If You Ask “What’s the Monthly Payment?” You’re Asking the Wrong Question

DSC00451.JPG by jb.atwood on Flickr!One of my friends bought a 2008 Cadillac CTS about a month ago. In order to pay for the $32,000 in debt he incurred, he needed to take out a sizable loan.

The credit union he worked with gave him several options – a 36 month loan at 6.75%, a 48 month loan at 6.875%, a 60 month loan at 7%, and a 72 month loan at 7.125%.

He took the 72 month loan.

Afterwards, he bragged to me about his deal. “I’m only paying $549 a month for that ride,” he told me, believing that I’d be impressed at how cheap he got a very nice brand new Cadillac.

I went home later, though, and ran the numbers. If he had taken that three year loan, he would have paid $988.11 a month. Ouch.

But here’s the kicker. Here’s what he would have paid total on each of those loans.

The 36 month loan would have cost him a total of $35,568.
The 48 month loan would have cost him a total of $36,833.
The 60 month loan would have cost him a total of $38,160.
The 72 month loan, the one he took, will cost him a total of $39,562.

His “sweet deal” is going to cost him an extra $4,004.

Ouch.

Here’s the problem. He led with the wrong question. He focused heavily on the monthly payments without even considering the bigger picture, and for that focus, he’s being rewarded with an extra $4,000 in payments.

Here’s a better plan.

First, don’t buy something that you can only afford with a suboptimal payment plan. Because my friend wanted more car than his wallet should be able to really handle, he’s paying a $4,000 surcharge for the option. If he had waited and saved up a bigger down payment or simply settled for a bit less of a car than a Cadillac CTS, he wouldn’t be watching $4,000 walk directly out of his pocket for nothing in return.

Second, always calculate the total cost of your purchase. That’s the number you should be working with, not the monthly payment. The lowest total cost is the deal that will keep the most money in your pocket.

Third, if you can’t get what you want for that lowest total price, keep shopping. You don’t have to buy today. If you need wheels for the short term, buy a low-end used car that can just serve to get you from point A to point B and wait on the long-term purchase until you have an appropriate down payment so that you can swing the best total payment plan.

Or, best of all, save, save, save and buy with cash. With the 36 month loan, his payments would have been $988. But if he started saving $850 a month right now (yes, $138 less than his payment) and saved that each month for 36 months in a 3% savings account, he’d have enough to pay cash for the car he wanted. That plan would cost him only $30,600 – a savings of $4,968 over even the best payment plan.

What’s the take home message? Looking at just the monthly payment when you go to take out a car loan – or any kind of installment loan, including mortgages – will almost always hurt you in the end. Instead, look at how much you’ll pay in total – that’s the number you want to be low. If you can’t afford those monthly payments, then you’re buying something more expensive than you can really afford, anyway.

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75 thoughts on “If You Ask “What’s the Monthly Payment?” You’re Asking the Wrong Question

  1. bob says:

    I disagree, the 72 month loan didn’t cost him $4,004 more. If he invests the difference of his payments over the 72 months, he may actually come ahead with the longer loan, depending on how the market performs over that period.

  2. Steve says:

    Agreed. For $549 a month, he could have paid for a new Honda Accord or Toyota Camry in less than 42 months with nothing down at the 48-month interest rate. Saving that $549 a month for less than three years would by that new Accord or Camry outright for cash.

  3. jake says:

    I wanted a fairly expensive car, but completely affordable to me. I did the numbers and to get the best out of it I had to put down a large down payment. I saved up and recently bought the car. Over 5 years I will be only paying $1000 of interest, which isnt bad (well, to me anyways). Giving away $7,562 worth of interest over 6 years is a lot to me.

  4. chris says:

    Another way to save that 4K (and then some) would have been to purchase a pre-owned car. I recently bought a 2007 in the model I wanted, and saved myself 7K (not to mention the finance charges by purchasing with cash).

    Everyone drives a used car, why not just start with one?

  5. paula d. says:

    All I have to say is ouch! Any way you slice it, it’s still a lot of money.

  6. That’s what my husband always says when he’s car shopping….”Don’t talk to me about monthly payments!”

    Jake, your plan sounds a lot better. We’re trying to save up to buy the next car in cash, but we’ll probably end up taking out a small-ish loan, unless things start looking way up financially for us.

  7. Elisabeth says:

    I agree with Bob.

  8. RDS says:

    I am amazed at how we have let cars dominate our lifestyle and transportation options in North America. My wife and I have been married for for almost seven years. In these seven years we have lived in five different cities – 3 in North America and Two in Asia. For three of years we have had one car and for the other four we have been carless by choice. We have relied on bikes, buses, trains, and occasionally taxis to get us where we need to go. By carefully choosing where we live we have been able to get by with one car or no cars. As a result we are happier, healthier, and wealthier.

