Why you should focus on price versus monthly payment when buying a car
Should you be more concerned with the purchase price or monthly payment when buying a car? Ask ten people and the answers will most likely be split right down the middle. From a financial perspective, however, it’s smarter to negotiate based on the purchase price of the vehicle. The amount of the monthly payment can be sliced and diced any number of ways, but it all adds up to one number in the end.
Why focus on the purchase price vs monthly payment?
The purchase price of the vehicle, plus interest, is the amount of money you will pay over the life of your auto loan. There are several factors that can impact this amount:
Your credit rating: The lower your credit rating, the higher your interest rate. It’s smart to work on raising your credit score before making any large purchase. You are entitled to request a free copy of your credit score from all three credit agencies on an annual basis. Check it thoroughly to ensure all the information is correct, no unexplained delinquencies are noted, and any open issues are resolved. Anything less than an excellent credit rating will cost you more money in interest than necessary.
The term of your loan: A standard car loan has steadily crept from 60 months to an increasingly common 84 months over the last few years. Simply stated, the longer it takes to pay off your loan, the more money you pay in interest, which increases the overall cost of the car.
It seems that most buyers are more concerned with negotiating a specific monthly payment rather than the total price of the car. They have room in their monthly budget for $300 and not a penny more. Kudos for being budget conscious, but understand the consequences of extending the term from 60 to 72 months simply to create a lower payment amount. An additional year of $300 payments plus interest only increases the total cost of the car.
Another consideration is the length of time you plan to keep your car. Will you be ready to trade it in or sell it in 3 or 4 years? How much equity will you have accumulated, especially if you didn’t make a large down payment? Cars generally depreciate 22% in their first year and the longer the term of your loan, the longer it takes to build up equity.
Know your options
While monthly payment negotiations could very well put you in the driver’s seat of your ultimate dream car, it might not be the most financially sensible approach. It’s important to understand the choices, the alternatives and their long-term effects on your wallet. Going into any purchase with the knowledge of how it works and what your options are makes you a better consumer and a smarter decision-maker.