Many people get confused or excited when they see a car dealer advertising a payment of $99 a month. Sometimes the dollar amount changes, distributors will use a monthly payment of $47 or some other low number. I’m going to explain why car ads that use these tricks usually give you a bad deal. In fact, I tell people that if a car dealer advertises in this way, they should avoid doing business with them. The reason car dealers use this method of advertising is because many people are fixated on what their monthly payment ends up being and never understand how that number was generated.
You need to understand how a car dealer arrives at your monthly payment to determine if your monthly payment of $385 is a good price or a bad price. Many people don’t understand that two people can have the same payment of $385 for the exact same car and one person got a good deal and the other a bad deal. So when someone asks me to rate their car-buying skills when paying a low monthly payment, I just nodded my head in approval just to be polite. Of course, I don’t know if they got a good deal or a bad deal and usually they don’t either!
So let’s take a look at all the elements that make up a car buyer’s monthly payment so you can make smart decisions. Your monthly payment is a combination of the following: an interest payment on your loan, a fraction of your actual loan (if your loan is for 48 months, you pay 1/48 of the loan each month), along with any other fees or taxes that can pay. They have entered 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.
You must now take the purchase price of the vehicle and submit any down payment or trade-in allowance. So if you’re buying a $25,000 car and you give a $5,000 down payment 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 may have included in the deal to create the final amount of money you will finance.
When you are 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 that the longer the loan and the larger amount of money you finance, the higher your financing rate. So do not be afraid to ask if your financing improves if you shorten the term of your loan.
For example, let’s say two people are financing the exact same car for the exact same amount of money, $20,000. One person got a financing rate of 7.9% at 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. The monthly payment for this second person will be $459.68. Now remember, you’re both financing the exact same amount of money, so who has a better offer? Many people would instinctively say that the lower monthly payment is the 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 highest 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 can buy a new Rolls Royce and pay $99 a month. To achieve this, all you need to do is deposit around $125,000! Car dealers advertise payments of $99 a month because they know that any potential customer who walks through that ad’s door is locked into their monthly payment. This allows the dealer to increase the financing rate, spread payments (some dealers now offer 72-month loans). By raising your rate several points and spreading payments another year or two, the car dealer and bank will earn thousands of additional dollars on each customer! Don’t let this happen to you! Shop 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!
