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Is Your Car Payment Destroying Your Life?

By Erik Folgate

You’ve heard me get on my soap box in the past about car payments and how they can soak up a lot of your monthly income. I really don’t like car payments, and I don’t think you need one to have a reliable car that serves your transportation purposes. As Americans, we’re obsessed with having nice, new cars. We have been taught from a young age that car payments are inevitable. You buy a car on credit, you pay the payment for five years, then you sell it. Follow that cycle, and you’ll actually never own a car outright. Here is an email that I received from a reader recently.

I am in a dead-end situation..I am paying for student loans,credit cards, and my expenses including a car payment of $636 monthly. Last year, I had 2 part-time jobs and a full-time job making 30K, and then i quit both part-time jobs to study. I can’t deal with living paycheck to paycheck with no emergency. I traded in my Honda Pilot EX-L fully loaded to a Honda Civic Ex-Navigation to reduce costs in gas. On the Honda Pilot I owed 20K and the dealer gave me 15K for it. The Honda Civic cost me 25K plus the upside down of the Pilot and the finance charges left me with a loan of 35K. I took that other loan and now in this recession with a job that only pay $26k a year I see myself living paycheck after paycheck, and I hate it.

First, I am not treat this reader as a spectacle, but their situation is a perfect example of how a car payment can strangle your finances and your life. $636 a month is almost HALF of this reader’s monthly take-home pay, and there is no way that he/she can keep paying this payment and continue to live. The easy answer to this situation is that he/she needs to sell the car as QUICKLY as possible. Obviously, he/she won’t be able to break even on the sale, because there is negative equity from a previous car, and depreciation to factor in from the new car. What you need to do is go to a local community bank or credit union and ask for a personal loan for the difference between what you owe on the original note and the amount you can sell it for. So if you owe $35k and all you can sell it for is $22k, then you’ll be left with an unsecured loan of $13k and a much lower payment. Have 3 or 4 garage sales and scrounge up $1,000 to buy yourself a “beater” car that will get you from point A to point B. The embarassment of driving a $1,000 car will help teach you to never go out and get a $35k car loan when you make $30k.

Car Loan Rule of Thumb: If your car loan is close to half or more of your yearly take-home pay, then you need to sell the car. If it’s less than half, then you should be able to pay it off with aggressive debt payments.

(photo credit: Shutterstock)

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • david

    Great rule of thumb, very good article

  • Thomas

    i have a vehicle that has 13K left to pay off but I want another car. how would getting a new car work with my current balance?

  • pamela

    I owe 19,000 on my 2008 ford escape I know i got ripped of so now what do i do to lower my payments i dont have the money to pay it off

  • PorlySlim

    Car payments = MISERY.

  • Heidi

    Although probably unfashionable, my husband and I drive a 1996 Jeep Cherokee Sport (bought new and paid w/ cash) and a 1993 Volvo 240 DL wagon (bought used w/ cash). We were able to get by w/ just the Cherokee for several years since we were in Chicago and I was able to take the train to work. In 2000 we moved to an area which does not have a world-class mass transit system, so we bought the Volvo as a second car. Both vehicles have served us well and we keep a spread sheet on repair costs so we’ll know when it no longer makes sense to keep a vehicle.
    We don’t have kids, but if we did, I know we would be driving something w/ more airbags, but with the exception of the weekends, each vehicle is only occupied by one person and both cars have a driver-side airbag and ABS. Also, my husband only drives about 3 miles each way to the Park & Ride to catch the bus to work and I am now able to work from home. I know… we are very fortunate in our minimal transportation needs. If you do need to finance a car though, don’t base what you can afford on the 72 month finance option. You’ll be much better off using the four year rule of thumb and remembering to factor in insurance costs when deciding what you can comfortably afford.
    .

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