Is It Really A Good Price?

The promise of refurbished goods, particularly electronics, is getting a “good as new” product for a much lower price.  The devil, of course, is in the details.  The major concerns fall into two categories. The first is whether or not the refurbished product really IS as good as new.  And the second, is in what way the service and support of the product will be different because it is refurbished.

Many refurbished products come with a much shorter warranty than their new counterparts.  This begs the question, “If the product is as good as new, then why won’t you stand behind it with a warranty that is as good as the new one?”

The answer is, of course, that refurbished is NOT as good as new.  The product has had whatever defect caused it to be returned fixed, but that doesn’t mean it is new.  The customer who owned it before might have had it two days, two weeks, or two months before returning it.  That isn’t new, it is used, and that is reflected in the shorter warranty.

In order to determine whether or not that refurbished laptop, TV, or microwave is a good deal, you need to compare what you would get with a new purchase versus what you get with a refurbished purchase and then assign a value to the differences.

For example, if a new product comes with a 3-year warranty, but the refurbished product only comes with a 30-day warranty, that is a significant difference, and so the discount to the new price should be substantial.

On the other hand, the difference between a 12-month warranty and a 90-day warranty isn’t really that big (8 months), so the discount doesn’t have to be as big.

As a rule of thumb, the more likely the product is to need warranty service, the less likely a refurbished product is a good deal.  Ironically, these are the products most often offered as refurbished because there is a large supply of them from people sending them in for service.

Keep you eyes open and make smart decisions.  Don’t just go for it because it sounds cheap.  Make sure and look at all the angles and you’ll come out ahead.

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Is Refurbished or Remanufactured a Good Deal? originally published at Finance Gourmet

I usually start by asking “What are your car payments?” For people who don’t have any other obvious issues, car payments can often be the answer.

The sneaky thing about car payments is that no matter what budgeting concept you use, they hide away. Some people will tell you to list your fixed expenses versus your discretionary (non-fixed) expenses. There are the car payments hiding under the fixed column. Other budgeting styles have you list your needs versus your wants. Again, there are the cars tucked under the “needs” heading. So while you stare vainly at the discretionary spending or at your wants spending, the problem lurks on the other side.

My Car Isn’t Expensive

Right now, you are thinking, “I don’t drive that expensive of a car.”

Ever notice how many car commercials there are on television? Whether you are watching the Super Bowl or the Oscars, Grey’s Anatomy, Deal or No Deal, American Idol, or House, you will see dozens of car commercials. As you watch those commercials you can get a very skewed idea of what is a “normal” or “average” car.

Take a couple earning $100,000 per year. They are doing pretty well right? It’s $8333 a month. Figure that works out to a take home pay of around $6000 after taxes and insurance premiums and so on. Let’s say they are a savvy couple and they were smart when buying a house. A $2,500 mortgage wouldn’t be any sort of a stretch. That leaves them $3,500 a month to live on. Not bad right?

Now let’s say that he has a car payment of $550 a month and she has a car payment of $450 a month. How about now? They have $2,500 a month to live on now. Car insurance, cell phones, internet, gas, groceries, utilities, ice skating lessons, band camp, day care… and all of the sudden a couple making six-figures has no money.

The hard part of this conversation is that neither one drives an “expensive” car.

A car that cost just $30,000 with a 5-year loan at 7% works out to almost $600 a month for a car payment. That’s not a Lexus! That’s a regular Honda or Ford or whatever.

A $500 a month car payment works out to $6,000 a year. For the couple above, that $500 payment represents 6% of their total income and that’s just for one car — PRE-TAX! If the the couple pays $20,000 in total state and federal taxes (a ballpark figure) then that payment actually represents 7.5% of their disposable income. Don’t forget, a couple usually needs two cars, so two $500 car payments eat up 15% of their annual income. Is it any wonder their budget seems tough to figure out?

How Much Is Too Much?

Loan guidelines suggest that a house payment should not exceed 30% of take-home pay. If a house is supposed to cost 30% how much should a car cost? Half as much? A quarter as much? Realistically, somewhere in the neighborhood of 10% would be a solid limit. Our couple above has $6,000 in take home income, so their total car payments should be under $600 total. Anything higher means plenty of head scratching come budget time. So, two $300 payments, or one $600 payment. If you want nicer cars, buy them less often. If you want newer cars, buy lower priced ones. Don’t even think about going over 20% unless you want to be worried about money every month.

Protect Your Budget

So, how do you keep from falling into this trap? If you like the car, go online to a neutral site like MSN or Edmunds and get a price. Don’t pretend you are going to get some super-low negotiated amazing price deal. Just go with the regular MSRP for now. Take the price and plug it into a loan calculator at 7%. See what the monthly payment is. Too high? Then it is probably time to find a different car to buy.

Another option is to buy used. A new car loses up to 20% of its value in the first year alone. Look for a used one-year old model or a two-year old model. A good bank or credit union will still give you a 5 year loan at the same interest rate (or within 0.25%) of the new car rate. If the lender offers you any other deal, go somewhere else. There is no reason you can’t get a 5 year loan at about the same rate on a 1 or 2 year old car. This will help keep your payment a little lower.

If you are within striking distance of paying off one or both of your car loans, do it, and then keep that car. Don’t buy another one, used or new. See how much more room there is in your budget when you don’t have a $500 car payment. If you get both cars paid off you’ll have $1000 more every month!

Upside Down

When you owe more money than the car is worth, it’s called being “upside down” in your loan. Don’t fall for the trick of getting out of your loan by buying a new car. All that happens is that your old negative balance gets rolled up into your new loan making your payment even higher, and guaranteeing that you will be upside down for even longer in your new car. For example, if you have 3 year old car, your car is probably worth less than you owe because the value of the car drops so fast the first couple of years. The car you bought for $25,000 is worth $18,000 but you’ve only paid off $4,000. So, you are upside down to the tune of $3,000. When you buy a new car for $30,000 your loan will be for $33,000. One year later your $30,000 car will be worth $26,000 and you’ll be upside down almost $7,000! It is a vicious cycle that too many people get caught up in.

Good luck. Your budget will thank you.

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Budget Issues? It Might Be Your Car originally published at Finance Gourmet