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The average new car payment is $551 per month, that is up ten percent compared to three years ago. Car buyers that bought or leased cars back in 2016 are getting some sticker shock and that is leading to some of them putting themselves into dangerous financial situations.

A report from USA Today, citing Kelly Blue Book, Edmunds, and The Public Interest Group, paints a picture of 2019 car buyers falling into a potentially dangerous “monthly payment” trap with increasing payments and transactions prices for new cars. The problem with the report, just like the myopic financial advice from professional millionaires, is that these experts are focusing on the wrong issue.

While USA Today and other sources are correct that super cheap loans combined with higher sticker prices are driving the total transaction costs up from 2016 to 2019, they still want to place the blame on this “monthly payment” approach to buying or leasing a car. The article opens with a reference to “the age of Netflix” and discusses how people are accustomed to these monthly subscription fees and that impacts their car buying habits.

Netflix did not invent monthly fees and the car loans have been around for a good while. The issue is not the payments themselves but how too many car buyers just do not do the math before going into the dealer.

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Here is a common scenario: A car buyer in 2016 got a zero percent APR loan on a new car that retailed $30,000 and the payments were $500 per month. That person is now back in the market but their trade value is equal to their loan payoff so it’s a wash. They go for another car at $30,000, but those low APR loans have dried up and now the interest rate is around four percent. That brings the payment of that $30,000 car to $552 per month. For folks on a budget that extra $50 can make a big difference.

So what do these folks often do? They either take on that larger payment or they stretch that loan term out, to drop the payments. That $552 per month becomes $469 on a 72-month term with the same 4 percent APR. But those loans are being stretched farther and farther, with 84-month terms becoming more and more common. These longer loan terms dramatically increase the risk of a buyer being “underwater” which is a bad place to be if you need to get another car.

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USA Today gets halfway there when it comes to giving advice on how to avoid paying too much

Advisers say car buyers should consider the total amount they’re paying over time. But many people think more about whether they can handle the monthly payment….If you can’t afford a midsize SUV, for example, consider a midsize car. The price difference between the average midsize SUV and the average midsize car in January was $38,744 to $25,930, according to Kelley Blue Book.

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You want an SUV but it’s too expensive? Just pick a smaller car! I’m sure many buyers are going to be really keen on that super helpful advice.

Here is what people should be doing: figure out what they can afford before they go shopping, even if that means starting with the monthly payment and working backwards. I’ve discussed this concept in detail in a previous post but here is a recap.

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Google search has a very helpful tool if you type in “Car Loan Calculator”

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That buyer who wanted to be at $500 per month but is now facing a four percent load can plug in the numbers and the calculator will kick back a spending limit of $27,150. This is less than $30,000, but that is how math and interest works. Maybe the $30,000 they had in mind is no longer in their budget and they need to seek an alternative.

The great thing about the car market is that different cars have different prices. Some are cheaper, some are more expensive. Used cars can usually give people more value than new ones. So if a new car is now more expensive due to a higher MSRP and/or increasing interest rates, the solution to keep payments down is simple...get a cheaper car.