While I am all for helping the economy and the environment, the awesome thing about a clunker is that is (hopefully!) paid for in full. If you are one of the more than six hundred thousand who got cash for your clunker, you are the proud owner of a new car… and possibly some new debt.
Let’s run some rough numbers. The popular Honda Civic costs around $21,000. If you qualified for the full $4,500 CARS credit for your clunker, that leaves you with $16,500 owed.
Loan amount: $16,500
Interest rate: 9%
Loan term: 48 months
Monthly payment: $410.60
The fact that many people were in a rush to beat the program’s deadline concerns me. A National Automobile Dealers Association economist was interviewed for a recent Newsweek article saying that he believes that “as many as 40 percent of the cars purchased under Cash for Clunkers were bought by people who would not have bought a new car in this calendar year.”
Adding more than $400 to your monthly obligations is not something that most people can do without a lot of planning. To make matters worse, according to Insurance News Net, insurance costs for some new-car buyers could be minimal; for others, it could be $500 or more a year.
If you find yourself suddenly facing a dramatic increase in your monthly credit obligations—for any reason—you will likely have to adjust your spending in other areas to compensate (giving a car back is not a realistic option). Thankfully, there are several budget areas where you can make quick cuts. Check out previous blog posts for quick ways to reduce your expenses on items like: