This whole concept about “affordability” isn’t new. I’ve covered this a few times before. But far too many consumers are approaching car buying and payments backwards.
More often than not, the process works like this: a buyer picks a vehicle, does the shopping and gets hit with a monthly payment number. That figure is often higher than what they were expecting and their reaction is, “Well, I guess I can make that work.” And “making it work” sometimes means stretching the loan to what some financial experts feel are dangerous terms, like 84 months or beyond.
The combination of monthly payments that are just barely within the budget (or outside it) with long loan terms create situations where buyers owe far more than their car is worth. And that’s a real recipe for disaster.
One big reason that this happens is that people are buying more car than they actually need, hence the term “overbuying.” Here is the typical thought process of your average buyer:
“I would like a mid-size crossover for the family. The Jeep Grand Cherokee is nice and they start at around $35,000... but I also want leather seats all the safety features and (goes to Jeep configurator), well it looks like I need a Limited with the Safety Package and an MSRP of $45,475.”
This person shops around drives a hard bargain and ends up with an out the door price including all tax and fees of $42,000. They are feeling pretty good about their negotiating skills and then they get hit with the sticker shock of the car payments of $764 a month on a 60-month loan with an APR of 3.5 percent.
They can’t swing that, but then salesperson does some magic math and says “If we take your loan to 84 months, that will only be $564.” Then they decide that’s much more palatable, so they sign the papers—and become one of the millions of people who “overbought” their car.
What they should have done is looked at the budget before they looked at the cars. Google has an excellent car loan calculator that allows you to plug in the monthly payments first, and then it will calculate your spending limit.
Read the entire article here.