All too often we look at things from their monthly cost instead of the larger, more important picture, of total cost. There were times when these were the same thing. Stores once offered payment plans on purchases that effectively amounted to the 0% interest offers of today, without the associated catches. Offers to accept $5 a month until you had paid the full cost of some mail order item graced page after page of newspapers and catalogs in the early 1900s. Once interest, or the potential for retroactive interest (as is often the case in today’s 0% offers), comes into play, the difference between monthly payment and total cost can be quite large.
We were out with friends recently and they relayed their frustrations in trying to buy a car. They found one that seemed to meet their needs. As the haggling over price began, it became apparent that they were unlike most other car buyers. They kept saying that the price was more than they wanted to pay and the salesman kept asking what their target monthly payment was. These may seem like the same thing, but they are radically different. Would you be interested in a new car if you only had to pay $200 a month? If your first response is “yes”, think again. If it’s “that depends” you’re on the right track. Paying $200 a month tells you nothing about the cost of the car. In fact, as monthly payments get lower, the cost of the car could even be going up. Our friends effectively didn’t care what the monthly cost was, they wanted to get the car for as little total cost as possible.
The salesman couldn’t understand their point. I can only assume this means that the majority of people he deals with are looking to pay a specific amount each month. Obviously monthly price is important. You don’t want to commit more to a purchase than your budget allows. But if you have a set limit of what you can spend each month on a car, it makes more financial sense to find a car that you can afford with a reasonable interest rate and standard terms for that amount. The alternative, creatively structuring your financing to bring the monthly payments of an over-priced (or outside of your budget) car will leave you paying more. Taking a bad deal in small doses may lessen the pain, but why not strive for a better deal to begin with?
While I’ve discussed this topic from the perspective of buying a car, the mindset carries over into other purchases as well. Lynnae of Being Frugal covered this topic as it relates to buying a home in this guest post at fivecentnickel.
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April 10th, 2008 at 12:42 pm
[…] Total Cost Trumps Monthly Payment All too often we look at things from their monthly cost instead of the larger, more important picture, of total cost. There were times when these were the same thing. Stores once offered payment plans on purchases that effectively amounted to the 0% interest offers of today, without the associated catches. Offers to accept $5 a month until you had paid the full cost of some mail order item graced page after page of newspapers and catalogs in the early 1900s. Once interest, or the potential for […]
June 6th, 2008 at 3:57 pm
[…] previously covered the importance of total cost versus monthly payments as it relates to buying a car. It seems that the practice of selling the monthly cost is prevalent in other industries as well, […]