    RDS
    http://financialvalues.blogspot.com/

  9. Slowfit says:

    Well, people always talk about investing the difference. I don’t think it happens too often.

    But realistically the guy with the lower payment will trade in the car in 2-3 years, and then roll into another payment. It is sort of like leasing, most people always have a payment, they get bored with cars after a couple of years.

    It doesn’t pay in the long term, but that’s how most people do it in the middle class.

  10. KC says:

    I’ve researched that particular car as I’ve considered buying one. They depreciate quickly, which would make me lean towards buying one used. He could get a 3 year old version of that car for b/t $19-$20k, assuming its the 2.8L engine, and those are Carmax prices, which tend to run a little high.

  11. Marcin says:

    Ok guys I love these things. OK so I bought a 2009 Accord for price u want to know ok $24,250 plus tax which came out about 26 K with tax. Now I told a friend of mine I bought at a great price. Year 2009 below invoice!! A lot of people were supprieed I got this rate. So my friend she went to buy the same car. But her car will cost her 35 K. She went to the same dealer same guy I referd her but she didn’t listen. She went and got the loan at the dealer. In addition to a 7% loan she got extra 2K warrenty plus 800 Alarm. (thats a 3K gift for the dealer). That is how they make their money. Please be smart!!!

  12. Johanna says:

    I don’t understand the last sentence of the article.

    “If you can’t afford those monthly payments, then you’re buying something more expensive than you can really afford, anyway.”

    First of all, which monthly payments? For the 3-year loan? And doesn’t it go against the point of the article – namely that affording the monthly payments is not what you should be looking at? Or is there a typo in there somewhere?

    I always thought that the reason long-term car loans are bad is that five or six years from now, you won’t have a nice brand new Cadillac – you’ll have a five- or six-year-old Cadillac. And if you’re the type of person who would buy a brand new Cadillac in the first place, it’s unlikely that you’ll be satisfied with a five-year-old Cadillac five years from now. So you go out and buy a *new* new Cadillac, and roll the balance of this loan into the next one, and then the trouble really starts.

    But since I’m not so interested in cars, I’m trying to figure out how the logic of the article applies to houses. Should you always take a 15-year mortgage instead of a 30-year one? Or take the 30-year mortgage, but only if you could have afforded the payments on the 15-year one? Or don’t buy a house at all unless you can pay cash? Or what?

  13. David says:

    There is a better deal than cash and that is those 0% loans (even though We probably aren’t going to see them ever again)

  14. UltraRob says:

    Last time I bought a vehicle was 5 years ago and it was a used one. The car salesman kept asking me how much I could pay a month. I kept telling him I wanted how much the vehicle was going to be with my trade in. I told him that’s all I wanted to talk about. I’d figure out how to pay for it once we agreed on the price. I got so frustrated with him trying to keep going back to monthly payment. I finally left. We were close to the price I wanted and it was the vehicle my wife wanted. We went back the next day and got them down a little more and bought it.

  15. Brendan says:

    I emphatically disagree with Bob. Investing borrowed money (which is what Bob’s suggestion ends up being) is quite risky. Even at the best of those rates, you are borrowing at a 6+% rate in order to invest? What guaranteed investment do you know about that the rest of the market doesn’t that can generate 6+% returns with no risk? That is what is required to break even adjusting for risk. It just doesn’t make any sense.

    You should never buy a depreciating asset on credit that is not critical. I think it is pretty clear that a Cadillac is not critical. If you need to take out a loan to buy a luxury, you just can’t afford it.

    Also, another point: the total cost of ownership of a car is much more than the sticker price, even if paid in cash. There is fuel, repairs, tune-ups, registration, insurance, car washes. Some of those might be toss-ups assuming you are going to need to pay them no matter the car you buy (registration, for example). But the others can vary drastically based on the car and should be built into any cost calculation. If you work up honest numbers for car ownership the sums involved can be quite surprising.

  16. Marcin says:

    Forgot to mention 2009 Accord EX-L 4 Cyl Retail is like $26,920.

  17. Trent – What I would like to hear is exactly what you said to your friend after he told you his great news? Did you give him some education? I don’t know anyone who would be careless enough to brag to me about their monthly car payments!

  18. DJ says:

    I disagree with Bob and Elisabeth based on running a few numbers.

    If you take the 6-year loan ($549/month) instead of the 3-year loan ($988/month), you are left with $439 ($988 minus $549) extra each month by taking the lower payment. If, over that 6-year period, you invest the extra $439 each month, after 6 years, you’ll have saved $42,830 (assuming a generous 10% interest in a growth mutual fund). In this scenario, your cost for the car was $39,562, you saved $42,830 and you’re left with a $10,000 car (I’m guessing that’s what the car would be worth). That’s a net $13,268 over the 6-year period.

