Ask Chuck: Is your car driving you to the poor house?

Dear Chuck,

I’m in a pickle. My wife and I both drive very nice cars. The problem is that I’ve fallen behind on payments, and my wife doesn’t know it. Should I sell the car?

Behind on Car Payments

Dear Behind on Car Payments,

Open up to your wife — sooner is better than later. Ask for her counsel and help before you make a rash decision. Transparency builds trust. Having both of you praying, talking, and seeking the best solution together is a double win.

Without knowing more about your overall financial picture, my sense is you need to sell one or both as soon as possible. Then buy something used and dependable that you can afford by paying all cash. Or try doing what my wife and I did. We got by with one vehicle for an entire year by simply planning ahead. It took some effort, but it was worth the challenge. If public transportation is an option for you, try doing without two vehicles as you work to get your finances healthy.

Understanding the cost of owning your car

GOBankingRates Survey:

The typical cost of owning a car comes to $762 a month. That adds up to $9,144 per year, including payments, insurance, taxes, repairs, and gasoline.

MarketWatch Guides Survey:

• On average, drivers spend 20% of their monthly income on cars.
• One in ten spend over 30% of their monthly income paying auto loans.
• Nearly two in five can’t afford necessary repairs and upgrades for their cars.
• Two in five feel their car expenses have impaired their ability to afford other essentials.
• Nearly one in two feel they can’t save or invest due to car-related costs.
• 25% admit to owning a car outside of their budget.
• One in eight live paycheck to paycheck due to the financial strain of cars.

Four reasons owning a car can make you poor:

From a GOBankingRates article published at yahoo!finance:

• You’re spending more than you can afford. Most financial experts limit car payments to 10% of take-home pay. Total car expenses should not exceed 20%.
• You purchased a car out of your price range. One in 10 drivers spend 30% of their monthly income just paying down auto loans — three times the recommended figure. Just because you qualify doesn’t mean you should spend that much. Know what you can comfortably pay before shopping in order to achieve your financial goals. Dealerships make money financing their cars.
• You keep having to pay for repairs. Either you bought a lemon or you’re not maintaining it. Unexpected expenses, like major car repairs, threaten financial security.
• You can’t achieve your financial goals because car expenses take priority over saving and investing. Any unexpected event can push you over the financial cliff.

A $69/month car payment?

Buying and driving good used cars has many financial benefits:

• Insurance costs less.
• Maintenance and repairs are often less.
• Depreciation results in a much lower purchase price.

I had been driving a 2007 Toyota that I purchased in 2009 during the “cash for clunkers” initiative implemented by the federal government. They incentivized dealers to overvalue trade-ins in an effort to get older cars off the road due to their higher contributions to air pollution. This drove the price of used cars down significantly. I was able to buy the vehicle I wanted for $3,000 under full retail value at that time. Follow me here. After driving the vehicle for 15 years, the used car market had completely changed. COVID caused a shortage of new cars which drove the price of used cars much higher. The value of my 2007 Toyota, now 17 years old, was now only $5,000 less than I originally paid for it! 

I never paid any interest on a loan or any major repairs. My cost per mile driven over 15 years was very, very low. Consider this. Driving the same car for 180 months that only cost me $5,000 would be the equivalent if I had financed the car at 0% interest for $69/month for 72 months. My cost per month over the period of ownership would be the equivalent of paying $27 each month besides gas and maintenance.

Avoid becoming ‘car poor’

Rebecca Lindland, Cars Commerce auto data and insights director, thinks consumers should focus on the total cost of a vehicle instead of just the sticker price. “Go into your car shopping journey understanding what payment you’re comfortable with, understanding what size vehicle you need, really knowing your requirements and then not overspending, because just like, there’s nothing worse than being house poor, there’s nothing worse than being car poor,” she advises.

She says that because trade-ins are in short supply, shoppers may receive great offers. The downside is that buyers are looking at higher prices for used cars or trucks. 

“There’s a shortage of specifically one to five-year-old vehicles. But the silver lining is that if people are trading in a vehicle from one to five years old, it’s actually worth almost 23% more than it would have been in 2020,” she adds.

Strategy for eliminating car payments

Many cannot imagine paying cash for a car, so here are some tips.

If you’re currently making payments on a car:

• Accelerate payments so that you can own the car as quickly as possible and eliminate the cost of interest payments. If there’s a prepayment penalty, see if it is less than your remaining interest payments.
• As soon as you pay off your loan, continue to make payments to your own bank account, as if you still had car payments.
• Do this until you accumulate the cash needed to make your next purchase without borrowing.
• This plan will save you lots of money and create more financial margin in your budget. If you have no payments but want/need to buy a newer/different vehicle:
• Direct automatic payments into a savings account.
• Do this until you accumulate the cash needed to make your next purchase without borrowing. 

Set and achieve your goals with the help of a personal business coach. Crown’s online Budget Coaching program matches you with a certified coach who will work with you to develop a customized plan to put you on the road to financial freedom.