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Why Broke People Drive Nice Cars

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Let’s be honest – we all know at least one of them. A person who is chronically broke. Someone who has a ton of debt, treats credit cards like free money, lives paycheck to paycheck…. Oh, and happens to own an expensive, late model car.

The definition of “broke” is very subjective. To some, it means anyone who has any kind of debt. To others, it might mean someone who has credit card debt. I’ve even seen people referred to as “broke” because their emergency savings can’t pay their bills for some ridiculous number of months or years. No matter how you define the term, the idea of broke people driving nice cars is more than many people can stand.

Obviously it’s not a good idea to buy a car (or anything else) that you can’t afford. But who decides what another person can and can’t afford? Is there a formula? And how does anyone truly know another person’s entire situation?

I’ll be the first to say that some people buy fancy new cars because they’re idiots. They know darn well they can’t afford an expensive set of wheels, but they choose to finance themselves into oblivion in an attempt to keep up with the Joneses. Yes, that happens.

But there is also another reason why broke people drive nice cars, and I’m not sure how many people are aware of it.

Buying a Car: A Comparison

Here’s what the car purchasing process is like for the average person with decent credit:

  • Go to the bank and apply for a loan.
  • Get approval.
  • Choose car.
  • Drive it home.
  • Make payments. (Or maybe you pay cash if you’re a Dave Ramsey fan. Whatever.)

But here’s how it works when you have poor credit and/or no down payment:

  • Go to car lot, usually in a panic because existing car is broken or wrecked.
  • Choose car.
  • Apply for financing at the dealership and pray for approval.
  • Drive it home.
  • Make payments. FOREVER!

How it Works in Real Life

In 2006, I found myself in an unfortunate situation: I was in the middle of Chapter 7 bankruptcy and needed a car. I had finally gotten a job after six months of unemployment (which contributed to the bankruptcy), but it was 40 miles from home. Living in a rural area with no public transportation – no buses, no cabs, no nothing – means long commutes that require a vehicle.

My ex-husband and I owned 2 cars at the time; my old clunker that couldn’t go 5 miles without dying, and a lemon that was being returned to the bank as part of the bankruptcy. He could drive my junky car because he worked close to home, but what the heck was I going to drive? I didn’t know anyone who had a spare car to lend me. A friend of mine suggested cash loans as an alternative but the court wouldn’t allow it. There was no escaping it – we were going to have to buy a car. (Sidebar: I love how it’s perfectly okay to take on new debt during a bankruptcy but only in the way the court decides is okay. Just love it.)

You know how many banks will loan to someone in an active bankruptcy? Zero. So, on the advice of my attorney, I was stuck going to a dealership and hoping I could find financing (this was less than a week before I started my job). And I found it all right – a crappy “bad credit” loan company that charged 18% interest. Okay, I thought. I’ll just get the cheapest car I can find for right now so I can hurry up and pay this loan off.

Now we all know that dealerships typically offer less than awesome financing options. The interest is high, the loan terms suck, and people end up paying way more than they should. But did you know that bad credit finance companies also have strict rules about what type of car you can buy?

I couldn’t believe the list of requirements in the finance company’s brochure. The car had to be a 2004 or newer. (Remember, this happened in 2006.) The odometer had to read 60,000 miles or lower. The car couldn’t have any history of accidents, even minor ones. My plan to buy a cheap car was quickly evaporating.

“Why are they so picky?” I asked the salesman. “Don’t they realize that I probably wouldn’t be bankrupt if I could afford a car like this?”

“Well that’s simple,” he told me. “They know your risk of default is high, so they want to make sure the car will still be worth something when and if they have to repossess it.”

And that’s how I ended up driving home in a 2006 Chevy HHR with 20,000 miles on it, with a big fat payment stretched across 6 years, less than two weeks after going to court for Chapter 7 bankruptcy. All so I could go to work to (basically) pay for the car.

Yep, That’s How it Works

For people who are at the mercy of a car dealer or finance company, there’s not always a lot of choice involved. If your finances aren’t in great shape and you absolutely must buy a car, it’s very likely that you’ll face some of the same “rules” that I did.

