How the Average Car Payment is Keeping You in Debt

Man Carrying Car Image

For decades, owning a vehicle was synonymous with freedom.

Having a car meant not having to be at the mercy of a bus or train schedule; it meant you could live and work in a different neighborhood from where you worked or went to school. Vehicles even became a place of refuge – a place to sing out loud or rest your eyes.

But cars are ridiculously expensive – and as rideshare companies like Uber and Lyft gain consumer trust and extend their services to every neighborhood in the U.S., more and more Americans are questioning the need to own a car.

When you can find a ride to your destination in a matter of minutes with just the swipe of your finger, does it make financial sense to continue to make $500-plus payments, possibly for the rest of your life?

Auto Budget

When shopping for a vehicle, the first thing to consider is your budget. Personal finance experts suggest spending no more than 15 percent of your take home pay on your fixed monthly car payment, as well as unfixed expenses like gas, vehicle maintenance, registration, fees, etc.

The average monthly car loan payment in the U.S. was $530 for new vehicles, $381 for used cars, and $430 for a lease payment, during the third quarter of 2018, according to a report from credit reporting agency Experian.

If those figures seem high it’s because they are. Monthly car payments are currently at their highest since Experian began tracking automotive financial data in 2009!

And those record-breaking monthly payment figures? It’s an average so some people are paying even more each month. The monthly auto loan figures also don’t include unfixed car expenses nor do they mention that the average new car loan is 68 months long!

Should I Sell My Car to Pay Off Debt?

How many times in the past have you thought to yourself “If I only had X amount of dollars, my problems would go away?”

Many people with credit card debt consider selling their vehicle if it meant they could get out of debt quicker, but is selling your car to avoid car payments beneficial in the long run?

Why I Sold My New Car

In 2015, personal finance blogger “J” of Millennial Boss shared that after paying $400 a month for 17 months on her “brand new SUV complete with moon roof, navigation, and fancy eyesight technology,” she decided to sell it.

“Between the car payment, gas, annual registration fee, maintenance, and car insurance, I was effectively paying $750 a month to drive!” she wrote. “I had owned 15+ year-old cars prior,” J explains, but her friends and family encouraged her to find a new car.

“Instead of encouraging me to fix up the minor things wrong with my car – such as fix the brakes – I was told to buy a new car because my car was ‘unsafe’ and it would be more expensive to fix up my car (I highly doubt it would be more than $9,000 a year!),” J said. “I was also told that new cars have the best financing so they were better than used.”

Cut Your Losses

J’s tipping point came when she was offered a job opportunity within walking distance of her home – she couldn’t resist pocketing an extra $750 per month and began the process of selling her car.

“New cars depreciate very quickly so when I discovered the amount it was worth, it was a bit of a punch in the gut,” J recalled. “So many people told me not to sell the car now because I just bought it and it lost so much value already….I’ve stopped listening to other people’s car advice.”

“I spent $750 a month the past 17 months but it doesn’t mean that I have to continue to spend that much any longer,” J said. “I can stop the bleed now.”

And she did. J essentially broke even when she sold her vehicle back to the dealership –the dealership offered her within $20 of what she owed on the car.

Questions to Consider Before Selling Your Car

While selling her vehicle in order to reach financial independence worked for J’s situation, not all of us are better off without a vehicle.

David Quilty at the personal finance site Money Crashers recommends asking yourself six questions before deciding to sell your car to pay off debt:

  • How much do you spend each month on gas, insurance and maintenance?
    • Are you driving a hybrid or a gas guzzler? Does your car seem to require maintenance more frequently? Are repairs more costly for your type of vehicle?
  • Do you still owe money on your car?
  • Do you own your car outright?
  • Do you even need a car?
    • Do you work remotely? Is there public transportation nearby you can use instead? Would this be a good time to try and bike to work?
  • If you still need a car, can you afford a cheaper one?
    • Maybe a BMW on a $50,000 salary was too much. Would you be able to find a car that had a monthly payment no greater than 10-15 percent of your net pay?
  • What about lifestyle considerations?
    • Do you have kids? Take frequent weekend road trips? What would happen to your commute if you no longer had a car – would it double? Triple? Would you be able to keep your other expenses the same or lower such as groceries, transportation costs, etc.?

Credit Score Impact

Selling your car to pay off stubborn credit card debt may give you peace of mind, but an unintended consequence may be that getting rid of that monthly car payment negatively affects your credit score.

Auto loans are viewed as installment debts, or payments that stay the same each month. These types of debts are viewed differently from credit card debts or “revolving debts” that fluctuate each month. Having a mix of different types of credit accounts is a positive thing for your credit score – it shows you can manage multiple types of credit.

So, removing an auto loan from your payment types by selling it or paying it off early, could result in your credit score dropping slightly.

A Personal Decision

Whether getting rid of your monthly car payment or vowing to never buy or lease a new car is the next step in your debt free journey, remember that this is a decision you need to make based on what is right for YOUR financial situation and financial future.

Have you sold your car to pay off credit card debt? Or did you decide to keep a car despite a high monthly auto loan payment? Share your story in the comments below!

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