What would you do about this car situation?

You're on the right track, but do not replace it with a some crap (synomous with Toyota vehicles). I have had horrible experiences with my 2010 Toyota Sequoia--it's had a ton of trans problems and endless recalls. I recently traded a 1995 Chevy Suburban which was starting to have all the kinds of problems you've been describing. I started using stop leak and none of them worked--I tried at least 7 different kinds. I now own a 2011 Dodge Durango, and it's no doubt the best vehicle I've ever owned. But, obviously I know you do not want an expensive SUV. I would recommend replacing your Mercedes with something like a Ford Fusion (possible the best all-around car in the world), Chevy Impala, Ford Taurus, Dodge Caliber, or Dodge Charger. Honda Civic is also not a bad car. Good luck!