When most people think about owning a car, they usually think of it as a necessity, and not a luxury. I have seen many people rush into the decision to buy a car, thinking that they can’t live without one. Unfortunately, this can lead to plenty of car buying mistakes.
In my opinion, focusing on monthly payments is probably the biggest car buying mistake that one can make! Actually, whenever you are making a purchase based solely (or mainly) on the monthly payments, you are making a huge mistake.
How Monthly Payment Targets Can Lead To Car Buying Mistakes
Unfortunately, many people in this country have become accustomed to “buying” items without actually having the cash to pay for it. This has lead to an entire industry of furniture/mattress salesmen, real estate agents, electronics vendors, and even car dealers who try to sell you their product based on estimated monthly payment.
There are a number of problems with this (including funding your indulgences by borrowing), but I’ll only focus on a couple here:
Price Is Rarely Discussed
When you are only trying to target a particular monthly payment amount, the price is rarely discussed. Most of the time, the salesman will simply ask you how much you are willing/able to pay each month.
I’ve had a number of car salesmen who virtually refused to discuss the total price, until I let them know how much I could “afford” per month. Of course, when I told them that I wanted to pay cash, they had to back off (or watch me leave)!
If you are buying a product, and you do not focus on negotiating how much you pay this item, then it will be easy for a salesperson to take advantage of you!
Monthly Payments Are Easy To Manipulate
The reason why the dealer is so eager to talk about monthly payments is because they can lower them without losing any money! Here are a few examples…
The salesman can arrange for you to pay a lower amount each month, simply by extending the length of your loan!
If you take out a $20,000 car loan at 8% annual interest for 36 months, your monthly payment will be about $627. Extend your loan period to 48 months, and your monthly payment drops to $488. Your salesman can bring it down to $406 if they set you up to pay for 5 years! If all you can afford is $350, simply agree to pay off this loan for a full 6 years, and you can afford your dream car (actually, you’d still be about $0.66 short)!
The same thing will happen if the dealer is able to workout a lower interest rate with their bank or financing arm. Using the above example, if your rate drops from 8% down to 5%, then your monthly payment will be about $599!
What you will notice in both of these examples is that your purchase price never changed! All the salesman did was manipulate a few of the variables in your loan, and he was able to fit into your budget!
This is why focusing on your monthly payment is one of the biggest car buying mistakes that you can make… The dealer can easily overcharge you for a car, and you’ll walk away ignorant and happy, because you like your payments!
You May End Up Paying For Unwanted Add-Ons
Anyone that has purchased a car from a dealer knows that there are other fees that can get tacked on to the purchase price. If you are only concerned with the salesman’s ability to get you a low monthly payment, then you may just gloss over these other fees, and pay for something that is unnecessary.
Also, many dealers will try to get you to take on extra packages and services, which you don’t need. Again, if you are only focusing on your monthly payment, you won’t see those things. For instance, if you agree to buy a car for $20,000, and you are asked to pay $24,000, then you can ask for an itemized list of taxes, fees, and other expenses, which make up that additional $4,000! But if you agree to “buy” a car for $450/month, you won’t even notice that they are there.
I remember a dealer adding a few thousand dollars to the purchase price of my current car. It was for services and/or packages that I declined, but he left it in the system. I was only able to tell because I was working with all of the numbers in my spreadsheet (not just a monthly payment)! It could have been an honest mistake, but either way, it would have cost me thousands of dollars for something that I didn’t want or need.
Be sure to look at the whole picture when pricing a car!
photo credit: freedigitalphotos.net
Reader Questions
- What are some of the ways that focusing on a monthly payment has lead to financial trouble for you?
- Have you ever noticed how car salesmen are so reluctant to talk about the overall price? How do you handle that?
- Has negotiating based on monthly payments ever worked out in your favor?
