Back in the days when I was a grad student, I had a clunky old Chevy Cavalier that I used to get to my classes, my lab, etc. The car was pretty reliable except for the times it broke down, which usually occurred every third month. In the winter months, a typical malfunction would occur every other month.

By the time the car had been towed away, diagnosed, fixed, and returned, I was out at least $600-$1000. Yet, I saw these expenses as necessary to owning a car. Besides, I couldn’t really see any way around them- a new car was expensive and I certainly didn’t have the $10,000 or so needed in order to purchase one. As far as buying another used car was concerned, I foresaw only the same problems as with my current Cavalier.

Thinking over it now, I realize just how foolish I was to hold onto a car that cost me an average of $3200/year in repair costs. My car expenses were one of the biggest reasons I could never accumulate any decent savings. In fact, as soon as I officially "retired" my car (by giving it away), I was able to suddenly amass $10,000 in my bank account!

Was I unusual in my car spending habits? As I began to talk with other folks about their car expenses, it dawned on me that many of us are also spending lots of money on our cars. According to the Bureau of Labor Statitics, the average American household spends over $8,500/year on transportation costs. The breakdown goes like this:

One would expect that people earning a below poverty level income would spend a lot of money on their vehicles, since those vehicles are probably old clunkers like my Cavalier and need to be fixed all the time. Surprisingly, though, people who earn quite well also spend a significant portion of their earnings on their vehicles. Overall, American wage-earners spend a good 15-20% of their gross earnings on their cars. Since I’ve yet to hear of gross earning being made applicable for car repairs and car purchases, this means that we are spending even more money.

Some of you might argue that you need your car for work, for school etc. But honestly, no one really needs a car. There are all kinds of transportation choices, from public transportation to car-pooling to even car sharing. Sure, these options make things a little less convenient for you. And, you may have to plan a little bit more before you head out the door to your destination. However, if you really crunch the numbers on how much even the occasional taxi cab would cost you for your transportation emergencies, I’ll bet it still wouldn’t equal the amount you are spending on your car.

Why you are paying so much money

Vanity The idea of buying a car simply to get one from point A to Point B is no longer valid. Our cars have become status symbols, as illustrated by endless Lexus, Hummer, and Jaguar commercials. Nobody wants to buy a used or older car, even though such a car would save considerably on money.

Leases It used to be that people would just go and buy a car. Nowadays, cars are "purchased" as a 3-5 lease plan. This means that, on top of paying $3,000-$5,000 for the privilege of driving the car, you also pay an additional $200-$400/month for the monthly lease. After the lease years are up, you must return the car to the dealer.

Lack of information Consumers are notorious for not researching the car they intend to purchase or the financing terms for which they qualify (usually both). Car dealers know this and have elaborate psychological systems in place for making sure that you overpay. At the other end of the spectrum are the car mechanics, who realize that most folks don’t know their crank shaft from their slave cylinder, and intend to make full use of such ignorance. There simply is no excuse for being an uneducated consumer, no matter whether you are standing in the car showroom or the garage.

If you are find yourself in the situation of having bought more car than you can afford, what can you do? Contrary to popular belief, you don’t have to keep paying insanely high prices simply because you signed your name on a few dotted lines. However, you are not left with many options.

What you can do now

Sell your car. Even if your car is not paid off, you may be able to sell it. Make sure you work with your local DMV in terms of the necessary paperwork, as well as your lender. Quite often, cars that are not fully paid off have some type of lien against them, which means that you may need to pay in extra money when the title is finally transferred to the next buyer.

Refinance. An easier option is to refinance your car for better loan terms. This may be possible if you’ve already stuck some equity into your car and are on good terms with your lender. Having good to excellent credit also helps.

Trade it in. With dealers desperate to sell cars in today’s dismal economy, you may be able to trade in your high priced vehicle for a more affordable one. However, the money you get on your current vehicle will never equal what you would’ve obtained had you sold it yourself. Also, depending on how much you initially paid in for your vehicle, you may have an "upside-down" car loan on your hands. What this means is that you may owe more on your car than it’s actually worth. If this is the case, your current loan may end up rolled over into your next one, resulting in even higher car payments for you.

Pay it off sooner….then save for the next one. If all else fails, allocate extra funds in your budget to pay off your car sooner. Once that is done, keep setting aside the extra money in a separate savings account. Four or five years down the road, when your current vehicle is undriveable, you’ll be able to take out this saved cash and purchase your next vehicle with a a reasonable down payment.This will prevent the unwanted "upside-down" effect on your future car loan, assuming you’ll even need one.