    If you take the 3-year loan ($988/month), pay off the car in 3 years and then invest $988 each month for the last 3 years of the term, you will have saved $41,352. In this scenario, your cost for the car was $35,568, you saved $41,352 and you’re left with a $10,000 car. That’s a net $15,784 over the 6-year period.

    Comparing the 2 scenarios, you’d come out ahead by $2,516 by taking the 3-year car loan and investing over the last 3 years instead of taking out the longer-term loan and investing the difference.

    The best option (in my opinion) is to save up and pay cash, but the argument that you have a better chance of coming out ahead with the 6-year loan doesn’t hold much water.

  19. Nathan Pralle says:

    Having bought several cars now, most of them new, my biggest admonition is not to worry so much about the size of the payment nor the interest that you’ll pay in the long run (although your article is spot on about how taking a longer payment can screw you in the end), but look at the RESALE value and, more importantly, how long will it take before your loan is “right-side up” again?

    As most of us know, new cars depreciate fast. Just driving them off the lot makes them lose a lot of value. If they loose TOO much value, they become upside-down, which means that your loan is greater than what you can get for the car on trade-in or private sale. That puts you in a very bad situation because you have less good options if you need to get rid of that car.

    In 2003, I bought a sports car. Perfectly affordable, nice 5-year loan, well within my budget. Unfortunately, it took me 4 years to get the loan right-side up so I could get rid of it because we had a baby on the way and needed something family-friendly. I wished more than once I had looked at resale value vs. the payments or the cost — I would have had a lot more flexibility.

    After all, if you buy new (or even if you buy used), how many people keep their car all the way through the payment? Some do. A lot don’t. Don’t lock yourself into something that you’ll regret later.

  20. $650. A nice intro level Giant OCR road bike.

    Honestly, I have recently decided to go car-free. It’s so nice to not have to worry about these types of decisions including: gas, maintenance, [sort of] insurance, and all the hidden costs.

    Read more about my car-free experiment at http://www.goingCarless.com

  21. AzBearin says:

    geez besides the cost of buying that Pig, what is he going to pay for upkeep and gas??!!! Gas prices may have dropped now but seriously does he think they are going to stay low…I expect to be paying $5.00 and more per gallon of gas for the foreseeable future…..

  22. rstlne says:

    I’d go for saving up and buying the car with cash because that’s the only way I’ve ever done it. Why drag around the ball and chain of monthly payments when you can have it free and clear?

  23. Kacie says:

    Bob, I honestly doubt that someone who thinks a $549/month payment is a good deal would be the kind of person who invests the difference. Sounds like he’s not so good with money concepts, ya know?

    My parents recently bought a ’04 CTS with 14,000 miles on it. They paid about $17k. Still pricey, if you ask me, but WAY less than $40k!

  24. yoyoguy2 says:

    Though i agree with the premise here, what about considering the cost of inflation with longer term loan? On any loan with a fixed payment, the payment essentially becomes “less” as time goes on, because inflation continually devalues the dollar (and hopefully, also, you’re getting cost of living raises, so it becomes a smaller percentage of your pay). Assuming 3% inflation, that final $549 payment in 6 years is the equivalent of only $458 today.

    Secondly, and more importantly I guess, I’m blown away that people drive new cars at all. I mean, honestly I can’t imagine a $900 car payment.

  25. Trent says:

    “I disagree, the 72 month loan didn’t cost him $4,004 more. If he invests the difference of his payments over the 72 months, he may actually come ahead with the longer loan, depending on how the market performs over that period.”

    I disagree. You’d have to make a ~killing~ in the market in the very short term in order to cover the taxes on your earnings and the savings on interest on the loan, which is after-tax. My back-of-the-envelope calculation says your before-tax return would have to be around 16% annually. If you’ve got an investment that can do that without risk right now, I’d love to hear about it. So would Warren Buffett.

  26. Krista says:

    Sort of on the same vein as Bob, loans aren’t always bad. There is something to be said for cash flow and liquidity.

    We just bought a car. A new one. And for us the loan decision was cut and dry, the loan’s interest rate is 0.9%, and my savings account is 3%. So I’m 2.1% better off getting the loan and keeping my moner in savings for as long as possible. And that’s what I did – I put $0 down and $15,000 in savings.

    The other considerations are that in the mean time, I have that liquid asset. If there’s a dire emergency, and my 3 month emergency fund doesn’t cut it, then I can use the cash to keep the roof over my head, rather than sleep in the car because I couldn’t liquidate it.

