Why Car Payments Are the New Credit Card Debt Trap

Yahoo

7 days ago

Struggling with debt is never fun. Whether it's credit cards, auto loans or something else, those monthly payments can cause a lot of financial stress. But while many experts agree that high-interest credit card debt is still a major problem, car payments are also becoming a debt trap for many consumers.
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Comparing Credit Cards and Auto Loans
Auto loans are a type of secured debt, meaning you need collateral — in this case, a vehicle — in exchange for a loan. As long as you make those monthly payments and pay off what you owe, you'll eventually own the vehicle. Failing to pay could mean losing the collateral.
Credit cards are unsecured. This means you won't have to worry about losing an asset if you fall behind on payments. You're still responsible for repayment. In some ways, this makes credit cards the less-risky option. However, it doesn't make them cheap.
According to a Q1 2025 Experian report, here's the typical monthly payment for auto loans:
$745 for a new vehicle
$521 for a used vehicle
Payment amounts vary based on factors like interest rate, loan amount, repayment term and credit score.
But what about credit cards? According to another recent Experian report, the typical monthly payment is $181.
The typical auto loan amount is $41,720 for a new car and $26,144 for a used car. The average credit card balance, meanwhile, is $6,618.
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Car Payments Are Much More Costly
As you can see, the average consumer spends between $340 and $564 more each month on their auto loan than they do on their credit card payment. That's a hefty amount, especially when you consider the average income.
According to the Bureau of Labor Statistics, the median weekly earnings of full-time workers is just $1,196. Assuming someone works 52 weeks a year, that's about $62,192 annually — or $5,183 monthly.
Using these figures, here's how much people are spending on their car payments and credit cards (broken down into percentages):
For credit cards: 3% ($181 out of $5,183)
For a new car loan: 14% ($745 out of $5,183)
For a used car loan: 10% ($521 out of $5,183)
This isn't to say that credit cards are 'less dangerous' than auto loans, however. It simply means there's a higher risk of falling into unmanageable debt with a new or used car loan.
The Debt Trap of Auto Loans
The debt trap isn't only about the numbers. After all, credit cards can be problematic for your finances.
But when you get a car, you have to worry about other things — like negative equity, depreciation and long-term maintenance costs.
'With car loans, people don't always look at the full amount of the debt, but just the monthly payment. If you have a car loan that is over a period of six to eight years, it is [easy] for the car to become over-encumbered, i.e., you owe more than the car is worth,' said Ashley Morgan, attorney at Ashley F. Morgan Law PC.
While you might be able to sell or trade in a vehicle that's too expensive to maintain, that alone won't always solve your financial issues. Say you have a vehicle with a significant amount of negative equity — meaning you owe more than the vehicle's value. You might still owe money on the loan once you've gotten rid of the car it's attached to.
And if you need to buy another vehicle — even if it's a cheaper one — you could end up owing on two loans.
Auto Loans May Not Qualify for Relief
Not only is the monthly payment typically higher for auto loans, but you might not qualify for debt relief like you would with credit cards.
'Auto loans are secured by the vehicle itself, so if you stop making payments, repossession becomes a real risk,' said April Lewis-Parks, communications/public relations director at Consolidated Credit. 'Since there's no collateral tied to credit cards, nonprofit agencies have more flexibility in helping you find a path forward.'
This doesn't mean credit card debt is easy to handle. But when you consider how much people typically owe in credit card debt versus auto loans, it's easy to see how those car payments can quickly become a debt trap.
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This article originally appeared on GOBankingRates.com: Why Car Payments Are the New Credit Card Debt Trap