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. Personally, I’m not one to drive or buy a nice car…I stick with my subscription of Car & Driver magazine instead!
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?