If you're constantly broke and can't figure out why, the answer may be sitting in your driveway.

Americans are spending more on their vehicles than ever before -- more than $8,000 a year on average -- and it's driving some to the breaking point.

Credit counselor Bill Thompson of Jacksonville, Fla., estimates that one out of every four clients his agency sees has overspent -- sometimes dramatically -- on a car.

"They may be spending 15% to 20% of their (take-home) pay on just the car payment," said Thompson, who supervises credit counseling for the nonprofit Family Foundations, "and that doesn't include insurance, gas, maintenance and all the other costs of owning a vehicle."

And sometimes there's more than one whopping payment. Sandra McGeary, a counselor at Consumer Credit Counseling Services of Western Pennsylvania, says she regularly sees middle-class families struggling with two payments in the $400 to $500 range. The burdens are so big that it doesn't take a major disaster, like a job loss, to send them over the edge.

"This fall they started coming in saying, 'We were doing so well. We don't know what happened,' " McGeary said. "I'll ask, 'Where did you cut back in your budget when gas prices went up?' and they'll usually say, 'What budget?' . . . A lot of times they don't know how much they can really afford, and they didn't cut back elsewhere" when their transportation expenses rose.

Once they've bought, they're stuck
With most other areas of the budget, you can find ways to trim. You can eat out less and shop more carefully to reduce your food bill. You can lower utility bills by adjusting the thermostat. You can cut your entertainment budget by canceling your cable service and borrowing movies from a library. You can even reduce your shelter costs by taking in a roommate or moving to cheaper digs.

Once you've committed to a car payment, though, your options are few, particularly if your loan is greater than the car's value. Whether you drive it or not, you've got to make the payments, and you've got to insure it.

What we spend on transportation Income range 2005 spending
Less than $19,179
$2,742

$19,179 to $35,999
$5,330

$36,000 to $57,659
$7,437

$57,660 to $91,704
$10,504

More than $91, 704
$15,691

All households
$8,344



(Sources: Bureau of Labor Statistics, Census Bureau. Average transportation expenses include vehicle purchases, finance charges, insurance, fuel, maintenance and repairs, public transportation and other out-of-pocket expenses but not vehicle depreciation.)

We're prolonging the agony
The signs of vehicular overspending are everywhere:

Average transportation spending grew more than 12% between 1999 and 2005, according to the U.S. Bureau of Labor Statistics, at a time when median income growth was basically flat. Even when adjusted for inflation, we're spending more: 8.3% more in 2005 than in 1995, with people in the lowest and highest income brackets accelerating their spending the most.
More than 80% of car loans are for terms longer than four years (which, a couple of decades ago, was considered a long loan). The average loan term has grown from just under four years and seven months in 1990 to over five years and four months in 2006. Longer loan terms mean that people build equity in their car more slowly, which in turn means that borrowers will be "upside down" on their vehicles -- owing more than they're worth -- for three years or more on the typical purchase.
One out of four -- 25.6% -- of cars that are financed include debt rolled over from a previous vehicle, according to vehicle research site Edmunds.com. By the end of last year, the average amount of negative equity in these deals was more than $4,000.
Rolling debt from one car to another is, in case you didn't know, a terrible idea. You'll pay higher interest rates because so much of what you owe isn't secured by the car itself.
And being "upside down" can really leave you up a creek if the car is totaled or stolen. You can protect yourself somewhat with so-called gap insurance, which covers the difference between what you owe and what you get from your insurer, but that's another hit on your wallet.

What's going wrong
So why are so many people messing up so badly on such a basic purchase? There are plenty of reasons, including:

Viewing cars as a need rather than a want. Transportation is, indeed, a real need. We have to get to the grocery store and to work. But many of us have plenty of options, from our own feet to public transportation to car pools to shared car arrangements (read "Should you share a car?" for more details).

Owning a car does get pretty close to a need in rural areas without public transport or when your job doesn't allow for car-pooling. But you never "need" a new car. That's a luxury, not a need. There are plenty of safe, reliable, gently used cars on the market.

There's also no requirement that you get rid of your current car once it's hit a certain mileage milestone. Today's cars are better built and more dependable than ever, which means that unless you've got a real lemon you could keep driving it past 200,000 or even 300,000 miles.

Treating cars as a status symbol. You can't watch television for long without being bombarded by car commercials, and many of us have absorbed the idea that we are what we drive. It's complete BS, of course, but some people have been so brainwashed that they literally drive themselves into bankruptcy.

Failing to consider the overall costs. When buying or leasing a car, many people consider nothing more than the monthly payment. They're not seeing the whole picture -- far from it.

