In light of recent events, I’m realizing that cars can be a catalyst for an unending cycle of debt. A year ago, I heard a financial advisor caution that cars send many people into debt because, when they break down unexpectedly, people without a considerable amount of cash in their pockets must pay for any necessary repairs with a credit card—which they, in turn, can’t afford to pay off. Thus, a tail-chasing, anxiety-wracked cycle ensues.
An article by Liz Pulliam Weston of MSN supports the idea that cars send many an unsuspecting driver into a spell of bad debt. Weston’s article, entitiled “The Real Reason You’re Broke,” breaks down the reasons behind how cars cause debt—and the list is long. “For a huge number of troubled debtors,” Weston writes, “it all began with a car. …If you’re constantly broke and can’t figure out why, the answer may be sitting in your driveway. North Americans are spending more on transportation than ever before — more than $8,000 a year on average — and it’s driving some to the breaking point.”
Apart from unforeseen repairs, many people go overboard in pimping out their rides. Or, they buy a car (or several) that they can’t afford in the first place; a car that’s too new, too shiny, or that exceeds their needs (and their budget…i.e. they share a 200-sq. ft. efficiency with their extended family, but drive a brand-new, monster-sized S.U.V. with shiny rims and an industrial sound-system). Bill Thompson, a credit counselor, told MSN that one in four of his clients overspends on their car; up to 15%-20% of their take-home pay, not including other expenditures like gas, maintenance, and other miscellaneous costs.
Facts from MSN:
- Average transportation spending grew almost 20% between 2001 and 2005, according to StatsCan, while household spending grew just over 15%. More troubling, family income grew just over 12% in the same timeframe.
- In the U.S., more than 80% of car loans are for terms longer than four years (which, a couple of decades ago, was considered a long loan). The average loan term has grown from just under four years and seven months in 1990 to over five years and four months in 2006. Longer loan terms mean that people build equity in their car more slowly, which in turn means that borrowers will be "upside down" on their vehicles — owing more than they’re worth — for three years or more on the typical purchase.
- One out of four — 25.6% — of cars that are financed in the U.S. include debt rolled over from a previous vehicle, according to vehicle research site Edmunds.com. By the end of last year, the average amount of negative equity in these deals was more than $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.
The article also makes the point that no one really “needs” a car (unless, the report says, you live in an ultra-remote area, in which case, you’re probably sticking around the homestead most of the time, anyhow).
Photo via flickr by JudeanPeople’sFront & by w_yvr.
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