Some people are probably thinking things like, “Well, you shouldn’t have let things get bad enough for bankruptcy!” or, “That’s what you get for having bad credit!” And while I agree to a point, those things had already happened and I couldn’t take them back. It didn’t change the fact that I had to have a car to go to work. It’s not like I could hop on my flying carpet every morning!

To me it’s simple – the alternative was sitting on my butt at home and being a drain on society. So I went to work. And I paid the price for my past mistakes in the form of a mondo car payment. But what I did not do is go buy a late model car just because I felt like it. I was fully aware that I couldn’t afford a car like that, but it was the cheapest thing on the lot that met the finance company’s requirements.

The next time you see a broke friend or neighbor driving a nice car, keep in mind that, maybe, just maybe, they aren’t doing it to live beyond their means. They might be doing it because that was the only option available to them. They probably didn’t know there were other options to help them buy a used car and get cheaper payments, or possibly purchase a car out right. Some of which include donating a car and then claiming it on your tax return to get a larger tax return, that could be thousands that can go towards a new (used) more affordable car.

Did you know that finance companies put restrictions on things like model year and mileage? Is it possible that this situation applies to any broke people you know who drive nice cars?

About Andrea Whitmer

Andrea is a freelance web designer and single mom trying to maintain a sense of humor in an otherwise chaotic world. She blogs in hopes of helping others avoid the same mistakes she made in the past. Join in the discussion here on So Over This, or connect on Facebook, Twitter, Pinterest, Instagram, or Google Plus. You can also subscribe to new posts via RSS so you never miss out!

Comments

  1. I never quite looked at it that way and I had no idea that there were so many restrictions on buying a car after declaring bankruptcy.

  2. morenewnonsense says:

    I'll throw another thing out there. Back a few years ago when I was flat broke and having to borrow money from my ex-in-laws just to live, my only car died a horrible death. It literally blew up in my driveway (pieces of engine embedded in the hood). I couldn't get a loan to save my life – even the "we finance here" places turned me down. The one place that did offer me a loan asked 22% interest and I could only choose from the limited cars on their lot – all of which were gas guzzling big sedans or SUVs, which even if I oculd have afforded the payments, I couldn't have afforded to pay for gas for them.

    I went w/out a car for a long time, until a dear dear friend helped me out. With his kids grown and out of the house, he and his wife were downsizing their cars and he offered to sell me one of them at a greatly reduced "friend" rate, plus allow me to make payments on it. The kicker? It was a late model, top of the line Acura sedan. Fully loaded. Sunroof. Leather. Heated seats. Sound system. Bells and whistles galore. But because we've been friends forever, he knew my situation, and he didn't need the car for trade in, he sold it to me for 2/3 of blue book value. And as I said, allowed me to make interest free payments on it for a year.

    So yeah, I'm one of the people who was "broke" and yet drove a nice, late model, expensive luxury car. Because it was what I could afford. :)

  3. Wow, that's quite a story, Andrea. The expensive car thing reminds me of a post you had awhile back about how peopel on food stamps have expensive purses and sunglases and stuff, too. Once it gets explained out like this, it makes a lot more sense, man. It's funny how different companies and legal things have rules that make things look one way, but they're actually the other.

    In your case, dude, there's no way I'd say that you shouldn't have made the mistakes that got you into bankruptcy… that's an easy thing to say, but that's not how life works. We make mistakes and we do things right, and iether way we deal with the good or bad consequences. Anyone could say I shouldn't have joined a gang, dropped out of highschool, and gotten a girl pregnant…uh, no duh, thanks for that info… it's about working with what you've got now! Thumbs up for biting the bullet and buying the expsnive car you had to to get to work and turn things around!

  4. Since W is a car salesman now, I see this all the time. He comes home and tells me that someone makes $1,000 a month, but they're bank approved them for a $600 month car loan at a 15% interest rate. It's insane!

  5. Everything Finance says:

    I had no idea this happens. What a rip off.

  6. That's crazy, though doesn't surprise me at all. The financial world (banks, loan companies, Mortgage borkers etc) NEVER have your best interests in mind that's for sure. I couldn't believe what we were pre-approved for when we started looking at mortgages. Almost 150k MORE than what we ended up spending.

