Many people get confused or excited when they see a car dealership announce a payment of $ 99 a month. Sometimes the dollar amount changes, distributors will use a payment of $ 47 a month or some other low number. I’ll explain why, because ads that use these tricks often offer a poor 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 advertising method is because many people are obsessed with 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 same car and one person got a good deal and the other a bad deal. So when someone asks me to assess your car buying skills by throwing in a low monthly payment, I just nod 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 they usually don’t know it either!
So let’s 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 48 months, pay 1/48 of the loan each month) along with any other fees or taxes that may have entered the deal. These are the separate items that make up your monthly payment. Therefore, 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 renting your next car. No number has a bigger impact on your car business than the purchase price of the car – common sense when you think about it.
You now need to take the purchase price of the vehicle and subtract the down payment or trade-in. So if you’re buying a $ 25,000 car and you deposit $ 5,000 or give the dealer a trade-in worth $ 5,000, your financing figure becomes $ 20,000. Now we take that $ 20,000 and add in the additional fees that you could have included in the deal to create the final amount of money that it will fund.
When you are going to finance 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 general rule of thumb is that the longer the loan and the large amount of money you finance, the higher your financing rate. So don’t be afraid to ask if your financing improves if you shorten your loan term.
For example, let’s say two people are financing the exact same car for the same amount of money, $ 20,000. One person earned a 7.9% finance rate for 60 months. This person will have a monthly car payment of $ 404.57. The other person earned a 4.9% rate for 48 months. The monthly payment for this second person will be $ 459.68. Now remember, you are both financing the exact same amount of money, so who has a better deal? Many people would instinctively say that the lower monthly payment is a better deal, I disagree. You see, the first person pays $ 404.57 per month for 60 months for a total of $ 24,274.20. The second person pays $ 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 have a car payment of $ 99 a month. To achieve this, all you need to do is deposit around $ 125,000! Car dealerships advertise payments of $ 99 a month because they know that any potential customer who walks through the door of that advertisement is obsessed with their monthly payment. This allows the dealer to increase the financing rate, spread the payments (some dealers now apply for 72-month loans). By increasing your rate several points and extending the payments for another year or two, the car dealer and the bank will earn an additional thousands of dollars for each customer. Don’t let this happen to you! Buy smart, don’t be fooled into judging a car deal by monthly payment, it’s the easiest way to get scammed by a car dealer!