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Getting Out (and Staying Out) of Debt: Car Debt

Some cars are the same price as a down payment for a small home. It’s amazing that as a country, Americans owe more than $1.2 trillion to the auto loan industry. This makes up 10% of the United State’s consumer debt. While the median income in the United States is $61,000, families are buying cars that are worth an average of $20,000 – $32,000. 

Excuse me? Why are you buying a car that is ⅓ to ½ of your income, as if you don’t have other bills? 

As explained earlier in this series, banks make their money off of your interest! This means it’s in the banks and auto industries’ interest to have you buy cars at a high price with high interest. Don’t fall for the trap, as attractive as an offer might look, it’s just not worth paying more for something than it’s actually worth. 

Now, let’s take a step back and use a persona to understand how to approach a car-debt-free life: Meet Sarah, 23 years old, (a totally fictional character of my imagination).

Sarah just bought a 40,000 car yesterday on a loan for 6 years at 5.76% APR. Sarah wasn’t being the most efficient and didn’t really research the car well enough to see if there were comparable cars like the one she bought with a smaller price tag. But what’s done is done — can’t really change the past. If I do the math correctly, this 40K car is going to be closer to 47K! 

Let’s say Sarah makes $60,000 pre-tax. 

Here is a high-level look at Sarah’s monthly expenses:

  • Income after NYC Taxes: $3,838
  • Rent: $1200
  • Electricity: $60
  • Internet: $30
  • Gas: $50
  • Groceries: $200
  • Student Loans: $800 ($80,000 of debt with 7% APR)
  • Car Loan: $658.39 (40,000 car loan debt with 5.76% APR)
  • Car add-ons: $200
  • Hanging out with friends: $175
  • Shopping online: $190
  • Waxing at the local Boutique: $75

_____________________________________________________

Total: $3638.39

Total leftover: $199.61

You can clearly see from the leftovers that Sarah doesn’t have much wiggle room in her budget and has no savings if anything goes wrong. We need to fix this quickly! But before we go into Sarah’s options… let me just say off the bat, this car is way too expensive for Sarah to carry on her own. It’s  ⅔ of her income — PRE-TAX! But we are going to see what kind of options there are regardless of if your car is much cheaper, or much more expensive!     

Currently where Sarah is at, if she uses every dollar that comes in, she doesn’t have much room for emergencies. This makes me worried because Sarah needs to have some type of reassurance if her car breaks down or has another life emergency that leads to unexpected spending. Plain and simple, let me stress again that I  think Sarah bought a car that was way too expensive for her income. 

Here is some advice Sarah could follow to get out of car-debt faster!

  1. Return her car
    Yes, I know she just got it but maybe it’s not too late to return. If she returns her car and gets a much cheaper and affordable one, then it will be easier to pay off and will give her SO MUCH more room to save for her future. 
  1. Side hustle to pay the car faster
    She could pick up a side gig, whether it’s driving for a car-sharing company, or sharing her physical car online with other people who want to rent it out. She needs to figure out a way to make an extra $100-$150 a week. This can be put straight to her car loan and will help you cut down her debt tremendously. The key to this part is being consistent.

She can also consider non-car based side hustles — but might as well make this car pay for itself 🙂 

  1. Pushing all her extra money into the car loan
    If she doesn’t want to get rid of the car, then she should put extra money into the car loan. Sarah has $199.61 left from her monthly expenses. If she puts that money into the car in increments, then this is how quickly she can pay off her car: 
Total$658.39$658.39
+$50
$658.39
+$100
$658.39
+$150
$658.39
+$200**
$658.39
+$200**
+$50***
$658.39
+$200**
+$100***
$658.39
+$200**
+$150***
Time to pay off6 yrs5.4 yrs5 yrs4.7 yrs4.3 yrs4.1 yrs3.8 yrs3.6 yrs
Interest Paid$7,404.32$6,594$6,074$5,632$5,251$4,919$4,627$4,369

**all leftover
***Side Hustle

So we can see that the interest paid on the car after 6 years went from 7.4K to 4.3K. That’s a 3K difference! If Sarah chooses this option and pairs it with her side hustle (+150 extra a month), Sarah can save 3K in interest, and be done with car payments in half the time!  

  1. Trade-in her car to get a cheaper one
    This option is a little simpler if she owned her car fully. Basically, she would trade-in her car for a cheaper car. This will allow her to get a new car for “free” and take that extra/leftover money and put it towards that auto loan. 
  1. Sell her car
    Similar to trading in her car, she can always just sell it. She can push this money towards the loan and either choose not to buy a new car OR buy a really cheap car outright and then pay the difference for a loan over time. Either way, she will be getting a headstart in getting out debt-free.
  1. Have someone else assume the car loan
    If she actually doesn’t need her car for everyday purposes and is fine losing a couple of hundred dollars, she can always just have an interested party assume her loan. She won’t get a replacement car with this, nor will she see any cash. She just transfers the loan into another person’s name on the car. 

Sarah lives in NYC which has one of the best public transit systems, so she can still stay connected to the places she needs to be without a car. But if she has already paid some money towards the loan, I would hate for her not to see any value come out of that so consider this as the last resort!

Sarah does have other options — to ignore the car payments altogether and either get it repoed or file for bankruptcy — but that would be a huge sting to her credit score. We don’t recommend it. 
I understand that no one likes to give up their car. It usually marks a milestone that they’ve achieved in their life. So whatever you choose to do to repay faster, please make sure you are doing two or more options at the same time — it will save you money over time, and allow you to access financial freedom much earlier. 

Good luck Sarah and to you!

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