Once you factor in insurance, gas, maintenance, repairs, taxes, depreciation and other costs, most cars will set you back at least twice the initial purchase price over five years.

(Depreciation, by the way, is just a fancy word for the steady, day-by-day drop in the value of your car. You don't pay for it as it happens, but you do pay eventually, when you go to trade in your car for another.)
You can check out Edmunds.com's "True Cost to Own" feature for the breakdown on your particular vehicle. Or you can use AAA's estimate.

The auto association estimates the typical passenger vehicle costs 52.2 cents a mile to operate, or $7,834 a year assuming 15,000 miles driven annually. The estimate is based on fuel prices of $2.40 a gallon and finance charges of $716 a year, based on a five-year loan at 6%. Your costs may well be higher; for example, bad credit can send your finance costs soaring. (Edmunds.com said the average car loan last year carried a 7.38% interest rate.)

Assuming they can afford a payment simply because a lender approved it. Thirty years ago, there was some truth in the idea that a lender wouldn't let you get in over your head. No longer. Not only are lending standards much looser, but many auto finance companies make loans knowing that a substantial portion of their borrowers will miss payments or default altogether. Lenders count on high interest rates to cover their risks. In short, they don't really care if you can afford the payment or not -- they're gambling on making enough from the loan that they'll profit either way.

Acting like a lamb before the slaughter in car dealerships. If ever a transaction were designed to soak the consumer, it's the typical car purchase. Car dealerships are experts at getting people to pay too much for cars or financing, and often both. The savvy consumer does plenty of research, gets detailed car price reports from Consumer Reports, MSN Autos or other sources, knows her credit scores and arranges financing in advance -- in other words, not at the dealership. She also knows the tricks of the car sales trade and how to negotiate a good bargain. As any car salesperson will tell you, this describes a pretty small slice of the folks who actually buy cars. Many people wander onto the lot with little information, fall for the salesperson's assurances that they're about to miss out on a great deal, have no idea what interest rates they should qualify for and accept whatever payment the dealership gives them.

What to do?
Options? You've got only a few:

You may be able to sell the car if you have some equity in it or can come up with extra cash to pay off the loan -- or if you can persuade the lender to let you pay off the remaining debt over time. Read "How to sell a car you don't own" for details.

You may be able to refinance if you bought the car new, made payments for a few years and have a lender who is willing to extend your loan term. For used cars, you'll need to have some equity in order to be able to refinance.

You can let the lender repossess the car. This option should be avoided if at all possible because repossession, voluntary or otherwise, trashes your credit and usually leaves you with substantial debt besides. You'll still owe the difference between your loan balance and whatever the car brings at auction, plus substantial repossession and auction fees.

You can drive out of the loan. This is usually the best solution for a too-expensive, upside-down car. Trim other areas of your budget so you can make the payments and keep driving the car until it's paid off . . . then keep driving it until you've saved up enough to buy another car or at least make a substantial down payment.

You also can try to reduce your transportation costs by driving less, raising your insurance deductibles and maintaining your car properly to avoid big repair bills.

Next time, think smart
Use a bad car ownership experience as motivation for change. The next time you're in the market for a car:

Rethink the whole thing. Isn't there something else on which you'd rather spend $8,000 a year? With that as your motivator, you may be able to find a way to live without a car, or with one less car if yours is a multiple-vehicle family, or to keep the car you have going for a little longer. Maybe not, but it's worth thinking about the options before you commit yourself to another payment.

Figure out what you can actually afford. Thompson, the Jacksonville credit counselor, says total car costs -- including car payments, fuel, insurance and maintenance -- shouldn't top 20% of net (after-tax) income. McGeary's Pennsylvania agency uses a slightly different rule of thumb: Total car costs shouldn't exceed 19% of gross (pretax) income.

These are only guidelines. If you don't have other large expenses, you might get away with higher car costs. If you've got a big mortgage or child-care bills to pay, you might need to spend less.

I like the overall budget guidelines in Elizabeth Warren's book "All Your Worth." The Harvard University professor and bankruptcy researcher recommends that all your basic expenses -- shelter, food, insurance, child care, transportation and minimum loan payments -- total no more than 50% of your after-tax income. That ensures you'll have enough left over for variable expenses like clothing and vacations (30% of after-tax pay) as well as giving you room to pay off debt (20%) and save adequately for retirement.

You might not be anywhere close to these guidelines, but they're something to shoot for as you get your finances in order. In the meantime, you can simply double your projected car payment and see how well that fits into your budget. If it doesn't, look for a cheaper car.

