if the trade-in value wasn’t acceptable, we’d walk away. After all, the new car wasn’t an urgent purchase. The salesman tried to guilt us into taking the offer by telling us that he’d gone out of his way to bring the car in (repeating his story that it was highly unusual for them to get the car on the lot before the paperwork has been completed) and complaining that we hadn’t mentioned the trade-in to him before (as if that should have any impact on the purchase price of the new car).

    Finally, the salesman ran to get his boss, who was probably the sales manager but also was apparently at least somewhat responsible for selling the used cars, since he talked to us about what he personally was going to do with the Honda – something about selling it at auction. He told us in his most sincere manner that the most he could get for the Honda at auction was $2700, so he would give us $2700 and hope to break even on it. Marc and I discussed the offer for a minute and agreed to take the offer. (Read this if you’re wondering why we didn’t just sell the car ourselves – and read Patrick’s post, too.)

    Some thoughts on financing
    As you might recall, one of my goals this year was to pay cash for a new car. Obviously, that didn’t happen. But we should have the car paid off in June, which is pretty darn close to my original goal. (We took the loan out in March and will have it paid off in less than three months.)

    We’ll be buying that new car soon (and financing it)

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    So much for my goal of paying cash for a new car later this year. However, we think we’ve made a good decision to go ahead and buy a new car now (or in the next month or so). The biggest factor is that our 1997 Honda Accord needs some work if we’re going to drive it for the rest of the year. So rather than spend $1,000 on a car that we’re only keeping for a few more months, we’ve decided that it makes sense to just trade it in and buy a new car now.

    As I’ve mentioned before, we’ve had a hard time deciding what car to buy. Nothing has strongly appealed to us, though we eliminated SUVs and minivans from consideration due to their higher fuel consumption. We’re happy with our 2003 Nissan Altima, so we’re going to test drive a 2008 model and if we like it, we’ll end up with a second Altima in our garage. Fortunately, the 2008 model looks a little different from the 2003, so it’s not like we’re buying the exact same car. Marc took a look at the hybrid version of the Altima but discovered that it has half the trunk space, which would be a problem for us.

    I’ve been studying the tips in the car-buying series at Gather Little by Little, and at his recommendation, went to Edmunds.com. I priced out a V-6 model with no bells and whistles – it comes to $23,211, which includes a $1,000 cash back rebate with dealer financing at 3.9%. I plan to finance $19,000, which will give us a monthly payment of about $350 for 5 years. Then I’ll put the money that we had saved up for the car purchase and make a large payment toward the principal on my remaining student loan (the interest on that loan is higher than 3.9%). We’ll still have both loans paid off within two years, at which point we’ll be debt-free except for our mortgage.

    As a side note, I asked my husband about getting a 2007 Altima, since it would come with 1.9% dealer financing. But he pointed out that the car would have been sitting around for at least a year, and quite possibly baking in the sun (the first dealership we plan to go to has at least two storage lots where the cars are parked outside, and the Southern California summer sun is intense). Plus the difference in total interest paid would be negligible, particularly in light of the fact that the loan will be paid off within two years. So we’ll go with the 2008 model.

    Image credit: Edmunds.com.

    I’m considering re-financing our mortgage

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    The recent rate cuts got me thinking about re-financing our mortgage (and I’m not the only one). We’re a few years into our 30-year fixed rate mortgage so rates would have to drop quite low in order for us to end up paying less total interest than we would pay with our current mortgage, assuming we re-financed to a new 30-year fixed rate mortgage. A 15-year mortgage is out of the question since it would raise our monthly payment, something I’m not interested in at this time.

    However, I came up with a scenario that makes re-financing quite attractive. It looks like we could save thousands over the years by refinancing now at a lower rate and then paying the same amount we pay on our current mortgage. Here’s an example:

    • Current mortgage payment: $1200 – Total interest paid after 30 years: $120,000; interest paid to date: $30,000
    • Mortgage payment after refi: $1000 – Total interest paid after 30 years: $100,000; total interest paid if monthly payment is $1200: $80,000

    Obviously, I’ve made up these convenient numbers, but the bottom line is that paying the basic monthly payment after a refi in this scenario would result in total interest paid of $130,000 versus $120,000 without the refi. However, continuing to pay $1200 per month after the refi results in total interest paid of only $110,000. That’s basically the position we’ll be in if we can get a good rate now.

    The problem is that mortgage rates have been going up. And we wouldn’t benefit from a refi at the current rates. But now that I’m aware of this scenario and there’s a possibility that rates might go down, I’ll be keeping an eye on rates and ready to pounce if they drop far enough.

    Responsible money management is not about affordable payments

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    This post at I’ve Paid for This Twice Already on “The ‘Can We Afford The Payments’ Mentality” got me thinking. Back in 2003, when Marc and I bought our first car together, we divided the responsibilities as follows: Marc did the technical research, deciding what kind of car we should get and what a reasonable price was; I handled the financing research.

    I knew enough about car buying and money management to know that the most important thing was the total price of the car, not the monthly payment. So I repeatedly fended off the salesman’s efforts to get me to quote an acceptable monthly payment. Even though I knew I wanted a payment of approximately $350, I never uttered that figure to him. He was so frustrated when I told him for the third or fourth time that I simply wanted to know what the total cost of the car would be that I knew most people must not hesitate to say what monthly payment they can afford.

    In 2003, when we bought the car, I thought we were doing pretty well when it came to money. We got a great price on the car, our good credit got us the extremely low interest rate of 1.9% on the loan, and our monthly payment was less than $365. The thing is, it never occurred to me to buy a car without a monthly payment.

    Admittedly, back in 2003, we probably couldn’t have afforded to pay cash for a new car unless we saved for a couple of years (and we really needed a new car then). We didn’t want to buy a used car for reasons I’ve discussed previously. But it never occurred to me that we could buy a new car without payments until a few months ago, when I resolved to pay cash for our next car.

    I guess over the last five years, I’ve abandoned the payments mentality completely. I suppose the only time I might go into debt is to buy investment real estate, although I don’t really see that in our future since neither Marc nor I want to take care of tenants. But otherwise, I don’t think we’ll be borrowing money again – ever.

    The Fed rate cut doesn’t help me personally (actually, it hurts)

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    The Federal Reserve reduced its interest rate to 3.5% this morning. There was once a time when I loved seeing the Fed cut its rates. The last time the Fed slashed rates like this (about 6 years ago, I think it was), the monthly payment on my private student loans dropped from $400 to $270. I was just learning about personal finance at the time and I knew just enough to keep paying the $400 per month so I would pay off my loans faster.

    Since then, I’ve paid off my private loans. And now I have no adjustable-rate debts. I have a 30-year fixed rate mortgage. I have a consolidated student loan. And that’s it. Which means the Fed’s rate cut does nothing to help my personal financial situation.

    In fact, not only does it not help, it hurts. Because the interest rate that I earn at the bank will probably now drop and I won’t earn as much interest on my liquid savings as I would have before the rate cut.

    The only personal silver lining that I can find is the hope that rates will keep dropping so that I’ll be able to re-finance my mortgage for a rate that’s even lower than my already low rate. Oh, and that when we buy our new car later this year, we’ll be able to get a really sweet financing deal (like 0%) so we can redirect the money we would have used to pay for the car toward my student loan.

    In the meantime, I know it’s probably futile, but I really hope that the people who could truly benefit from this rate cut take advantage of it and pay off their debts. Our country’s economy would only improve if everyone were in a personally strong and stable financial position.