Apr 25, 2024
Divorce and auto loans, individually, can get expensive. Unfortunately for 23-year-old Jenny from Houston, Texas, her ongoing divorce battle and auto loan debt are interlinked.
In an episode of Caleb Hammer’s YouTube series, Financial Audit, she revealed how the sudden changes in her home situation has left her spending 39% more money than she earns.
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“That terrifies the crap out of me,” Hammer remarked, while pouring over Jenny’s credit card paperwork and overdrawn bank statements.
However, Jenny’s situation isn’t helped by her penchant for reckless spending. Here’s what Hammer suggested she do to get herself out of debt.
Consumer debt crisis
According to data from the Federal Reserve Bank, auto loans are one of the largest borrowing categories for the average consumer, just behind mortgages and student loans. At the end of 2023, households across the country collectively had $1.61 trillion in auto loan debt alone.
In Jenny’s case, she underestimated the burden of the money she’d borrowed to buy her 2021 Toyota Camry because she was married at the time. “That wasn’t based on my [income], it was based on my husband’s income,” she told Hammer.
However, Jenny is now in the process of getting a divorce — and the car’s liability remains in her name. Hammer discovered that Jenny’s interest rate is 11.97%, with an outstanding balance of $30,656. She has 63 months left on the term and monthly payments of $646.
“That’s 30% of your income,” Hammer gasped. Jenny’s payments are not unusual given that the average monthly car payment for a new vehicle is $738, according to Experian’s latest data. However, she clearly can’t afford that amount because her monthly income from her part-time job as an assistant manager is just $2,251.
This situation is compounded further by her reckless spending habits.
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Unfettered spending
Since her breakup, Jenny has moved back in with her parents which allows her to avoid housing costs. This would’ve given her some breathing room, financially — had she not maxed out her credit cards on vacations, online gaming, high-end makeup and nights out with friends.
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She revealed an addiction to Monopoly Go on her phone, and a girls' trip to San Marcos, Texas, even though she couldn’t afford it.
“Is there anything on here that’s a necessity?” Hammer asked while going through her monthly statements. Altogether, Jenny spent $3,151 in one month — 39% more than her monthly income.
Jenny isn’t the only one using credit cards and overdrafts to bridge the gap between her spending and earning. The Consumer Financial Protection Bureau (CFPB) found that more than a quarter of consumers had someone in their household with an overdrawn bank account.
In fact, Gen Zers, in particular, are raking up credit card debt at an accelerated rate. Between 2021 and 2023, this cohort of consumers saw their aggregate credit card balance surge to a whopping 174%, according to data from LendingTree.
Snowballing debt at a young age is risky behavior. To break the cycle, Hammer encouraged Jenny to sell the car immediately and pick up a cheaper model for less money. In addition, he suggested she switch to full-time employment to boost her monthly income and adopt a strict budget to keep her spending in check.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