If you must borrow, stick to loans of 48 months or less. If the only way you can afford a car is with a longer loan -- or worse yet, by leasing -- then you really can't afford the car at all. A loan of four years or less will help keep you from overspending and allow you to build equity in the vehicle faster.

Own your cars longer. This one move can save you literally hundreds of thousands of dollars over your lifetime. Keep your cars for at least a year or two, if not longer, after you've paid them off. Set up an automatic savings plan so that the money that used to go for payments goes instead into a high-rate savings account (ING Direct and EmigrantDirect.com are two options). Use the money to help pay for your next car. The longer you save, the less you'll have to finance.
Try to pay cash for your vehicles. In general, you don't want to borrow money to pay for assets that lose value, like cars, if you can possibly avoid it. You might not be able to pay cash for your next vehicle, but you certainly could for the one after that. Finance it for four years or less, keep it for another four years after you've paid it off, bank the payments and voila: You have cash for your next car.

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But the new BMW's are so nice you just have to get one...

I spent $2700 on gasoline for my 2004 Impala last year!

Well there goes my dream car, Porsche 911 Turbo

So is the next problem sub-prime car loans; is the gov't now going to bail out these people too?

$8K per year for a car? For a depreciating asset?

We have always bought new cars. But buying a new car is the worst thing you can do... except for one circumstance - you keep it for years after the loan is paid off.

We have a 1999 Dodge RAM and 2001 Pontiac Grand Prix. We bought both new, but both have been paid off for years, and its nice to have no car payments.

Its nice to drive payment free. In fact, I don't think I will buy another car. Just drive these two cars forever.

Are the cars shiny and new? No. They are still shiny (well, except for the rear bumper on the GP), because we maintain them well, and both still have considerably less than 100K miles on them, they are still quite reliable.

Did I say I have no car payments? No house payment either.

Boat payment - well thats a different story; everyone must allow themselves one vice.

We have been doing this for years, and we usually buy a new car every 5 years or so. That way, we keep the cars new or at least in decent shape when its time to buy a new car.

Over the long run, keeping the maintenance on the car, buying new assures us the car has been well maintained since new, and due to owning them for so long is the only way I can justify buying new.

Also when we buy a new car, we are frugal on the options. Its not quite as easy to do today as it used to be because the way the "packages" force you to buy all the extras, but you can increase the price of the car 25% or more by options such as sunroof, leather, fancy chrome wheels and so on.

Heck, I remember when most new cars, Air Conditioning and Power Windows were options... Now, they are standard equipment, and you cannot buy a car without both.

Sure these are nice, but not worth it if you can't afford it, and if it means buying a new car without the chrome wheels vs. a used car with them.

I used to think; if I buy a car with Air Conditioning, why do I need power windows? The first car I bought with Air, I did exactly that - didn't buy power windows.

I can buy a new car with nice aluminum wheels; why do I need to spend $800 more for aluminum polished wheels?

But I am not Mr. Cheap, and I do like the options as much as anyone else, so I usually get the mid-trim level; a balance of the cost vs. the convenience.

Even our Grand Prix is like that. It has a lot of items once considered luxury items on a car; power seat, power windows, dual zone air, and so on; but it is a GT model - in 2001, considered mid-trim level. It has a lot of nice features, but still a comprimise.

We're gonna be buying a new car when we retire next year - sort of a retirement present. Since we have denied ourselves all of the goodies like leather seating and such; we deserve it, and it will probably be the last "expensive" car we buy. We won't need a new car next year, because the GP is still in good shape (after fixing the bumper).

The most our car burden has ever been is still less than $4K per year for a new car, and this has been for what I consider a nice car. I simply cannot fathom anyone spending $8K per year then complaining they cannot afford payments.

You can buy many cars for much less than $8K per year. They may not be SUVs with 4WD, leather, or GPS navigation systems, but if it comes to eating or sitting in a leather-equipped car, seems silly to me.

And, you sure should plan on keeping it for a few years. We have bought 8 new cars over the last 35 years the admiral and I have been married. This gives us a new car about every 5 years, and we have kept them over an average of 10 years; owning 2 cars at a time.

We have never had to dish out a lot of money for repairs. I don't like fixing them myself, so we always have a mechanic do it, but the most expensive repair we had to have done was a transmission repaired in 1980.

Usually over a 10 year period, we'll have to do brakes, tires, battery, and used to be, exhaust systems, mostly considered minor repairs. So buying new, keeping them maintained, and owning them for 10 years has been the best solution I have come up with.

Excellent post, Mark!

