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.

Comments (8)

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cycle of debt said:

I heard a best news about debt cycle. This is really nice post. Cars may kept us in cycle of debt. I hope that we will get more information from you.

April 22, 2008 | url

MarkR said:

There is also a misunderstanding by the public that is propagated by the dealers, and that is the general thought that a car is an investment. It is not an investment and is always bad debt if you didn't pay cash.

April 22, 2008

Mark said:

Why is it that something as unfriendly to the owner, the planet and society at large seen as a status symbol? I think the real terrorists are behind the wheel of their four-wheeled weapons of mass destruction. In the last 20 years Australia has lost over 50,000 people to road traffic accidents, in the military this is called "friendly fire" yet cars are still marketed as sexy freedom machines. Is it sexy to kill small animals and children?. Car drivers are the sleeper cells that form the "axles of evil" this is the real war on terror. Overcoming this threat to our freedom and security is made more difficult by the grassroots community support and easy financial entry to the terrorist organisation. Like most evil organisations bent on world domination entry is easy escape is much much harder.

April 23, 2008

Leon avalos said:

I must side with Mark on this one It is not an investment and is always bad debt if you didn't pay cash.

April 24, 2008 | url

Leon avalos said:

i had to add i a little ,but waht r going to do it is the american way I must side with Mark on this one It is not an investment and is always bad debt if you didn't pay cash.

April 24, 2008 | url

RowdyKittens said:

This is an excellent post. We sold our car recently and I am so happy it is gone! Cars are money pits and horrible investments. Plus they are destroying the planet. I though I would miss my car, but what I feel is a sense of relief. We are debt free and that is a fabulous feeling. http://rowdykittens.com/?p=361

April 26, 2008 | url

cycle of debt said:

This is good post. Recently i sold my car. I got some profit. I think it's not an investment.

May 05, 2008 | url

marvie jones said:

I must say, I never expected to see the day where I would be talking about anything other than reducing the debt, I'm running into the tyranny of zero, which is where you can't reduce (the debt) any more _____________ Marvie Don't be a victim. Stop credit card debt now. We can help. http://www.stop-credit-card-debt.com

June 02, 2008

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