08-20-2012 12:31 AM - edited 08-20-2012 12:58 AM
I am looking to purchase my first car in about a year and a half. I have been budgetting my money for a while now to save up, and every day I ride my bike to work and school (I am a senior at a state university) I daydream about it. There is no convincing me to spend less money on this car, so please don't derail. I am just asking for the best way to proceed. I know it is a bad investment, and it's not a smart idea. The car I am looking to purchase will cost 90,000 dollars (it's a Tesla Model S if you really want to know).
I'm 24 years old and will graduate with 30,000 dollars of student debt. My credit score will be around 690-720. I have had multiple lines of credit that I have used. A 1000 dollar low interest credit card, a paypal credit account of 2500, and a 7500 loan account through my credit union. They are (and will be) all paid off. I am wondering which is the best way to proceed in getting approved for an auto loan with the lowest interest rate/ highest likelihood of receiving.
1) Continue to save up money. Budgetting out, I could make a $70,000 down payment, and could finance the remaining $20,000. No matter how I do it, I will have the 20,000 paid off in the next year, along with the debt gone (this is through some non-reportable LEGAL income). Or is 70,000 for a down payment too much?
2) Pay off my student loans ASAP rather than making minimums. In this scenario, I will have zero debt, but will only be able to put down about a 40,000 down payment, with a 50,000 dollar loan needed.
Assume a gross income of 3,000 a month from my employment. I could literally throw 2000 a month down on the car payment. The rent where I live is 850 a month, but my wife lives there too, so I think for the application I could just say 425.
So what is better? To have my student loans completely paid off, or to use all that money to go toward the downpayment? Any advice? I have looked at calculators, and done lots of math, but there doesn't seem to be a good guide on how to make this situation.
Thanks in advance for your help. Reasoning is always welcome
P.s. To clarify, I am not interested in what is the best option for less interest/ paying less money, but what would enable me to be more likely to purchase the car.
08-20-2012 07:54 AM
Not sure where you live but with 70k have you thought about option 3?
3) Invest in a multi family (2 or 3 family) house with that 70k.
This would enable you to live free of rent and ideally the other family or 2 would pay for the mortgage/taxes/insurance.
I'm also 24 - bought my dream car at 17 (used m3 $50,000) in cash. I have since sold it made back about 40k, and am in a beater 1987 mustang but I OWN a HOUSE! Not to be a devils advocate but you stated you have a wife, she may fully support your decision in this car purchase and I wish you the best in actually purchasing it but owning a house > car is alot cooler in my book.
((The Tesla S is a sick car though, have fun and be safe))
08-20-2012 09:00 AM - edited 08-20-2012 09:15 AM
I'm sorry but purchasing a car like that straight out of college is a bit short-sighted. That is a huge purchase on a depreciating item. A lot can change in your life. You might have little ones show up without much notice
If you are set in your decision. Pay off the student loans first. You dont want that hanging over your head if circumstances in live change (This can happen without much notice). The car at least you can sell if something happens.
08-20-2012 10:31 AM - edited 08-20-2012 10:33 AM
Okay, so you're specifically asking for the best way to get approved, and NOT for any advice about how to save money, pay less, make better financial decisions, etc. Since you already stated that you KNOW it's not a good financial decision, I'm going to spare you the financial "advice" and honor your request to answer exactly what you asked.
Your biggest problem is going to be debt-to-income ratio, assuming $36,000 gross reportable income per year. You'll either have NO debt, or $30k student loan debt, depending on which option you go with, plus housing expense of $425/month.
I'll shoot at what is hopefully a bit high (I'm assuming 5% over 15 years), and say that your student loan payments would be $250/month.
If you finance $20,000 over 72 months at a rate of 5% as well (again, hopefully shooting high here), your car payment would be roughly $325/month. That doesn't include taxes or fees, which are probably going to be huge on a car that price. So it might be more like $30k financed, which would be $485/month.
That gives you a (totally hypothetical) debt to income ratio of $1,160/$3,000 = 39%. If the interest rates are lower, then the debt to income is lower/better.
No student loan payment. Financing $60k (taxes/fees) at 5% over 72 months gives a monthly payment of $805. Debt to income ratio is $1,230/$3,000 = 41%.
In this case, you'd have a better chance of approval with option 1. The debt to income ratio is lower, and the lender's risk on the loan is lower, since you're financing less. Student loan debt seems to be slightly more favorable than other types of debt when getting loan approvals too.
Even with option 1, you might not have an easy time getting approved with that debt to income if you don't have auto loan history, but having the bigger down payment should give you the better chance.
08-20-2012 11:40 AM
Thanks for showing your work!
The cool thing about buying an all electric car in my state (Washington) is that you don't have to pay taxes on it.
Regarding getting approved for an auto loan. With a 70,000 deposit, it seems IMPOSSIBLE to ever be upside down in a loan. From the banks POV, they really have absolutely nothing to lose? From their perspective, if I default, I owe so little on such an expensive car, why would it not be in their best interest to give me the loan?
I am young and don't know how it works in the real world, but are credit unions really going to feel like they are taking a risk?
Another question about income. If I have other income, such as my wifes financial aid (in the form of grants) and we sign together, can I add that as gross income?
She also gets VA benefits, in the form of 1,000 a month while in school. Can I add things like that, or can I only talk about job based income?
08-20-2012 02:16 PM
That's awesome about the sales tax. Definitely check and see if the Tesla is eligible for the Federal tax credits for electric vehicles too, if you didn't already. You'll still have some fees from the dealer, DMV, etc., but hopefully not much.
As far as I know, lenders will not count financial aid as income. I don't know about the VA benefits. If they're not taxable and they're for educational purposes, probably not.
Lenders might be happier to make a loan with such a tiny loan to value ratio, since it really is less risk for them. I don't know exactly how much that might factor into offsetting the debt to income and lack of previous auto loan history though. Maybe a lot, maybe a little, I really don't know. Do Tesla dealers have captive lenders? If so, you might not have a problem getting financed with them at a decent rate. The dealer can probably tell you about that. Certainly check with a credit union too.
Another thing: don't forget to budget for car insurance. You'll need full coverage if the vehicle is financed, and I bet it's expensive for that type of vehicle!
myFICO is the consumer division of FICO. Since its introduction 20 years ago, the FICO® Score has become a global standard for measuring credit risk in the banking, mortgage, credit card, auto and retail industries. 90 of the top 100 largest U.S. financial institutions use the FICO Score to make consumer credit decisions.>> About myFICO