Why You're Broke

You might be surprised where many payday borrowers' financial woes originate. Your car just might be the reason you're broke.

The Culprit: Your Car

If you find yourself in constant need of an urgent cash loan, you might need to take a good hard look at your transportation costs. Americans are dumping more money than ever into their vehicles each year--$8,000 on average. Cars can be such money pits that credit counselors estimate that about 25% of their clients have overspent, sometimes drastically, on their cars. A sign that you're in trouble is when your car payment alone consumes 15%-20% or more of your take-home pay. This percentage doesn't even include other pricey related costs, like gas, maintenance, insurance, etc. What often happens is that consumers overbuy on their vehicles, and now that gas prices are so high, they are pushed to the financial brink.

Do Cars Lead to Borrowing?

It may seem like a leap to connect your car with your need for an urgent cash loan, but the connection is there. When you consider the following facts, you can understand why cars are one of the biggest drivers of the need for payday loans.

• Transportation spending in the U.S. rose 12% from 1999-2005, even though the growth of median income was stagnant during that time.
• Over 80% of auto loans are for terms in excess of four years. The average car loan term in 2006 was five years and four months. These excessively long-term loans mean that you will inevitably be upside-down on the loan one day, meaning you will owe more on the vehicle than it is worth. This means you have no equity in your car, which can exacerbate your financial difficulties while adding the stress of a car payment to your budget for the next six years.
• One in every four cars is financed with debt rolled over from a previous vehicle. This is a bad move because it results in negative equity, an average of $4,000 at the end of the first year of payments, in fact. Trading in your car too soon is a surefire recipe for financial troubles down the road.
• Rolling debt over from another car is a poor decision because you will pay much higher interest rates than you would've by trading in a car you own free and clear. These interest rates, coupled with skyrocketing gas prices, can be enough to force you into a dependency on urgent cash loans.