    Or, even if it’s not an emergency, let’s say I want to buy a house in the next 5 years. I can add that cash to my existing down payment and save the 5.5% mortgage interest and mitigate a larger debt by taking on a smaller one to begin with.

    I do get what you’re saying, many people don’t think in terms of total cost and get into trouble. But for the ones that do, some debt can actually be a useful financial vehicle in the long run.

  27. Krista says:

    yoyoguy: I never even thought about that, but that is a great point.

  28. Lurker Carl says:

    The killer with a 72 month loan is the automobile is worth less than the payoff throughout most of the loan period. That means you’ll owe the difference if the car is totaled or stolen. That also means you’ll not get out from under the debt if you need to sell that car, like if you lose your job.

  29. Matt J. says:

    Wow, he got killed.

    He could have purchased a certified/used 2006 CTS with less than 20,000 miles on it for around $21,000.

    In other words, he could have paid about half of what the new car will end up costing him, but still enjoyed 90% of the life of it.

    Saving almost $20,000 beats ANY interest rate or down payment plan hands down.

  30. Russ says:

    “for nothing in return”

    He did get something in return that was important to HIM: The use of the nicer car than he’d have otherwise had. Just because it’s not important to you, doesn’t mean it isn’t to him.

    I personally wouldn’t have done that either, but there are things I do buy that he wouldn’t buy, etc. Everyone is different, and being happy is all that really matters, and if the money is less important to him than the car, that’s his choice. He is the one that has to live with it, not you.

    I guess my issue here is that you talk about the purchase as if it’s a black and white decision, when it isn’t; After all, he is just a human being.

  31. asithi says:

    Why is it the worst the financial decision, the more people feel they need to brag about how great it is? My friend recently brought a $43k Tundra. Her excuse, they need a new truck to tow their new jet ski. “The truck is such a great deal since they got it for 0% financing.” I mean if you overpaid, you over paid. No matter what the financing is.

  32. Solomon@ThingsI'mGratefulFor says:

    Wow. That sure is a lot of money to pay for a car. I bought mine for £700 (about $1,400) over 6 years ago, and it’s worth more now than what I paid for it, because it’s a classic.

    I bought this specific model because it’s cheap to run, tax, insure, etc. It’s still going strong. I see people spending great sums of money on cars, and I wonder if they’re actually any better off. I don’t see how they are myself. Especially when you factor in an interest value. The only time I want interest is when it’s in MY favour, lol.

  33. Chris says:

    When I bought my car 6 years ago, straight out of college, I went to the dealers and told them what I wanted to pay per month they kept coming back with 72 month and more payment plans.

    I kept telling them no, this is what i want to pay for this payment plan (i think for some reason i insisted on 60 months).

    And I got my price. I did buy more car than I needed (Acura TL). But, having virtually no expenses coming right out of school and living at home I paid off the car in a year, while also keeping 6 months of expenses in an emergency fund until i paid off the car.

    The more I read about personal finance, the more I realize I’ve always known the fundamentals, just without ever putting a name to them.

  34. Chillyrodent says:

    This makes me ill. We just bought a house, and our mortgage payment is $402. I would need that bad boy equipped for full-time living for that kind of money.

  35. leahbird says:

    Just wanted to throw my two cents in… My husband and I started our marriage with 2 car loans totaling around $500/month. We finally woke up and realized how much money we were wasting. We sold both cars and bought 2 older cars in cash. This started our debt snowball, and I am proud to say that in less than a week, we will be completely debt free!

  36. Chris says:

    That makes me ill that you just bought a house and your mortgage is only 402!

    I’m looking into settling for a condo and the mortgage might cost me $2000 a month

  37. Turk says:

    You don’t suggest the best option of all … pay cash; you will pay ZERO interest!

    Why pay more for a car than the asking-price (i.e. asking-price plus interest)?

    Watch this SNL video:

    http://consumerist.com/consumer/clips/snl-skit-dont-buy-stuff-you-cant-afford-252491.php

  38. Amateur says:

    How come no one mentioned the option of leasing this car? The car wouldn’t be worth anything after 6 years of wear and tear, anyway. He would have faired out better leasing this car for 3 years, and have a new Caddy to drive on a new lease when the old one runs up. Also, the maintenance on that bad boy would be sky high after the warranty runs out, paying that price for 6 years doesn’t seem to make sense. Low end, middle range sedans are worth buying, it just works out better when looking long term. But buying a luxury car versus leasing one, the lease is a better deal. He could have invested his cash modestly while leasing and came out far better ahead.