  7. I had no idea… ugh, it makes me sick. It sounds more like they're putting the person in this "I'm broke, but I still can and should be able to get nice stuff" mentality, which may keep them in debt for longer than necessary… just sad. Thanks for sharing. I see this all the time where my dad works (subsidized gov't housing for the lower income families) and you see all these huge, brand new expensive cars in almost half of the driveways. Some of them are status-medals and self-elected, but it is scary and sad to think companies could take advantage of people in such a state…

  8. Even people with good (or even great) credit will have trouble getting a loan for a car with more than 100K miles and that is over a certain age. That's just the way banks work. Does it suck? Yes, but they are the ones taking on the risk. If I were to loan money to someone I deemed a high risk I would probably come to similar terms. Again, is this fair? Not really, but they have something you want/need so they control the terms.

    The good news is you can get away from this by making a car payment to yourself every month and then you are able to pay cash for car (of course this is only possible when you have your financial ducks in a row).

  9. I had no idea. No IDEA! Mind.blown.

  10. That's terrible but something similar happened to me when I was car shopping four years ago and had to get financed with a second chance bank. My APR was ridiculous but I made my payments every month like clock work.

  11. Anne_UGifter says:

    Wow. I had no idea this was a thing. That really, really sucks. Hopefully it at least has a silver lining of cars being reliable when you're forking over a million dollars for them at exorbitant rates. :S

  12. Thanks for the interesting post. IT gives us a different prespective on car buying and why some people get into crazy bad deals.

  13. I live in the car capital (Los Angeles) of the world! It is not uncommon to see every exotic car imaginable on the street at one time or another. I often wonder if they paid cash for it or not. I cannot even imagine the maintenance for a Ferrari or Bentley never mind a payment. The people I know who are rich and successful own more normal cars in the $20-30K range. The others owe a lot of debt on their cars, homes and everything else.

  14. There are always companies that prey on the broke and poor. It usually keeps them broke and poor unless the person does something about it. I have never enjoyed the car purchasing experience, but have never experienced like you have.

  15. teinegurl says:

    i have a question so what do you do after this?? Do you pay the car off ?? Do you try to build up and emergency fund to cover in case anything happens with this car or are the repairs covered by warranty??

  16. Wow. I don't even know what to say! In a way it makes sense – the value of a nicer car is less likely to depreciate as fast as an older model, but still that just doesn't seem to be a safe option for the lender or the the person buying the car.

  17. plantingourpennies says:

    Wow, I had no idea about this. What about the "buy here pay here" type places? I know their interest rates are pretty high, but surely they can't be that much higher than 18%! And the cars at least are cheaper…

  18. I didn't know this! It totally makes sense though from a dealer POV

  19. Huh. What a wacky system! I mean, I understand that the lenders want to reduce their risk…but that just really sucks for anyone in that situation.

  20. Wow. I don't even know what to think, my mind is absolutely blown. It's the most ridiculous thing I've ever heard, and yet it makes perfect sense when you think about it from a repo perspective.

  21. Though, I can understand the financing company's reason for giving all those requirements, I still feel bad for people who are in that kind of situation.

  22. Canadianbudgetbinder says:

    Interesting, I had no idea either. We have a mate that has $0 to her name and lives pay to pay who was in a similar situation and needed a car because she didn't have a magic carpet. She showed up at the house in a fairly new car with all the bells and whistle from the lot and will be paying it forever problem is that the car is now falling apart because she can't maintain it.

  23. I would have never even thought about that but it makes perfect sense from the companies perspective. That's a harsh reality to have to face.

  24. You could have asked the person willing to give you money to buy a cheap car, and then rent that car from that person. That would have been much cheaper for you than an expensive loan for an expensive car.

    • Unfortunately I wasn't lucky enough to have anyone standing around wishing they could give me money. I was just saying that it wouldn't have been an option anyway because of the rules around the bankruptcy. But yes, I guess if someone had been willing to do that, I could have paid them instead.

  25. there are lots of buy here pay here lots in my town that all sell cars worth less than $6000 but they have high miles are high priced and sooo not worth it. My friend bought a car there i told her that car would die before she paid it off and i was right. Lucky she didnt get one too expensive bc that car lasted til she owed bout $800 she had to junk it got $400 and had to pay off the other $400. Im waiting for my tax return to sell my pos and pay cash for something one thing ive learn is car loans suck. I will never get another again so lomg as i can help it id rather suffer driving a car that has no heat no ait and cant interstate before i will get another evil car loan.

