Total Cost vs. Monthly Payment

A friend of mine is considering buying a new car and was talking to me about how to negotiate the price.  I realized one of the important things to remember when buying a car (or just about anything on installment payments) is that frequently, you’re encouraged to look at the monthly payment, but the important thing to think about is the final payment.

What does a lower monthly payment cost you?

When I was buying my car, the salesman kept saying “Okay, I can get your monthly payment down to X.  How does that sound?”  And I had to keep reminding him “I want to know what the final cost is, not what I have to pay every month.”  Often, lower monthly payments can mean higher interest rates.  Of course, you definitely need to make sure that you can afford your monthly payment, but if you’re going to be paying a significant amount in interest, you might find yourself reconsidering the purchase.

Some car dealerships will actually refuse to negotiate with you on final amount versus monthly payment.  In my opinion, if that happens to you, you should walk out and not work with that company.

Why do companies offer these sorts of deals?  Frequently because they either own the financing company or they get kickbacks from the financing company.  It’s in their interest for you to take a deal that involves you paying interest.

However, sometimes you can work the system so it benefits both of you.  I have a friend who works at a car dealership.  They get a kickback for every car they finance, but the person who financed only needs to hold the loan for three months.  If they make three installment payments, then pay off the entire loan, the dealership still gets their benefit from the loan company and the buyer has paid very little in interest.  In those cases, the dealer will often give you a lower total payment because they want that added benefit.  It never hurts to ask.

What about No Interest Deals?

If you find a payment opportunity that allows you to pay zero percent interest for a certain amount of time, that can absolutely be worth it.  It allows you to portion out your payments without having to pay a penalty for doing so.  But take note – frequently, these deals are time limited, and the potential interest is secretly accumulating in the background.  So make sure that you pay off the total debt before the time is up, or you’re on the hook for all that interest.