Advertiser Disclosure
X

Advertiser Disclosure: The credit card offers that appear on this site are from credit card companies from which MoneyCrashers.com may receive compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others.

By

Views

10.4K

Dig Deeper

23,546FansLike
18,279FollowersFollow
36,888FollowersFollow

Become a Money Crasher!
Join our community.

Is Your Car Payment Destroying Your Life?

Views

10.4K

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.

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.

Next Up on
Money Crashers

job search newspaper

Top 16 Jobs That Require Little or No Experience

Are you fresh out of school, looking for a job, but lacking in experience? You might think this will stop you from landing a...
Couple Calculating Budget

How to Agree With Your Spouse About Money & Avoid Financial Problems in Marriage

If you and your spouse argue about money, you’re not alone. According to a 2014 Harris Poll, money is the No. 1 thing couples...

Latest on
Money Crashers

Sign Up For Our Newsletter

See why 218,388 people subscribe to our newsletter.

What Do You Want To Do
With Your Money?

Make
Money

Explore

Manage
Money

Explore

Save
Money

Explore

Borrow
Money

Explore

Protect
Money

Explore

Invest
Money

Explore