  39. Sharon says:

    I think that you have to look at both sides of the question, the monthly cost and the long term cost. Sometimes people can’t do what is best in the long term because of short term finances. It may be best in the long term for me to put $200 in retirement savings a month, but because of under-employment it would put me in arreers with my landlord…yeah, landlord gets first priority. If I needed a car to get to work, and had no money saved, yes, I would take out a loan. However, to sacrifice that much long-term money for pride and coolness…no way.

  40. Lurker Carl says:

    Amateur, show us the math. Renting new luxury cars for the rest of your life never makes sense. The residual value drops like a rock for most luxury makes, more so with American cars. That makes for expensive leases.

    Even a leased vehicle under warranty requires maintenance and repairs, then the leasing company nickel and dimes you to death when your lease ends. Excess mileage, overdue maintenance, wear and tear, dings, stains – every possible imperfection will come out of your pocket when the lease terminates.

    If you must have a Cadillac, pay cash for the off-lease model of your choice and drive it until the wheels fall off. Let the original owner pay the depreciation. You’ll save much more money in the long run.

  41. Amateur says:

    Yes, I was hoping the buyer would lease the bad boy and realize maybe it’s not for him, that a middle range sedan would do just fine. There’s no way leasing luxury cars for the whole lifetime would be worth it, but it’s a good way to try it, without shelling out $700 a month to own it.

    I agree with paying cash for a used ride, a good one, too. But some folks will insist on going brand new and higher priced, and end up trading it in before they even pay it off.

  42. First, never buy a new car. It loses 25-35% of its value the second you drive it off the lot. Find a clean, well-maintained used car instead, and have it checked by your mechanic before you buy. If you MUST have the “new car smell” take it to a detailer and they’ll clean the car and add the smell, LOL!

    And…before you go shopping, arrange the best financing deal you can find with your bank or local credit union. Then negotiate the best price you can with the dealer, letting the dealer think that he’ll make his money via the financing. Once you’ve agreed on a price, pick the best finance rate, choosing between the financial institute and the dealer.

    But…! always ask any dealer about your total out-of-pocket costs! It’s astonishing how “dealer prep” and other fees can substantially hike what you thought was a great price.

    Finally, never be afraid to walk away from a deal. Never fall for the “once in a lifetime, good only for today” pitch…no matter what you purchase.

  43. jake says:

    @Cathryn Sykes comment#26

    “First, never buy a new car. It loses 25-35% of its value the second you drive it off the lot.”

    I dont mean to offend by any means but this statement always baffled me. If it were worded to say “Never buy a new care, IF you could not afford it” then I would agree, otherwise I would have to say no.

    First, if nobody buys a new car, then there will be no “used” cars out there (I am over simplifying here. The 25-35% is applied to ANY car driven off the lot, used or new.

    Second, new cars constantly have improved emmissions and better gas miliage. If you keep buying used cars you are allowing these inefficient and environmentally bad cars to remain on the street. I know people who are driving around average 10-15 miles a gallon on a used car.

    Third, used cars can be a hit or miss, and when you miss it is a nightmare. My friend bought a used Audi A4 with 70K miles, last year. He has already spent 5 grand on repairs (this is straight from a Audi dealer) they keep saying this or that is not working but NOT covered, so its straight out of his pocket.

    Do your research and buy within your means (also calculating cost of maintence and repairs down the road).

  44. jtimberman says:

    Ugh.

    “How much per month” is why leases are so damned popular. It is a very easy sell, because the finance terms are more amicable for the dealer. Dealers make more on the lease than they do on the actual car. Maybe that should tell you something, that maybe it isn’t such a good deal for you?

    The best way to buy a luxury car is the same as it has ever been: buy a late model used car where someone else already took the depreciation hit, and PAY CASH. Don’t ask how much down or how much per month. Ask “How much?”

  45. Kevin says:

    6 year car loans are the ARMs of the auto financing world. I.E. they are sucker bets.

    PS – is your friend a 60 year old man? I can’t see a 30-something like yourself driving a Cadillac.

  46. Carlos says:

    Your “friend” isn’t John McCain, is it? He drives a CTS, but, I’m guessing, probably wouldn’t brag to you about the financing deal :-)

  47. Macinac says:

    Several years ago I had a consulting gig in Bismarck ND. The salesman I worked with out there was from South Dakota with a big geographical territory. He took me to lunch in his Cadillac, which I remarked on. Looked new to me — not being one who keeps track of Cadillacs — but he told me it was two years old (I think) and cost the same as a new Ford Taurus. So he had bought a post-initial-depreciation ride and was cruising the wide open spaces in Cadillac style for a Ford price.

  48. Sonia says:

    We just bought a new truck at 0%

  49. Tax Resource says:

    The market the way it is now, your friend could have held off or made an offer. But the best strategies are to pay cash, get the lowest rate of interest possible, and pay weekly if allowed.

