A lot of people get confused or excited when they see a car dealer advertise a $99 a month payment. Sometimes the dollar amount changes, dealers will use a $47 a month payment or some other low number. I’m going to explain why car ads that use these tricks are usually offering you a bad deal. In fact, I tell people that if a car dealer advertises in this manner they should avoid doing business with them. The reason car dealers use this advertising method is because so many people are fixated on what their monthly payment ends up being and they never understand how that number was generated.
You must understand how a car dealer arrives at your monthly payment to determine whether your $385 monthly payment is a good price or a bad price. Many people don’t understand that two people can have the same $385 payment for the exact same car and one person got a good deal, the other a bad deal! So when someone asks me to evaluate their car-buying skills by throwing out a low monthly payment I simply nod in approval just to be polite. Of course I do not know if they got a good deal or a bad deal and they usually don’t know either!
So let’s look at all the elements that make up a car buyer’s monthly payment so you can make intelligent decisions. Your monthly payment is a combination of the following: an interest payment for your loan, a fraction of your actual loan (if your loan is 48 months you pay 1/48 of the loan each month) along with any other fees or taxes you might have rolled into the deal. These are the separate elements that make up your monthly payment. So you must have negotiated a good purchase price for your car or your monthly payments will never be a good deal. This is true whether you are buying or leasing your next car. No figure has a bigger impact on your car deal than the car’s purchase price – common sense when you think about it.
Now you must take the vehicle’s purchase price and subtract any down payment or trade-in allowance. So if you are buying a $25,000 car and you put $5,000 down or give the dealer a trade-in worth $5,000 your financing figure becomes $20,000. Now we take that $20,000 and add any additional fees you might have rolled into the deal to create the final amount of money you will be financing.
When you go to financing you need to determine how much interest you are paying on the money you are financing, in our example let’s use $20,000. The length of your loan determines the number of monthly payments you will make. A common rule of thumb is the longer the loan and the large amount of money you finance, the higher your finance rate will be. So do not be afraid to ask if your financing gets better if you shorten your loan term.
For instance, let’s say two people are financing the exact same car for the exact same amount of money, $20,000. One person got a rate of 7.9% financing for 60 months. This person will have a monthly car payment of $404.57. The other person got a rate of 4.9% for 48 months. This second person’s monthly payment will be $459.68. Now remember, they both are financing the exact same amount of money, so who has a better deal? Many people instinctively would say the lower monthly payment is a better deal, I disagree. You see, the first person is paying $404.57 per month for 60 months for a total of $24,274.20. The second person is paying $459.68 for 48 months for a total of $22,064.64. The person with the higher monthly payment ends up paying $2,209.56 less for the exact same car!
Now that you understand the process you can see that anyone could buy a new Rolls Royce and have a $99 a month car payment. To accomplish this all you need to do is put about $125,000 down! Car dealers advertise $99 a month payments because they know that any potential customer who walks in the door off that ad is fixated on their monthly payment. This allows the dealer to jack up the financing rate, spread the payments out (some dealers now push 72 month loans). By hiking your rate several points and stretching the payments out an extra year or two the car dealer and the bank will make additional thousands of dollars on every customer! Don’t let this happen to you! Buy smart, don’t be fooled into judging a car deal by the monthly payment, it’s the easiest way to get scammed by a car dealer!