Poor Choices in Car Finance can be the Undoing of the Home
Did you realize that to an unbelievably large number of people who are broke, their entire problem comes from one flashy car too many? That's how it usually happens - a car that's too much for your financial level, obtained with car finance that runs too long, and that is traded in for new model far sooner than necessary spells financial disaster. Doing this once is bad enough; when people do this over and over again through their lives, they put themselves on an expressway to the poor house.
So here is what happens - on average, every family in America puts out more than $8000 every year in car finance and car maintenance expenses. And clearly it is doing them in. Credit counselors often say that 25% of their clients have been placed in the situation they are in, from having fantastically overspent on a car. Often they don't think twice about spending a quarter of their income on car finance. And then they pay for gas and maintenance as well. A family that has made a poor choice like this, is also likely to have made other similar choices. There are often other expensive loans to pay off too. When people spend $1500 on servicing loans of all kinds, they land in bankruptcy court.
Servicing a loan isn't like any other kind of expense. If you you feel things are a little tight one month, you can always cut back on entertainment, move into a smaller house, cut down on cable costs, and eat less expensive food at home. If you have a loan to repay, there's just nothing you can do about it. You're completely committed come what may, to making that payment. It doesn't matter how much use you get out of the vehicle the car finance bought. Whatever you've committed to paying, you have to, on pain of being dragged to court.
People don't seem to realize it; but the longer your car finance runs, the more you're being bled white. Almost all car loans these days are financed for five years or longer. This means that towards the end of the car finance period, for the last couple of years at least, these people will owe more on their cars than their cars are worth. And add to that the loan rolled over from the previously-owned car, and you have a really burdensome loan that you pay extra high interest on forever.
The biggest mistake we make buying a car is that we assume that just because the car finance people approve the loan, that we can afford it. If you have a steady income, it is still possible to get in over your head. Find out what it really costs to own a car you have in mind before you actually go for it. Edmunds.com has a feature where they calculate for you the real cost of ownership a car lands you with.
So what you do if you are already stuck with a car you can't afford, and car finance costs and running costs together are eating you alive? You could pay the car off all at once and get out of it while you're still whole; or you could have them repossess it. But the best way to go would be to pay for your folly by keeping on driving the car, and cutting costs elsewhere to be able to afford it. You could use the experience to remember that it never feels good when we buy something bigger than we can afford. People go and pay 20% of what they make just to get a car financed; the 20% figure is kind of okay, but only if that figure includes everything to do with your car, gas and all.