My Dad did me the very great favor of POUNDING into my head the exorbitant costs of driving from a very young age. (Of course, he partially negated his message by buying a new car every two years for most of my young life... )

But because of that, I've kept ridiculous records of my auto expenses all my life, and can tell you the cost per mile, cost per month, and cost per car of most of the vehicles I've owned.

Some who know our wide-ranging life experience know that we've enjoyed extended periods of income in the upper 90s percentile, and other extended times of income that struggled to meet the median. So our car choices have been all over the map.

On another thread, I recently posted the relative savings realized by my own approach to vehicle ownership and my brother's. (He's the one who REALLY gets it!) Our main vehicles currently are a 1995 Ford F250 (with 180,000 miles on it) and a 1984 Mercedes 300 SD (with 208,000 miles on it). The Ford is completing it's sixth year of service to us. We've driven it 90,000 miles. Purchase price: $10,000. Current value: $6,950. But it costs a lot to drive it. 11 mpg avg.

The Mercedes cost $4,000. We've driven it just over 60,000 miles in 3.5 years. Current value is a bit over $5,000, and it gets about 26 mpg in our experience. Needless to say, insurance on both vehicles is inexpensive.

By contrast, I paid more to drive the 2001 Cadillac DTS 70,000 miles in three years than BOTH the current cars cost for the full extent of their ownership. (Actually, a good bit more than double.)

My brother, on the other hand, rarely pays more than $500 for a car. His current 'stable' is a 1981 Chevy Luv truck with an Isuzu diesel that he paid $500 for six years ago. He's driven it just shy of 70,000 miles. The other car is a 1987 Subaru wagon that he bought about four years ago for $450. It's been run just about 30,000 miles.

Yes, he has more days when he's working on cars than most of you do. But his cost of getting from one place to the next is negligible. It's cheaper to drive when you're not concerned what it 'looks' like!

I think a lot of folks are going to discover these salient facts as we go forward...

+1,
and don't give up the dream !,

i belong to a diffent mindset then some others ...
BUy that 911, buy that vette, buy that lexus ...

and make that be the impetus to finding further success,
do whatever is necessary to make it work,
you will meet with some downsides but the upsides will be worth it
calculated reckless doesn't mean stupid

troop, i wish you worked at porsche
http://www.porsche.com/usa/models/911/911-turbo/

I am trying to get my wife to buy a new car. Her Shadow with 180,000+ miles, needs a lot of car. My truck with 160,000+ miles needs to stop being our primary transportation, if only for the fuel bill. I bought the truck because despite being a Ford person, the Dakota was more suited to my needs and I was not willing to pay the fuel penalty of an F150 Screw. We are looking at a Taurus or a Focus. The Focus is a lot cheaper and gets better gas mileage, but the Taurus would be better suited for the long drives we take and for hauling my parents around. I am figuring about a 25-30% premium for the Taurus and about 10-15% fuel costs. It is also an issue of whether or not I can get a better deal on the Taurus since everyone is in a panic and want high mileage ratings.

Another good strategy is to buy nice cars at a hefty discount once they're 2-3 years old. With the certified used car, you often get a new car like warranty, discounted interest rates and if you choose carefully, a car that is in near-new condition. Somebody else takes the hit on the steepest part of the depreciation curve and you get a nice car to drive. I drove two Infiniti Q45s for about 9 years using that method and paid <50% of what they cost new.

I'm sorry, but I freaking love driving my BMW.

There are definitely two schools of thought on this one. I have worked it both ways depending on the circumstances at the time. I went from a 2003 F350 to a Suburban because it met my needs better when taking cost into consideration. I also bought an 85 4Runner for my daily driver. Right now the wife and I both drive Subaru's and we have the Suburban to tow the boat. We are looking at losing one of the Subaru's and the Suburban in favor of a more comfortable ride on trips, a better towing experience and a reduction in the number of vehicles I have to park in front of the house.

I believe the real problem comes from people over extending themselves. If you can afford it, do what you want. I have employees that make 40K per year and drive cars that cost 40-50K. Makes no sense to me. I have been approved for many things that I did not go for simply because I did not feel comfortable with the cost. Have I always made good decisions? Nope! But the bad ones hurt and I learned from them.

In the search for a new truck, I am taking things like increased fuel costs compared to the reduction in insurance costs. Future plans such as possible getting a truck camper (don't want to have to upgrade 3 or 4 years down the road).

I've also considered keeping the Burb and upgrading one of the subaru's to a larger car for trips. I go back and forth, but at least I think it through. Which is more than I can say for some.

Yes of course, we are all in agreement that if you can afford it, get what you want. But I think the jest of the article was those that cannot afford it were still trying to buy upscale.