  50. Melinda says:

    I work with a girl who recently leased a vehicle (salary sacrifice) and is making a fortnightly payment of just under $300. Paying cash the vehicle is worth around $14,000 on road. It’s leased for 5 years, and the lease includes rego and fuel. Work that out… 26 payments every year of $300 = $7800 times five years = $39,000. For a $14000 car!!!! At the end of the five years they won’t even own the vehicle, it will have a $7,000 residual to pay out!

    I tried to talk her out of it, however she kept pointing out that she was saving around tax (around $500 max per year I estimate) and that rego and fuel is included. I have a vehicle (18 years old) with a larger engine and I spend roughly $1560 per year in fuel. $400 in rego.

    And the real kicker? She doesn’t even have her licence yet! Her partner does the driving so they now have two cars, this was to be her car so she could get her licence and six months later she still hasn’t driven ‘her’ car more than three times.

    Oh yeah, this is the same person who leased a $2000 laptop because two of us in the same work area both bought laptops recently (we both of us paid cash and in my cash it’s a tax deductible expense). They now have four computers (none more than two years old and two of them leased) for two people.

    Then she mentioned one day that she couldn’t afford to stop working and stay home with their child. I did point out that I had mentioned that when we were talking about her car payment. She just doesn’t get it. :-(

  51. TParkerson says:

    Thanks for the interesting post Trent…brings up the point that it is human nature to get attached to our “toys”. I have had some beaters in my life and have also had some fabulous vehicles; both got me from point A to point B…well usually!

    I am currently driving a 2003 Chevy Tahoe, which we bought used from my BIL, who owns a dealership. (This is a great advantage, by the way!) It was a sales-persons car…had high mileage but little wear. Has all the bells and whistles and I intend to keep it for a very long time. We did finance it but thru our CU with a very good rate for short term.

    I would add my thoughts to the chorus…do your research. Know what options you need and what you should expect to pay. Don’t overlook trade-ins at a dealership, particularly non-model trades (ex: a Toyota at a Ford dealer). With the internet, there is absolutely NO reason why anyone should step foot on a lot without having seen most of what’s available in their area.

    Also, be prepard to be rather ruthless when you do step on the lot…salespeople WILL try to emotionally attach you to a vehicle. I once saved about $300 a month on a vehicle because I refused to take the vehicle home while the finance manager worked on the numbers to get them where I wanted them to be. It takes chutzpah to walk away from the vehicle you want but it almost always works in your favor if you are committed to do it! Avoid the weekend test drives too…once you experience the “cool factor” from friends and loved ones, you will do whatever it takes to make the deal.

    Hope everyone has a great day. Time’

  52. Laura says:

    Great points Trent. I got stuck with a bad car loan by not looking past the monthly payments.We accelerate our payments and will have it paid off about 2 ears early.
    If you’re considering getting a car, use Trent’s advice.

  53. Amanda says:

    I’m about to buy a ’01 car (no frills), in good shape, under 50k miles for under $4k. That’s less than the *extra* he’ll be paying for his good deal.

    I mentioned I was getting a car to a friend (I haven’t owned one in over 1.5yrs) and she automatically said “Hello payments”. To which I had to clarify I was paying cash.

  54. Ian P. says:

    Other folks have mentioned to buy used, but it’s especially relevant when buying “American”. GM vehicles in particular depreciate like crazy in that first year. Your friend could have saved $15,000 by buying a 2006 (I believe the 2009 CTS is a complete re-design, and maybe he loves the new look). A quick check of cars.com in my area (Orlando) shows 2006 CTS’s for under $20,000.

    Luxury cars, as well as American cars are the very best candidates for buying used.

  55. bob says:

    Trent,

    On comment #15, how do you get 16%, I’m getting 7.125% * 15% (long term capital gains rate) = 8.19% to cover the car loan interest rate. When it comes down to it, most investors who dabble in margin accounts, would kill for a 7.125% margin account interest rate. Either way, it is not likely a $4000 loss IF (big IF) the buyer invests the difference. With markets down right now, this potentially COULD be a good move.

  56. Brandon says:

    $4,004 extra for driving a “new” car for 6 years comes out to around $1.82 a day. A cup of coffee, everyday. Maybe for some people it’s worth it.

  57. K says:

    @Cathryn Sykes
    I disagree that buying new is a bad deal. My family has always bought new cars and kept them for 12-13 years. Buying new gives you a warranty (mine is 6 years) and the benefit of knowing exactly where it has been and how it’s maintained. They also seem to last longer. I paid $16,500 for a brand new car that will last 12 years. That’s the equivalent per month of buying a used one for $9600 and keeping it 7 years, not to mention lower maintenance costs.