  26. Huh. Never thought of it that way. I drive a cheapest-car-I-could-find-on-the-lot car, and it was pretty cheap. Everyday I unload kids out of cars at a school with over 80% of students in poverty. And I stew. I drive a Corolla. They drive new Cadillac SUV's, Infinities, and other cars with leather and seat warmers and DVD players… and I see that you are probably right about some of them. It still kills me to collect and send food home with them on the weekends…as I climb into my cold Corolla…but I do what I do for the kids, and I don't begrudge those little ones their warm tooshies and cartoons.

  27. Very interesting. They also probably figure that because they will see a lot of defaults they want to make sure the amount that those who do continue to make their payments will be substantial enough to take the risk. Car dealers (and the finance arm of car makers) make a lot more money on the nice new car than they do on used cars.

    A while back I did a post showing just how much you can be a millionaire when you retire just by driving used cars instead of new. Wouldn't have helped in your situation, but might help some avoifd getting into that situation: http://smallivy.wordpress.com/2011/05/17/would-yo

  28. Kinda like charging folks with bad credit who pay higher interest rates making it even harder to pay back.

    It's kinda a cycle it seems. At least you have a nice car!

  29. Wow, I'm surprised by this. I had no idea that there were such restrictions on the type of car you could buy. It's backward, if you think about it; it may be that they can repossess and sell it in the future for some value, but if they restricted it to only being able to buy a less expensive car, they would be taking on less risk to begin with.

  30. kimateyesonthedollar says:

    I had no idea. Kind of like they are setting you up to fail. Take your money for a little while then come get the car back to sell again. Wrong all the way around, but not surprising.

  31. I have been in this situation and it sucks! However, the car I got wasn't so nice but the interest rate was also 18%, that's just wrong. Fortunately that was several years back. I agree that many people do what they have to based on limited options. However, there are also those who just make ridiculous choices. I have several relatives mid twenties still staying with mom but driving a 30k dollar truck, makes no sense to me.

  32. Ive had to be on welfare and think its unfair we are protrayed as hummer driving fur wearing people. Some of us need it. Granted i have seen thoes people so and I shake my head. theres people comming from NY to nj to try to double dip. I know of a girl that got busted for selling 20 dollar steaks for 40 dollars off her food stamps. Drunks sell it for cash to get alcohol…there is bad out there but were not all that way. And yea seeing someone drive up in a mercades for fs is just crazy. i had to do buy here pay here as well…it cost me a lot

  33. I know exactly what you are talking about. A couple of years ago I was living in AZ broke and barely getting by. My formerly perfect credit was trashed when I got laid off in the recession and my car was on its last legs and almost worthless. I got offered an amazing job that would pay me a life changing wage(3x my current wage). I decided to take the chance at a better life and move myself and as much of my stuff as I could across country, I just had to get a vehicle that would make it. I started car shopping, the plan was to find a reliable but older truck. I didn’t care about the mileage or anything else. I just needed it to be cheap. Banks wouldn’t give me a loan unless I either purchased a new vehicle or one with under 60,000 miles on it. I couldn’t get a decent interest rate because my credit was bad. Also, they considered me a first-time buyer, which meant that even if my credit was good, I still would have had the same restrictions! I had purchased three other cars, I just did it with cash, yet I was being punished for never taking out a car loan! What!!! I went on Craigslist, bought the a 95 Ford f-150 that had been owned by a cement company that went under. It cost me 1700 dollars in cash and I drove that damn truck to MD, slept in it for 4 days and now I make more money than I even need. I’ve been here for two years, bought a beautiful home, and have turned my financial world around. I still drive that truck. People ask me all the time when I’m going to go get a new car and stop driving my ugly old truck. The answer is never. I have only had to invest 30 dollars to replace a starter in the entire time I have owned it. I have buddies who have purchased brand new from the dealership and constantly have issues that require maintenance. I will never ever have a car payment in my life.

    • Good for you, Nikki! Just another example of cash being king – I couldn’t have done that in my situation because I had a pile of debt and no cash. But you had more options because you were smart enough to put some money back. Good for you! Glad to hear that things have gotten better for you, yet you haven’t felt the need to run out and buy a flashy car. :)

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