About a third of American households, according to a survey from the Federal Reserve, don’t have $500 in their savings accounts. Because we live in a car-centric society, having your car unexpectedly break down could cause massive financial hardship. If a car in one of these households needs repairs, and there isn’t enough cash on hand to cover the work, there are only a limited number of ways to cover that cost. A string of bad luck can cause many in this country to slip into a downward spiral of debt.
This new video from Vox helps elucidate all the ways that a theoretical person in need of theoretical car repairs could get out of them, and the pros and cons of each.
The six ways to borrow $500 for a simple car repair, and the six different outcomes, are wildly situationally dependent.
If you want to avoid the trap of institutional debt, it’s possible you could sell an asset to offset the cost, like a gaming console or a wedding ring. Or you could borrow from a friend or family member, hopefully at low (or no) interest rate. These methods, of course, rely on you having assets to sell or acquaintances with money and a charitable bent.
If you absolutely must go into debt to pay for the repair, hopefully you can rely on a credit card or a bank loan to make good on the labor. These will come with an interest rate, usually a fairly high one, and require you to add another monthly payment to your budget. They’re also often impossible or come with practically-usury interest rates if you have a history of poor credit.
The third group of methods often used for paying a surprise $500 cost should be avoided if at all possible, though often the ones faced with this choice don’t have any other options. If your bank allows it, you could run your checking account into overdraft, which comes with steep transaction fees. Perhaps the worst, and most predatory, way to pay what is owed is a payday loan. Payday loans compound biweekly, adding up to something like a 400 percent APR. Avoid at all costs.
Now imagine that car breaks in a way that requires the driver to buy something else. Now we’re talking an even bigger debt to even more predatory lenders. This is how people end up signing a deal for $88 per week with a buy-here-pay-here lot for a 1992 Toyota Corolla. This is how the American financial system continues to grind the country’s working poor into dust and attempt to squeeze blood from stone.
Can anything be done? Shit, I hope so.