Updated: 10/13/2010 9:00 AM ET|
The real reason you're broke
For a huge number of troubled debtors, it all began with a car. Too much car, financed too long, traded too soon.
If you're constantly broke and can't figure out why, the answer may be sitting in your driveway.
Americans are spending more on their vehicles than ever before -- about $8,600 a year on average -- and it's driving some to the breaking point.
Credit counselor Bill Thompson of Jacksonville, Fla., estimates that one out of every four clients his agency sees has overspent -- sometimes dramatically -- on a car.
"They may be spending 15% to 20% of their (take-home) pay on just the car payment," said Thompson, who supervises credit counseling for the nonprofit Family Foundations, "and that doesn't include insurance, gas, maintenance and all the other costs of owning a vehicle."
And sometimes there's more than one whopping payment. Sandra McGeary, a counselor at Consumer Credit Counseling Services of Western Pennsylvania, says she regularly sees middle-class families struggling with two payments in the $400-to-$500 range. The burdens are so big that it doesn't take a major disaster, like a job loss, to send them over the edge.
With most other areas of the budget, you can find ways to trim. You can eat out less and shop more carefully to reduce your food bill. You can lower utility bills by adjusting the thermostat. You can cut your entertainment budget by canceling your cable service and borrowing movies from a library. You can even reduce your shelter costs by taking in a roommate or moving to cheaper digs.
Once you've committed to a car payment, though, your options are few, particularly if you owe more than the vehicle is worth. Whether you drive it or not, you've got to make the payments, and you've got to insure it.
What we spend on transportation:
|Annual income||Average 2008 spending|
|$19,064 or less||$3,430|
|$19,065 to $36,270||$5,657|
|$36,271 to $59,086||$7,834|
|$59,087 to $93,357||$10,469|
|$93,358 or more||$15,614|
|Sources: Bureau of Labor Statistics and Census Bureau. Average transportation expenses include vehicle purchases, finance charges, insurance, fuel, maintenance and repairs, public transportation and other out-of-pocket expenses but not vehicle depreciation.|
We're prolonging the agony
The signs of vehicular overspending are everywhere:
- Nearly 90% of new-car loans and 81% of used-car loans are for terms longer than four years (which, a couple of decades ago, was considered a long loan), according to vehicle research site Edmunds.com. The average new-car loan term has grown from just under four years and seven months in 1990 to five years and three months. Longer loan terms mean that people build equity in their car more slowly, which in turn means that borrowers will be "upside down" in their vehicles -- owing more than they're worth -- for three years or more on the typical purchase.
- One-fifth of cars that are financed include debt rolled over from a previous vehicle, according to Edmunds.com. As of March 2010, the average amount of negative equity in these deals was nearly $4,000.
- Rolling debt from one car to another is, in case you didn't know, a terrible idea. You'll pay higher interest rates because so much of what you owe isn't secured by the car itself.
And being upside down can really leave you up a creek if the car is totaled or stolen. You can protect yourself somewhat with gap insurance, which covers the difference between what you owe and what you get from your insurer, but that's another hit in the wallet.
What's going wrong
So why are so many people messing up so badly on such a basic purchase? There are plenty of reasons, including:
Viewing cars as a need rather than a want. Transportation is, indeed, a real need. We have to get to the grocery store and to work. But many of us have plenty of options, from our own feet to public transportation to carpools to shared car arrangements such as Zipcar.
Owning a car does get pretty close to a need in rural areas without public transportation or when your job doesn't allow for carpooling. But you never "need" a new car. That's a luxury, not a need. There are plenty of safe, reliable, gently used cars on the market.
There's also no requirement that you get rid of your current car once it's hit a certain mileage milestone. Today's cars are better built and more dependable than ever, which means that unless you've got a real lemon you could keep driving it past 200,000 or even 300,000 miles.
Treating cars as a status symbol. You can't watch television for long without being bombarded by car commercials, and many of us have absorbed the idea that we are what we drive. It's complete BS, of course, but some people have been so brainwashed that they literally drive themselves into bankruptcy.
Failing to consider the overall costs. When buying or leasing a car, many people consider nothing more than the monthly payment. They're not seeing the whole picture -- far from it.
Once you factor in insurance, gas, maintenance, repairs, taxes, depreciation and other costs, most cars will set you back at least twice the initial purchase price over five years.
(Depreciation, by the way, is just a fancy word for the steady, day-by-day drop in the value of your car. You don't pay for it as it happens, but you do pay eventually, when you go to trade in your car for another.)
If your vehicle is 5 years old or newer, you can check out Edmunds.com's "True Cost to Own" feature for the breakdown on your particular vehicle. Or you can use AAA's estimate.
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Everyone's situations are always unique. LIz's articles are great as a general statrting point, but should only be that (a place to start).
I own 2 cars. One is a certified used Focus that I bought in 2005. It has been paid off for 4 years now and I plan to run it into the ground (maybe I will get another solid 5 years at least, maybe longer). I used to own another coupe that my wife drove until our 3rd child was born. Fact is, we could not fit 3 carseats in either a Focus or a 2-door coupe. The latter vehicle was owned outright, so we sold it and bought a new Flex. We shopped around and also looked at buying a used Oddessy, but that would have been about the same cost. When considering dealer cash-back incentives, it was cheaper to buy a new Flex rather than a used one. We got 0% financing on the car and used the proceeds from the sale of the other car as a downpayment. We took out a 60 month loan because I wanted lower monthly payments (at 0% financing the length doesn't matter since there isn't a penny of interest). We plan to drive this car into the ground, hoping to get at least 15-20 years out of it.
My choices for the second car go against most things said in the article, however I am in a pretty good position. Every payment goes straight to equity, and I feel secure in my family's transportation. My own car is nothing fancy, but it works and it's completely mine. It's simply a matter that every individual situation is different and needs to be approached as such.
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