Remember the last time you decided you needed another car and went to shop? What did the salesman ask you... "how much payment can you afford?" Shopping for large purchases can lead you into one of the most common "gotcha's"; focusing on the payment and not on the purchase price. Almost never does the total cost of the vehicle become part of the bargain, but payment does. Why? Because salesmen know that we tend to make our decisions based on short term thinking rather than true costs. The car dealer can get your payment in your price range by changing how long they finance the vehicle, but that may not be in your best interest.
Let's take a hypothetical car. Found one for $24,000 on the internet. Now would you pay $27,000 for that same vehicle? Of course not. But when you finance your car, you choose to pay more to have it by adding interest to the cost of the vehicle.
The salesman asks how much payment can I afford? Most of us have an amount we think we can manage based on our other budget choices. Would I be willing to spend $757? Wow! I would become car poor to forfeit that much from my budget. That is what financing that car over 3 years would cost. At that rate, I would pay an extra $3,000 in interest over that three years. We may think that is too much to pay, but in reality, that is the payment option that lets me pay the least. In three years I would have my car paid for in full and be able to start a savings plan that would allow me to buy my next car without having to finance so much.
Too much to manage, so the salesman offers me a great deal on the car where I can drive today for $497 per month. He just extended my loan to five years and increased my total interest paid to $5,000. Now this car will cost me just over $29,000. The salesman used time to gain the power of the sale.
Let's consider how we can use time on our side. If I were to drive my old jalopy for another 3 years and save the monthly payment in the bank, I could go shopping with a great down payment and not have to bust my budget to have the car I want.
Another option would be to save the payments and look for a nice used car for the money I have. Cash is King in the bargaining world and you can get yourself a great deal if you are willing to pay cash. Be willing to forfeit the payment route and you will find yourself in the power seat with the savings you have accumulated. You will feel good having no payments too!