Photo credit: AP

New car transaction prices are rising, interest rates are up, and practically every analyst that covers the auto industry is worried about buyers being “priced out” of being able to afford that new car. Here’s one easy solution to this problem: people need to stop “overbuying” their cars.

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.

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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.

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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.

Let’s say this person wanted to spend a maximum of $550 a month, but with a much more reasonable 60-month term. According to the calculator they are looking at a maximum loan of $30,233 including all taxes and fees.

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The 2019 Hyundai Santa Fe is a mid-size crossover about the size of a Jeep Grand Cherokee but comes standard with the full range of advanced safety tech starting at only $26,480. Even if this person added all-wheel drive and a few upgrades they could get a Santa Fe SEL+ for $32,480. Assuming they get a few grand off in their negotiations combined with the heavy rebates coming from Hyundai, once taxes and fees are added back in they would be right on target.

Is the Santa Fe as sexy as a Jeep? Does it make the same style statement? Probably not. But it’s a car that will suit the buyer’s needs, and offer them the features they are looking for, an at a much more affordable price.

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Now the purpose of this exercise is not to convince folks to buy a Hyundai over a Jeep, but rather to illustrate the point that the budget needs to come before the car—and not the other way around. And this was just an example comparing new cars. For a lot of people the best solution is to forgo that shiny new car and to get a value out of a pre-owned model that has already taken a depreciation hit.

Folks who are “overbuying” are usually pushing their monthly expenses to the max, and if a major event happens where income is reduced or an unexpected expense occurs, those buyers can find themselves in a tough spot.

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While it is certainly the case that cars have gotten more expensive and that the average transaction price has out-accelerated an increase in wages, the reality is that the average consumer can’t do anything about the meta-economics of the automotive market. What they can do is shop carefully so that whatever they buy is well within their comfort zone from a financial perspective. Cars aren’t too expensive if buyers are open-minded and rational enough to buy what they need, rather than what they want.

Shop around. There may be something out there that suits your needs just as well as the shiny car you were after, and won’t break your budget.