Monthly payment vs total price

When shopping for a car, it's tempting to focus on getting the lowest possible monthly payment. However, it's essential to understand that a lower monthly payment can often lead to a *higher* total cost for your car. Let's talk about how this happens.

Monthly payment

When you finance a car, the monthly payment is the result of three factors: the loan amount (the price of the car minus any down payment), the interest rate, and the term of the loan (how long it takes to pay back). Changing any of these factors can affect how much you pay each month.

The illusion of lower payment

Say you’re buying a

$ 15,000

car and are considering a three-year (or

36

months) loan with a

6 %

annual interest rate. Your monthly payment would be

$ 456.33

. Over the course of the loan, you would pay

$ 16,428

in total, which includes

$ 1,428

in interest.

This monthly payment may be a bit over your budget, so in order to afford it, you ask the lender for a longer term. Here are the options you can choose from:

	$36$ ‍ months	$48$ ‍ months	$60$ ‍ months	$72$ ‍ months
Interest rate	$6 %$ ‍	$6 %$ ‍	$7 %$ ‍	$7 %$ ‍
Monthly payment	$$ 456.33$ ‍	$$ 352.28$ ‍	$$ 297.02$ ‍	$$ 255.74$ ‍

The

72

month loan may seem like a great deal, as the payment is almost half of the original one you looked at. However, what may feel like a budget-friendly decision in the short term could cost you in the long run. Over the six years, you’d end up paying a total of

$ 18,413.28

for the same

$ 15,000

car, which includes

$ 3,413

in interest. That's almost

$ 2,000

extra compared to the three-year loan.

Here is how all the options look like:

	$36$ ‍ months	$48$ ‍ months	$60$ ‍ months	$72$ ‍ months
Monthly payment	$$ 456.33$ ‍	$$ 352.28$ ‍	$$ 297.02$ ‍	$$ 255.74$ ‍
Total cost	$$ 16,428$ ‍	$$ 16,909$ ‍	$$ 17,821$ ‍	$$ 18,413$ ‍

Even though picking a smaller monthly payment might look more affordable at first, you will actually ending up paying thousands of dollars more. If money is tight, choosing to pay the extra thousands for your car just keeps you in debt for longer.

Low payment - high risk

Besides increasing the overall cost of a car, a small monthly payment can also be risky. Cars lose value over time, so if your monthly payment is small, you might owe more than what your car is worth.

Selling the car

If, for whatever reason, you need to sell your car before you've finished making all of your monthly payments, you might find out that the car's value has dropped below the amount of money you still owe on your loan. This is especially likely if you've made a small down payment and chosen a long loan term. In this situation, you’d still be responsible for paying the remaining balance on your loan after the sale of your car. This is what's known as being "upside down" on your loan.

Getting into an accident

Another scenario where this could happen is if your car gets in a severe accident. If the cost to repair the car is more than its current value, the insurance company would consider the car a total loss and pay you its "actual cash value." But like in the selling scenario, if you owe more on your loan than that cash value amount, you'd need to pay the outstanding gap yourself.

In both cases, you end up having to pay money even though you don't have the car anymore. It's like paying for a ghost car - you're paying for something you don't have, and that can be a tough pill to swallow. That's why it's so important to consider your payment and loan term when buying a car.

The importance of choosing the right payment

Being aware of this can help you make a more informed decision when setting up your car financing. It's crucial to consider both what you'll pay each month and what you'll pay overall. Just because it costs less per month doesn't mean it's cheaper. You should aim for a balance that fits your monthly budget but doesn't inflate the total cost too much.

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