    @Marcin
    A friend of mine bought a 2009 Accord for $21,500 (final price), so how’s that for your so-called good deal?

    I’ve had the same thing happen. A friend of mine told me her car payment was $590 and I thought “that’s nice… my mortgage is $550 and I can live in it!”

  58. Mike says:

    OK, I’ve been bad. I had a moment of weakness. I found a truck that blue booked out at $21,500 and I got it for $13,800. I was bad because I financed it. So that $13,800 + taxes plus payments etc. will add a couple thousand to that amount. As expected, the dealer did stick with the “monthly payment” negotiating thing. I was ready for that so I took the price of the truck with my own monthly payment in mind before I talked to the salesman. There was a bit of haggling but we agreed to an amount finally. I added $12 per month for a 3 yr/36,000 mile bumper to bumper warranty as well. I guess on the positive side – my wife and I will bombard the payment book to pay it off early. The credit union has no early/pre-payment penalties. This is just what happened in our family, I still agree that cash talks. If you can save – it’s better in the long run.

  59. Battra92 says:

    I bought a new car in September 07. For some reason (despite having just fine credit) I couldn’t get all that great of financing on it.

    I will have it paid off by January so I guess it’s not that big a deal, right?

  60. Trish says:

    I have a problem where, due to a business-related bankruptcy, I cannot get a loan for an amount of money that will be affordable to me in a 36 month term. I wanted to buy an economical used car for about $9,000. I could not get a loan for less than $15,000 or a car older than 3 years old. So I had to go for a newer, more expensive car, with a longer term so that I could have a car. I commute quite a distance so a beater car I could buy for cash would kill me in both gas and maintenance costs. The moral of the story is, keep your credit up!! The worse your credit rating is, the harder it is for you to stay out of debt, ironically.

  61. Krista says:

    To say “never buy a used car” is just not reasonable.

    We bought a new car for $26k with 0.9% financing. We looked at buying it used, but our particular model doesn’t depreciate as much as others – certainly not the cut-and-dry 25% you guys have saying.

    A 3-year old car would have cost us $21k and the best financing we could get would have been 5.5%. In the end, the used car would have been $1000 cheaper by the time we paid it off.

    Judging by previous comments, I’m sure you’re all thinking “well, then, the used car was the better deal”.

    But there are lifestyle issues to consider. We want to keep our car for many years. ALL of the used models we found (and we looked for 6 months) were the basic, no-frills packages. In a few years, when I’m (hopefully) driving my young family around, I’ll want some extra safety and conveniece features that I could only get by buying the car new. Had we bought the old one to save a penny upfront, we would have had to spend a dollar later on getting an even newer one to fit our new needs.

    New cars aren’t always wrong, used ones aren’t always right. Same goes for loans vs. cash. The point – and I think the point of the post – is that you need to look at the whole picture, and think ahead to the end result.

  62. Meg says:

    “Or, best of all, save, save, save and buy with cash.”

    I love it! If only we all had the discipline to do this. The key here is delayed gratification, which none of us like. We do really well until that moment of weakness. My father always taught me to shop and walk away, even if you have to do that many times. Not so the sales guy will give you the best deal, but so you are sure that financially you are making the best decision. Boy, how I wish I had always followed his advice. Impulse decisions have been my downfall more than once.
    Now we are actively saving for the next big purchase, wanting to not go credit again (unless it is for an income producing asset).

  63. John says:

    @ K, thats nice, keep one upping everyone!

    I bought a new car, and this was 4 years ago, with Zero down, and 0% financing for 5 years. Warranty has covered the very few things (ignition lock, and some sort of rod). You can get a new car and make out ahead depending on the situation at that specific time.

  64. Christine says:

    $39,562 – $35,568 = $3994, not $4004.

  65. Curious Buyer says:

    Ok, I don’t usually get involved because I’m a “middle of the road” mentality (which usually means EVERYONE on these things tells me I’m wrong) but I’m curious TRENT, what’s your opinion of doing a 60 month loan if it’s a 0%? Can you give me a reason that it is a bad deal? (Other than OMG invest that money, please. This is a dream car I would be getting – as in one of my savings goals that I am working towards anyway.)

  66. Amateur says:

    Coming from a family that drove 2nd and even 3rd hand cars forever, and using those vehicles until the wheels fell off, I am pretty much against financing for these things. But 3rd hand cars are very expensive to repair unless you buy them from people you know, who take very good care of their cars. Those 3rd handers were the gems of the family, bought from family friends who treat their stuff like it was worth more than what they paid for.

