Never Buy A Car Based On The Monthly Payment

This post may contain affiliate links where we earn a commission. Please read my disclosure for more info
Car Shopping and Monthly Payments
Photo Credit: Gustavo Fring

When it comes to buying a new or used car from a dealership, the biggest mistake many car shoppers make is buying based on the monthly payment.

In many cases, the end result is you either end up with a car that you overpaid for, you get stuck making car payments for years longer than usual, or you pay thousands in extra interest. In the worst-case scenario, you end up owing more than the car is worth or your new wheels get repoed.

Before You Do Anything, Find Out How Much Car You Can Afford

Use my Car Loan Payment Calculator to calculate the monthly payment amount you will have to pay based on the length of the loan and interest rate to give you an idea of how much you can afford to spend on your new car.

Be sure to include any sales tax, doc fees, and destination charges in the total price of your vehicle.

Bookmark the calculator to refer back to when you are negotiating at the dealer.

Why Monthly Payments Can Be Misleading

I get it. Vehicle prices these days are through the roof and unless you live somewhere with good public transportation, we all need a car to get around. I could tell you to only pay cash for your next new car, but some of y’all will probably look at me like I’ve grown a second head and stop reading right here.

Since you are going to finance a car because you can’t write out a check for the full amount, you might as well do it right. That means negotiating on the total price of the car rather than the monthly payment.

Take for example you walk into the dealership and tell the salesperson your budget is $500 a month. Dollar signs are going to be dancing across his eyes because Xmas has come early. This is because there are many ways a dealership can make money from this purchase:

Stretching Out the Car Loan Length

The easiest way for a salesperson to make a car fit your budget is to spread out the payments over a longer period.

For example, a $500 monthly car payment spread over 5 years or 60 months calculates to $30,000 in total payments made. That same $500 payment for 6 years or 72 months is $36,000 and $42,000 if over 7 years or 84 months. You may feel like you are paying the same amount each month, but the extra months of payments mean spending thousands of extra dollars on your car purchase.

As car prices have gone up, the average auto loan length in 2020 has increased to 70.6 months, the longest on record according to Car and Driver. 84-month loans are not far behind in popularity.

Frankly, if you need to stretch a loan term to purchase anything, you likely can’t afford it and you shouldn’t buy it. Consider something less expensive.

As a financially conscious consumer, do you really want to spend almost a decade making monthly payments on a depreciating asset? That $500 a month is what stands between you maxing out your Roth IRA for the year or not.

Hiding the Car’s Real Price or Discount

Would you be upset at yourself if you found out your neighbor had bought the same car as you but paid thousands less than you did? I would.

Unless you are buying from a no-haggle dealer, you can get a better deal off the sticker price depending on how good you are at negotiating. Going to the salesperson and telling him or her you can afford $500 a month on your next car is not negotiating. This is not much better than telling the salesperson you will buy any car he can scrounge up on the lot as long as it’s a certain price.

Salespeople make money on commission and the closer they can sell you a vehicle at MSRP or sticker that still fits your budget, the more money they will make. When you buy based on monthly payments, you risk getting a lousy discount as long as they can hit your price target.

Charging Higher Interest Rates

I was reading about someone who went to one of those dealerships that promise they can get financing for anyone no matter whether they have bad credit or no credit at all. The dealer was able to get him into a car all right – with a 23% APR. That is a higher interest rate than my credit cards!

When you only care about your monthly payment and ignore things like the finance charges, you open yourself up to being taken advantage of. The higher the rate, the more interest you will be paying over the course of the auto loan and the less car you can afford.

Experian’s State of the Automotive Finance Market reports that the average car loan rate was 5.61% for new cars and 9.65% for used cars in Q1 2020.

If you are thinking about financing a car, the first thing you need to do is know your credit score so there won’t be any surprises. You can find out your credit score for free by using Credit Karma.

Read: Credit Karma Review: How To Get Your Credit Scores For Free

Once you know your credit score, you can usually get the best financing at the dealer if you are shopping for a new car and have excellent credit. If you have average credit or are buying used, you can get quotes from online lenders or local banks and credit unions that you can use as a bargaining chip with the dealer.

Lowballing You on Your Trade-In

The last thing you want is the dealer charging you a higher price for your new car purchase while giving a lower trade-in value for your existing car. It’s almost like getting money stolen out of your wallet. But the only one to blame is yourself.

To get the best deal for your old car, you need to negotiate your trade-in separately.

Red flags should pop up if your salesperson disappears off to his sales manager and then comes back bringing “good news” that he can meet your monthly budget without telling you the amount they are offering for your old car.

It’s also important to know the value of your car if you intend to trade it in. You can do your research by going online to Edmunds or Kelley Blue Book to get some estimated trade-in values for your car. If you have the time, you can also take it to CarMax to get an actual offer for your car that is good for 7 days. Keep that offer in your pocket when you go into the dealership.

Keep in mind that when you trade in a car it lowers the total purchase price of your new car, saving you money on sales tax. Do the math to see how much more you would have to sell your car for privately to recoup your tax savings.

Sneaking In Additional Dealer Add-Ons

When you only think about monthly payments, you don’t think about how small amounts from additional options add up to a lot of money.

When I bought my car, the dealer tried to sneak in things like nitrogen in tires, wheel locks, window tint, and more that increased the sales price by hundreds. I noticed it because I had an itemized list listing the total price for everything that was included including sales tax and fees.

When you are worn down from dealing with the salesperson, you then go into the finance manager’s office where they will try to sell you even more things like extended service warranties, fabric protection, paint protection, and rustproofing.

When you only look at the monthly payments, all those items may only increase the monthly installments by a few dollars a month over 60 months which is easy to dismiss as no big deal. And if that wasn’t bad enough, you are paying interest charges on those options which increase your overall vehicle cost even more.

Closing $ense

To make sure you get the price you want and stay within your monthly budget, there is more to buying a car than walking into the dealer showroom. Do your research first to find a car that fits your price range. All dealers now have their inventories listed online on their website.

Read: The Best Time of the Year To Buy A Car and Get The Best Deal

With an idea of what your credit score is, go get auto loan quotes to see how much you can borrow and the rates. With this information, you can accurately calculate your monthly payment and the total out-the-door price to shoot for in the negotiations.

Now you are ready to start going on test drives for your new set of wheels.

What are some of your experiences with shopping for a new car? Do you have any car shopping tips to get the best deal?

Leave a Comment

Feel free to leave a reply with any comments, suggestions, updates, or corrections to this article below. If you haven't made a comment here before, your comment will show up after it goes through the moderation queue. Thanks!