As evident by the whole mortgage fiasco I don't think banks tell anyone no anymore. It seems if you can sign the papers the loan is all yours regardless of your income. Some people just need to keep up with the Jones if they can afford it or not.

Amen to that. I paid 17k for my 2004 Durango over a year ago, it had 37k miles on it, and a powertrain warranty to 70k miles. I've got 62k on it now. It would have stickered for 42k, and probably bought for roughly 35k. I saved half, and will still get a TON of good problem free use out of it. It doesn't make any financial sense to buy brand new. I will continue to buy all of my vehicles this way, if you look hard enough you'll find exactly what you want barely used.

I don't know which is bigger anymore, people's car-egos or window stickers.
If you buy a new car, you are typically in the $30k range, put $5k down, and you are looking at $500 a month for 5 years. Run it 15k miles a year you are at 75k at the end of your payments. A couple more years will peak you over 100k. Most people will not run much more than 100k before trading, but at that point you are trading in a worthless item for the most part, which may still have many more miles and years on it. Then if that person had the fortitude to save that $500 a month they were paying, they'd have a chunk for a down payment on a new car, but that typically doesn't happen. So it doesn't surprise me many people have big car payments, and that doesn't even consider the "I deserve a new car every 3" syndrome.

I've made some mistakes in buying new cars, one big in particular. I compromised in the model, and pretty much bought on a whim of "We need a new car" when we really didn't. It wsa traded at three years old, and yes we took it in the shorts. We are now at the point where our cars are more than satisfactory. One was bought new, and only gets 8k a year on it, so it will be around for a while. The other gets run a lot, few thousand a month typically. I plan to run it until it is paid off.

My 1998 Honda Civic with 103k is getting a paint job this spring. I figure a paint job is cheaper than a car payment since the car wont bring much in on the trade. Would I like something like a mini van to tote my family around? Yes but the car runs great and only needs a fresh coat of paint.

I agree with the sentiment of the article.

Cars - or trucks - are the one status thing that most anybody can afford, but probably shouldn't. It is a huge drain on people's pocketbooks.

I'm an advocate of the 3-5 year old used car rule. And, I really don't care for the certified vehicle programs - it's just a way for companies to inflate used car prices. If you really need to spend $20,000 a year to drive that new Porsche or even $10,000 to drive that new fancy pickup - I think it's great, because then I can buy it after 4 years and drive it for $5,000 a year.

That said, my wife just bought a brand new car last week - a Toyota Camry Hybrid. It's a nice car with all the options, and she drives a bunch of miles - so I liked the idea of higher gas mileage. I took it out last night and filled the tank for the first time. It had gone about 405 miles on 11.4 gallons of gas for a total of 35.5 miles per gallon - mostly city driving. On the 3.5 mile trip home from the gas station it got 48.7 miles per gallon (it gets much better mileage after it's warmed up) We figure it will save about $120 a month in gas over her minivan.

I figure the car will cost about 4,500 a year to own - for the first 100,000 miles, excluding taxes, insurance and gas. The second 100,000 miles will cost probably about 2,000 a year - which is about as cheap as you can drive a reliable car.

Couldn't agree more. My $52K Aviator cost us less than half that at 3 years, and my $48K Audi cost me $7K. If you can spot good maintenance and are able to do the basic work yourself, you CAN have it all...and have fun too. I have never bought new, and probably never will. Of course, by used cars have gotten less "used' over the years...I'm limited to brakes and maybe the occasional control arm...not the complete rebuilds I used to have time for years ago.

The wife's Mustang and my Lincoln cost me about $1400 per year, total. That's gas & oil changes. We've had the Mustang 13 years come April, and I've had the Lincoln 4-1/2 years now. I'd love to get something newer, but, as is the point of this topic--I can't afford anything newer. Fortunately I'm a good judge of cars, in all the years of owning these 2 cars, the only mechanical issues ever (knock on my head!): the 'stang needed a fuel pump about 9 years ago, and an alternator last year. and I've had to replace the right front airbag strut in the Lincoln. Aside from that, tires, brakes, oil & grease...

And honestly, I have no idea how people pay for cars, houses, gasoline, food, and still have money to pay for boats, RV's, etc...

There's no way that I'm going to pay out $1300 a month for a vehicle... ever!

And this is why:

... or a boat that is a RV!

LOL---but remember, our combo "summer-home-RV-boat" cost us less than a new 26' Cobalt. And, we had to sell our house just to afford THAT! It costs less than $100 per month for slip & storage... Everyone thinks we're rich--hardly! I could probably GET rich if I wrote a book on how to LOOK rich....