    Some new cars have great deals for their lower end models, with 0% financing, 36 months, and new everything, it’s not so bad for a new ride, if you have most of the cash to pay it off quickly.

  67. Marcia says:

    We bought our first new car a couple of years ago. Previously, they had all been used. We got a new one because we couldn’t find a used one in the type of car we wanted (Toyota Matrix) because they were new.

    I did my research before going. We didn’t *need* the car that day either. And every time the salesman tried to say “what if we can get your payment to under XXX”, I said “I care about the total cost of the car.”

    In the end, we negotiated the car price, the trade-in, and the financing completely separately. They gave me my price when I said “it’s 4 pm, I’m tired, my son is tired, my husband is tired, we’re leaving”. And when we moved onto financing, I wrote a check for the full amount.

    We buy a car about every five years (we have two cars, and we drive each car for 9-10 yrs).

  68. mike c says:

    I think there is not enough emphasis on paying your car with cash. You should not be happy about the $549 monthly payment… you should be devastated for all the money you are paying in interest!!! The only reason you should take financing for your car is because you have no other choice. Can you buy a cheaper car? Can you wait to buy the car?

    If you can afford to pay $549 a month for 5 years for a car, you should be able to save $549 per month for the 5 years after your car is paid off and be able to afford a new, top of the line, car… But of course you need to keep your car for 10 years…

    And you could pretty much say the same about leasing. In my opinion both leasing and financing are ways for the dealer to make more money out of the sale. Except for a few cases, most times they are just gimmicks to take your money.

  69. Bill in NC says:

    New car = buying service.

    Better price than you will get from a dealer on a lot.

    Dealers have much more experience in negotiation than you ever will.

    Don’t sell (“trade-in”) your car to a dealer either.

  70. Jerry A., Frederick MD says:

    One often overlooked item during leasing discussion is negotiating the price. The monthly lease price is based upon a formula ([new price - residual value]/time). You can negotiate the “new price” for a leased car just like a purchase, dropping your payments. Mind you, I think leasing is not a good deal. It might work for businesses that can write the cost off as a tax deduction, but for most people it is a waste of money.

  71. DaveOR says:

    I guarantee that he will want to get something else in 2-4 years, with a 6 year loan and be upside down – with the car worth less than the debt is. Then the next dealer will offer to roll that difference into the next car loan so that he’ll start out upside down before he leaves the lot – usually you have to leave for the value to drop. This is the first step in the series that got us as consumers and a country to where we are.

  72. Marcia says:

    FWIW, we traded-in our 12-year old Saturn because it was a bit of a lemon. Any time it rained, the battery would die (luckily for us, it doesn’t rain often in So. Cal.). About 5 years of occasionally taking it to get it fixed resulted in it working for a year or two, and then with the same problem.

    I would have felt really guilty selling that lemon to some poor soul on the open market, but felt just fine turning it over to a dealer.

  73. JimmyDaGeek says:

    You’re missing the point. Your friend has no intention of keeping the car for the entire loan, nor does he have any idea how long he will be upside-down. He only looks at the monthly payment because he believes in making car payments for the rest of his life. He really doesn’t want to buy a car. He wants to rent one until he gets tired of it or next big thing hits the market. So, from his point of view, the monthly payment is important because he never calculates the total cost of ownership.

    For us frugal people, this is a totally foreign concept just like our idea of owning a car forever is repugnant to him.

  74. steve says:

    yoyoguy and the first poster may be correct. The interest rate differential between the 36 month loan and the 72 month loan is approximately 1.2%. It is quite easy to earn at least 1.2% on an investment, even in this climate, and even considering taxes on returns.

    If someone wants to do a more elaborate proof, fine, but on the face of it it seems that taking the longer loan is NOT a bad deal and you would come out ahead if you took the difference between the 36 month payment and the 72 month payment and invested it in almost anything, from orange direct savings account on up to equities.

    I will leave aside the issue of the wisdom of purchasing a $26,000 automobile new. But assuming that you are going to do that, the first poster and yoyoguy are correct.

    And Warren Buffett would concur.

  75. steve says:

    actually, I just rechecked Trent’s post and the interest differential was only 0.375% between the 36 month and the 72 month loan. Leaving aside cash flow issues and overall wisdom/affordability of the purchase, it is by far the best financial move to take the longer loan and invest the monthly difference in payments, because even a savings account that is taxed at 15% or 20% would only have to earn 0.47% to break even with that. Ing direct is offering around 3% now.

    Also, as another poster pointed out, this scenario only gets better as time goes on, because the fixed payment for the car becomes adjusted downward by at least 3% annually in real terms when accounting for inflation.

    It looks like Trent’s friend got it right, but for the wrong reasons and unknowingly.

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