Shrewd college kids think like smart car shoppers
Do your research before stepping on the lot — or get stuck with tens of thousands in debt
No matter how complicated your life is now, you simply cannot adopt the “we’ll figure it out when we get there” methodology of financial planning.
I’m cursed/ blessed with the affliction of preplanning. This makesme the most annoying person on the planet. I can’t leave the house without checking traffic on at least three apps. And I can’t go out to eat without scouting the menu online a week in advance.
Some people — meaning my wife — may label this as crazy. But I want to know as much as I can to make an informed decision.
Maybe I go overboard planning for a night out, but most people don’t go nearly far enough planning for life’s most expensive ordeals — like financing
college.
DON’T BUY TOO MUCH CAR
To put how crucial planning for college is into perspective, let’s compare your decision- making process with that of buying a new car. You’ll quickly see why research matters. This isn’t just any car lot. It’s the weirdest dealership on the planet. You can buy any car you like, whether it’s $ 35,000 or $ 150,000. Inside the dealership is a huge slot machine. You get to pull the handle to see if you win any rebates or special financing. Then you head into the finance office. This makes you nervous. While you did a ton of research on the car, you didn’t do much on the cost or how to pay for it. You’re hoping this goes quickly, because all you want to do is drive the car off the lot. Besides, you’re feeling lucky — the giant slot machine just gave you a $ 2,500 discount.
The finance manager is awesome. She’s doing her best to help you get into the car of your dreams. The lender? It feels like he’s trying to crush your dreams. He mentions something about only being able to lend you a certain amount of money. Unfortunately, the new car smell has distracted you.
The good news is that you’re borrowing at a relatively low rate: 4% or so. You’re trying to make the purchase over a four- year period, and based on the cost of the car, the loans may only carry you to the end of year two. Then you’ll have to find alternate financing.
You don’t care, because you don’t have to start repaying the loan until the four years are up. You’ll figure it out when you get there. “I’ll take that one!” you say, pointing to a $ 135,000 car.
UH, OH: NOW WHAT?
The first two years fly by. Before you know it, you’ve reached the limit you’re allowed to borrow. Now you’re faced with a dilemma:
You can abandon the car in the alley, leaving you with tens of thousands of dollars in debt and no car. One of your friends recently did that. He’s living with his parents rent- free.
You could go to a secondary lending market and borrow at more than a 10% interest rate.
Your parents could borrow at 6%. You choose the 6% or 10% loan ... you don’t remember which because you attained your goal. You now own the car, and you still haven’t made one payment. Even better, you won’t have to make a payment for six months.
Including interest, your car will now cost you well over $ 215,000. The payments are brutal. You’re starting to think the $ 40,000 car would have made more sense. You wonder why your parents didn’t talk you into the more practical car. Then you learn they’re on the hook for your car, too. They’re wishing you’d chosen the more practical car too.
Who’s at fault? The finance manager? The lender? Or the person who could have discovered all of this before selecting their car by digging into the details? You better put that car to good use. You’ve got student loans to repay.
College shopping is like car shopping at the world’s weirdest dealer. You can buy a $ 35,000 car or $ 150,000 car. It’s your choice. Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com