Someone once told me that financing was the American Way.....ugh. As a bankruptcy attorney at Halcomb Singler, LLP, I meet with people all the time who are drowning in payments to various finance/credit card companies. Most of these folks really, really wish that they had not taken out loans or used credit cards to get themselves through the tough times. However, in my experience it seems that more and more people in Indianapolis and central indiana are looking financing more of their possessions over a longer period of time and I wanted to address that today.
It is true that Americans are inundated with offers for financing on a daily basis. I know that when I go out to my mailbox it is not uncommon to find two credit card applications in the mail. If Americans want to go get another car most have no trouble (although sometimes at very high interest rates) obtaining some sort of financing to get a vehicle. I have also seen a rise in the ability to finance other less traditional goods and services such as dental work, medical procedures, and vacuum cleaners (yes, you did read that correctly).
I readily admit that the ability to finance is important. Loans allow people to buy homes, further their educations and drive to work. However, I would like to urge people to think hard about taking a loan for just any reason. In my opinion loans should be avoided at almost any cost with a few exceptions. To me, there is no problem with taking out a loan to finance the purchase of your home so long as it is a home that you can afford. By afford, I don't just mean that as of the time you buy it you have the ability to make the mortgage payment, but that is a good topic for another blog posting. In addition, I am not against taking out student loans to finance your own education. Although, I would recommend that you take out as few student loans for the minimum amount necessary and work during school to try to minimize the required payment once you graduate. In addition, don't take out $100,000.00 in student loans for a job that is going to pay 30k a year. Make sure that taking loans for an education is a good business decision.
You are now probably wondering why I did not mention vehicle loans as a type of loan that I believe is an exception to the general rule against financing. I am on the fence about vehicle financing. I think that ideally, no one would finance a vehicle and would drive the car he or she could afford to buy with cash until it died. However, I also know that people need a vehicle to get to work and sometimes simply just don't have the cash to buy a car outright. So, I am saying that I am ok with the financing of a used vehicle in some circumstances. This means that you should not finance for over 36 months and during that time you should start putting money aside in savings towards purchasing your next car so that you don't need to finance again. And don't turn around right after you have made your last payment to buy a newer car. Drive the one you have until it dies and use the time without a car payment to boost your savings.
In my opinion, one of the most disturbing trends in financing today is that many people are financing a vehicle over a period of 72 months. This means that every month for six entire years that he or she is going to be sending in a payment. It also means that if you drive an average of 15,000 miles each year that at the end of 6 years you will have 90,000 miles on the vehicle. We all know that most vehicles are going to need some costly repairs prior to the 90,000 mile mark. So, on top of your payment you are going to have to shell out extra money for repairs. Trust me, the repairs are much easier to stomach if there is no payment. As Dave Ramsey says, a vehicle seems to run a lot better when it isn't pulling a payment book behind it.
There are also a few things that I can confidently tell you there is just no earthly reason to finance. One is a vacuum (no explanation needed). Others include boats, 4 wheelers, motorcycles, camper trailers or any other "toy" or luxury item. The bottom line is that no matter how hard you try to talk yourself into these purchases, you do not need them. So, if you are going to buy them you better be able to pay for them with cash. Not only should you have the cash to pay for these items, you should have 6 to 8 months of income left over in your emergency fund after paying cash for any of these items.
I think I will always work with people who need to file bankruptcy and are struggling to pay debt. I enjoy being able to help people with their financial struggles through creditor workouts and bankruptcy. But I see the stress that debt puts on individuals and families on a daily basis and I hope following a few of these rules will help some people avoid financial stress. As always, if you are looking for more information on bankruptcy or debt check out Halcomb Singler's website or click here and we will contact you for an appointment.
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