WTF Friday: Can this single mom replace her over-financed, Sandy-destroyed luxury car?


In this weekly feature I answer your personal finance questions.

Dear Emma, WTF?!

I live on the Jersey Shore  and my son and I are very lucky in that our home was not destroyed by Hurricane Sandy. However, my 2006 Acura TL was totaled by flood waters. To replace it will cost $15,000 but my insurance will only give me $3,000. I still owe $5,000 on the note. I plan to take a $17,000 loan against my 401(k) to pay off the debt and replace my vehicle. My boyfriend says that is a bad financial move, while I say that car makes me feel like a million bucks. What do you think?

Stranded in Seaside Heights

Dear Stranded,

I think you should marry this boyfriend, stat. There is so much wrong with your plan and you’re fortunate to have a smart guy to tell you what’s what.

Let’s start with the numbers. If you were to finance a car and had decent credit, you could get a three-year used-car loan for 3.4 percent, according to Bankrate.  Your 401(k) will charge you 6.5 percent for any loan against your investment. True, you pay this interest to yourself, but you also miss out on any growth that money would enjoy if you leave it in the retirement fund. The private loan is clearly the better option – especially if you are worried about monthly out-of-pocket costs.

The other big issue here is that you feel entitled to owning a luxury car. If you had a loan worth one-third the value of a 6-year-old car that the insurance company believes is worth just one-fifth of the sticker price (follow that?), you are suffering from a disconnect between what you can afford and what you want. Hence your current pickle.

Here’s what I suggest: Buy a gently used Honda or Hyundai for $8,000. Shop around – look for a  clean record, low miles and finance the whole thing if you have to, but keep the payment terms to under three years. That way the remaining loan balance is unlikely to exceed the value of the car. Meanwhile, take that $3,000 from the insurance, put it towards your current loan and hustle like crazy to pay off that remaining $2,000.

And now some homework. Go walk around the seashore. Talk to people who live there. See all the destruction? The dismay? Stress and tears? Now ask yourself: Would a fancy car make any of that better?

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