HEELS ON WHEELS: 6 Signs of Vehicular Overspending

HEELS ON WHEELS
By Katrina Ramser
San Francisco Bureau
The Auto Channel

INTRO TO OVERSPENDING ON VEHICLES
Thirty years ago, there wasn't an issue on overspending when it came to vehicles. When you walked into the bank for a car loan, the lender reviewed your income, debts, and credit history and vehicle price or loan amount in mind. If you didn't make enough money or were viewed as a risk in anyway, you simply were not granted the money. You we deemed as not being able to afford the car.

But banks learned over the years higher risks have higher payoffs. Approving consumers for more debt or car than they could handle became an art form. Slap on a nice interest rate and extend the life of the loan so it appears more affordable to the consumer, and you've got a long-term cash cow. So as a nation, we became addicted to not just new cars, but bigger and better new cars, thinking we could really afford them. Monthly car payments symbolized a rite of passage into adulthood while buying used meant your were poor or cheap.

The current recession or economic collapse is reminding consumers – or teaching consumers for the first time – that driving within our means is a viable (and noble) goal. As we begin saving again, we see it possible to collect enough cash to pay for a car outright. As we embrace a greener lifestyle, we stop thinking of vehicles as status symbols but rather gas savers.

In order to get our financial house in order, we've got to first look at what's sitting in the garage or driveway. Here are 6 Signs of Vehicular Overspending – and I use my family's mistakes to make my points:

Sign #1: Your car loan is longer than four years. Once upon a time all you could get were 48-month or less vehicle loans. Now vehicle loans go as long as six years or 72 months. Our 2005 Dodge Ram 1500 is unfortunately on a 72-month payment plan. Financed through Chrysler for less than $24k, do you know how much we'll pay in interest over the life of the loan? Try $8,285. That's a whole other car. Plus, a longer loan means it takes longer to build equity.

Sign #2: You are thinking about rolling old car debt into new car debt. We're kind of drooling at the 2009 Dodge trucks – and the deals. But if you still owe on a car during trade-in (likely due to the fact you opted for a 72-month plan like us), you're considered upside-down on your vehicle. You'll pay a higher interest rate if you do this.

Sign #3: A significant percentage of your income is spent on cars. My husband shells out about $1,000 a month for car costs, or about 25% of his take-home income as a builder. Way too much, but here's how it's broken down monthly: The average car payment is $475 (he pays $440); full car insurance coverage is $189; his extended service plan is $120; gas around $190 a month for a 20-mile round trip commute. Registration evens out to be $31 a month; little car repairs, dealer tune-ups and washes at $49; and car accessories averaged $115 as he did need to buy a spray-bed liner and lumber rack. Nothing extravagant, just life's little costs and probably similar to your own.

Sign #4: You have neither cash nor a Car Fund for your next vehicle purchase. My husband was able to put $7k down on the Dodge because he saved regularly. If you put $275 a month in an online bank account and call it your Car Fund, in 18 months you'll have $5k with the help of interest. Double it up, or plan out your next car purchase to happen in 2012 or 3 years, and you'll have $10k.

Sign #5: You take the first vehicle loan you’re offered. My husband had okay credit at the time of his Dodge purchase and took what the dealership offered him – a miserable 10.39%. Talk about highway robbery. We cleaned his credit up and just qualified for 6.39% at our local credit union, basically cutting the remaining interest costs in half.

Sign #6: You think your current car is too old. We had to buy the Dodge work truck because my husband's 1984 Toyota truck – a 20-year old car – had become a threat to his safety and others around him, despite the fact he's a great mechanic and knew the car inside and out. The best way to come out ahead when managing vehicular overspending is to hang onto your car for as long as you can – if we didn't have the Dodge, we'd have no debt and would be investing or saving 25% of an income.