Car Payments

On a finance deal today that at first seemed easy. The client told me she had already been turned down by two banks. But she said her credit was “ good”. Steady job. Paid on a T4. What could be the problem?

And then I saw the credit bureau.

A quick call to the client, and after a few sentences the story mostly told itself. Bought the house in 2011. Then lost her job. Single mom, so while of out work, the unpaid bills kept coming. They piled up. While she searched for work the bills became collections. She ignored them, as there was nothing else she could do – she was struggling just to keep financially afloat.

The unpaid collections themselves dated to 2011, five years earlier. And yes – they were a problem. But what was the real deal-killer? THE DREADED CAR PAYMENT! A car payment so large it is equal to 50% of the monthly mortgage payment!

In this case, the client got back on her feet – but she failed to deal with her outstanding collections. Perhaps because she believed the collectors had “given up” and “stopped calling” they were no longer a problem. But …. They remain on the credit bureau.

When her financial situation improved, instead of looking after her collections, she financed a brand spanking new car through a car manufacturer’s finance program! She is locked in for 5 years – at an interest rate that is very attractive (nearly zero!), but the payment is so high it will prevent her from utilizing even subprime lending until it is paid.

It is so frustrating to see this common error. So many deals cannot go through a bank – they must go subprime – because of car payments.

Car payments are part of your debt service ratios, and can easily convert you from bank material to having no available borrowing capacity through traditional financing. Depending on the size of the car loan/lease, we can sometimes pay out the obligation on the car, and include it in the new finance deal.

But better still would be to limit the car purchase to something less, manageable …. Used?

I doubt very many people would consider me poor. Yet – the current automobile I drive, a 2013 Toyota Highlander, was acquired used with 15,000 km on the odometer. I scoured the province for vehicles – patiently searching for months until the new 2014 Highlanders were set to hit the dealer lots. All new for 2014, it would be instantly recognizable to any and all that my 2013 Highlander was an “older model”. (The shame!)

And then I pounced. I found two different vehicles, each less than a year old, with less than 15,000km. One in Cobourg, one in Brantford. I played one against the other. Most of the negotiation was done by email. I won’t tell you what I ended up paying (the dealer probably lost money).

All of you are free to choose to buy whatever you wish, and pay for it in whatever manner you choose. But for me personally, as I make my choices – between what is best for the car dealer, the finance company, or my family – my family wins every time.

Enjoy the sun everyone.

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