A Non-Profit Car Loan is Still a Car Loan

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The New York Times Opinionator blog has a rather doting feature on More Than Wheels, a New Hampshire-based non-profit that sets people with bad credit up with low-interest car loans.

The story profiles one recently divorced mother who used to struggle with breakdowns and bad credit:

Trahan now drives a 2010 Toyota Yaris, spending about $120 a month on gasoline for her commute and $297 for car payments. Her repair bills are near zero. She doesn’t fear losing her job and her kids can depend on her to show up when she says she will. … In addition to changing her life, Trahan has also changed her footprint on the planet: Her new car uses less gasoline and emits less carbon than her old one. And now that Trahan’s credit is repaired and she’s saving more than $300 a month, she plans to leave her current apartment to rent one closer to work so she can cut her long commute — and her oil dependence — even further.

I don’t doubt the honorable intentions behind this non-profit and, to be sure, getting a car loan with an interest rate under 6% is better than getting one at 16%. But there are a few problems with this program that I would consider to be common myths about car buying:

Myth: Older used cars are unreliable

Reality: This bias against buying a used car stems from the days when older cars really were terribly unreliable. Now? Not so much. In 2001, Consumer Reports reported that “Back in 1980 the average trouble rate for all new vehicles was 88 problems reported for every 100 cars. By 2000 that rate had dropped to 20 problems: an astounding 77 percent improvement.” Stereotypes about used cars still persist. But today, cars are more reliable and last longer. I’m not saying that you should drive a Pinto, but for a couple thousand dollars, it’s absolutely possible to get a 10- or 15-year-old used car that will provide adequate transportation. I’ve driven those, and so have lots of other people. If you’re struggling financially and don’t have much in savings and your 401(k) is less than robust, it’s hard for me to see how a $300 per month car payment should fit into that equation.

Myth: Upgrading to a more fuel-efficient car is better for the environment.

Junking your used SUV in favor of a used sub-compact is good for the environment. But upgrading to a brand new car that gets better gas mileage? It’s probably, at best, a wash once you include the carbon footprint of manufacturing a car. It is an inconvenient truth that the real solution to the energy crisis and global warming involves less manufacturing and less economic activity: If you want to help the environment, buy a used fuel-efficient car, and drive it until it dies. You never hear about that because no one can make money selling you the idea of not buying something new. I’m not trying to bash corporate interests (in this particular blog post), but it’s a mathematical fact: less consumption means lower carbon footprints.

Myth: Getting a car loan is a good way to rebuild credit.

Eh. Dave Ramsey put it this way: “Only broke people will tell you to rebuild your credit. You don’t need to rebuild your credit because you’re not going to live off of credit anymore. If you’re not going to live off of credit, who cares what your credit score is. Focus on building wealth and changing your family tree – not rebuilding your credit.” Sure, at some point you might want to buy a house. But FHA loans, for instance, don’t require an exceptionally high credit score and the combination of time passing and perhaps using a secured card or building an alternate credit score will get your score where it needs to be. Borrowing money to buy stuff is what gets people into credit messes in the first place, and it’s really not the best way out of that mess.

A better approach is this: take reliable, older used cars, make sure they run well, and give them to low-income people who need a way to get to work. There are already several that do this — like Goodwill’s Wheels-to-Work programs.