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Soaring Car Payments Leave Consumers Cash-Strapped

By Stacey L. Bradford
November 5, 2004

AMERICANS IT SEEMS rarely let a little thing like money come between them and their cars. Given the choice, they'll gladly spend more of their disposable income on a flashy set of wheels than on other objects.

According to the latest Cambridge Consumer Debt Index, 56% of Americans say their monthly car payments (including both loans and lease payments) are so burdensome that they're preventing them from making other big-ticket purchases, up from 55% last year. Some 17% of consumers report that their monthly payments are a major burden, up from 11% in 2003. And 39% say their auto loans or lease payments are at least a minor burden on their budgets, down from 44% a year ago.

"Over the last year, people were drawn into the showroom with 0% financing incentives," says Jordan Goodman, spokesman for Cambridge Consumer Credit Index, which tracks consumer spending habits. "But when they get good financing, they don't negotiate on price. Payments can be higher than they can afford."

How much are Americans spending each month? More than you might think. In 2004, the average new automobile retailed for more than $30,000, according to Edmunds.com. That's a record high. The average, says Edmunds, is rising about $1,000 a year.

Combine higher prices with lower down payments, and it's not surprising that so many consumers are stretched so thin. Indeed, 17% of consumers are shelling out between $500 and $700 a month for new vehicles (not counting insurance, gas and maintenance), up from just 10% last year. Forty-three percent are writing checks for $300 to $500, down from 50% in 2003. And just 32% are paying less than $300 a month, in line with last year.

According to the Federal Reserve, consumers piled on 5.8% more debt in September compared with August. Total debt increased to $2.053 trillion. Of that, nonrevolving debt, which includes car and student loans and medical burdens but not mortgage debt, increased 3.4% to $1.305 trillion over the last month.

How do you know if you're living beyond your means? Experts advise consumers to keep their total debt-to-income ratio at or below 36% of gross income. Car expenses, including maintenance and insurance, shouldn't exceed 20% of take-home pay, says Edmunds.com.


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