The Lure of Low Monthly Payments

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Low monthly payments sounds like a great thing, doesn’t it? I mean who wouldn’t want to pay a lower amount as opposed to a higher amount. Everything we i love compound interest, ilovecompoundinterest, financial coaching, car payments, low monthly paymentshave learned about money tells us that a lower payment is better than a higher one.

I’ll admit that I’m probably a lot like a fish. I “swim” around and when I see something shiny, beautiful, or delicious looking, I want to strike. The crazy part is on many of those occasions when something looks great and looks like it would be beneficial for me, it is often a lure and not the real thing. One lure that got me in the past was the lure of low monthly payments, especially as it pertained to a new car.

Sales and marketing folks know the right lures to put out there to get us to pay attention and then to also get us to strike. One key fact that sales people know is that often times people are looking to purchase big ticket items prior to saving for the full cost. I totally get it and I’ve done it in the past myself, so no judgement from me. Let’s look at some of the most common ways that sales folks try lure you in. They may say…

“I Can Lower Your Payments”

This statement is most commonly used around a car dealership. In this scenario they approach us with the pitch that we can trade in our current car and you can buy the new car from them while getting your monthly payments lower than your current payment. That is a super shiny lure that we would all want to jump on, right?  So what is really going on behind the scenes when someone offers a lower monthly payment?

Car dealers know that if you have a car that’s a couple years old, it still has value on the used market and you’ve paid the bulk of the depreciation on it already. They know pretty well what you are paying per month because you likely bought it new from the dealer who is telling you they can lower your payment. They know exactly what they can offer you on trade-in and the price of the shiny new car. They’ve already done the math and know that the new loan balance will be a little bit lower than your previous loan starting balance which will then result in a lower monthly payment. They just have to get you hooked.

In my personal experience, this was exactly how this played out. The dealership where I had bought my new car knew what I paid and knew what my monthly payment was. They sent me countless post cards telling me they “want” used vehicle just like mine and they have a “shortage” of good used vehicles like mine and will pay top dollar on trade-in. Oh and of course in the largest print they could fit on the mailer, they would say they could LOWER MY MONTHLY PAYMENTS! If we take what they say at face value and think they really need our vehicle and will pay top dollar, then they totally have us hooked. Not only did my dealership send these mailers they also called me numerous times to personally extend this offer to me and invite me to a “special” event that is for only the highest qualified buyers like me. Who doesn’t like to be told their special and they are the most qualified. Well, as I’ve already revealed, they got me and I was hooked by their lure.

Keep in mind, nothing they are doing is illegal or shady. They are just highlighting key points and putting the appropriate spin on the situation to get us to feel something is missing in our life (a new car) and that they have the perfect solution to that need for us, and of course how they can lower our monthly payment! This just sounds like the perfect win-win situation.

So what really happened? I did go to the dealer and they hooked me. I couldn’t resist the lure of a new car at a lower monthly payment. I got into the new vehicle and started again with a new 5 year note. I learned many things from that experience which I’ll highlight at the bottom of this post.

“What Do You Want Your Monthly Payment To Be?”

This is a variant of the first tactic, but one that car sales people can use whether you are buying a new or used vehicle and regardless of whether you are trading in either. Since they know that so many people are simply focused on what their monthly payment is and not saving ahead to pay cash for a car, they are just appealing to your sense of instant ownership and desire to get you in that new (or new to you) car with the lowest monthly payment possible.

For a car loan, the three variables that affect what your monthly payment will be are the sales price, interest rate, and the term (length) of the loan. The price of the car really isn’t going to change much although you could potentially negotiate some.  And the range of interest rates available to you will likely not be too great either. But, the biggest factor that the car dealership can adjust is the length of your loan. It used to be that a 5 year car note was the longest you could or would think about getting. But research from has indicated that the average car note duration is around 6.5 years. That means that folks are financing cars for 6-7 years without hesitation.

So, will your monthly payment be less with a 6 or 7 year note than it would be with a 5 year note, of course, but you need to look at your total cost of the vehicle and what other factors could be at play.

You have an interest component in every payment you make for that car, so just like a 30 year mortgage has you paying more interest than a 15 year mortgage over the term of the loan, the same principle is true with a 6-7 year car note instead of a 3 or 5 year note. But one rather dangerous thing that happens with a brand new car note of 7 year is that as soon as you roll off the lot, you owe more on the car than it is worth. This is called “negative equity” or sometimes people say you are “upside down” on your car.

This becomes dangerous for a couple of reasons. Should you be so unfortunate to have an accident with your car and it is totaled, your insurance will pay what the car is worth (meaning it depreciated rapidly when you drove it off the lot), so be sure to properly insure it if you do get a 7 year note because you will still owe the bank for the car even if you totaled it and can no longer drive it…plus now you have to buy another car.

The negative equity also becomes an issue if for some reason you are forced to sell the vehicle in the first year or two. Life happens and I’ve seen this first hand with clients and they are no saddled with a car that they can sell, but will still owe money on it and don’t have money saved for a less expensive car. Since a car depreciates an average of 40% in the first 5 years (with the bulk of that happening in the first 1-2 years) you are in a slow race to catch up to your car’s value if you take an extended loan on it.

So What Did I Learn After I Got Hooked By the Lure?

Yup, I learned a lot from being hooked by the new car lure. Here are some of the lessons I learned and hopefully you can learn from me and not get hooked like I did.

  • Buy used vehicles (let someone else pay the huge depreciation in the first couple years)
  • Save ahead for the entire cost of the vehicle (and avoid auto loans all together)
  • Focus on total cost and not low monthly payments (if you still choose to take out a loan)
  • Know the lures the dealers use and focus on the long game rather than monthly (if you choose to take out a loan)

Dealerships know the appropriate lures to use. It doesn’t make them evil; it just means you have to be strong and well prepared to protect yourself and your money. They know that people will not think long term or about the total cost, which is what I failed to do in my previous situation. I hadn’t saved up in advance to buy the vehicle, but now I am saving for when I need to purchase my next vehicle. No more car loans for me!

If you enjoyed this information or know someone who would, I encourage you to share this message with them. And if  would like help taking control of the financial aspects of your life, please consider Aspelin Financial Coaching to help you be victorious with your money! Servicing clients in all 50 states via in-person meetings, video calls or phone consultations.