Smart SpendingSmart Spending

Beware the monthly payment math trick

You need to figure out your total cost first.

By Karen Datko Oct 18, 2009 5:27PM

This post comes from partner blog Blueprint for Financial Prosperity.


If you've ever tried to buy a car or a house, you've probably faced the monthly payment math trick. It's a psychological trick salespeople use to get you to buy something you couldn't afford or to pay an amount you weren't originally comfortable with.


A salesperson will try to convince you to purchase something based on the monthly payment you'll have to make. It frames the purchase in a way that lets you begin integrating the purchase into your life, before you've actually made it, and may even make it more likely you'll make the purchase.

Here's an example: Let's say you want to buy a car and you are looking to spend $12,000. You begin looking around and find a nice used car for $12,000. You figure you can get a loan at 6% for four years on the $12,000 and walk out of there paying $281.82 a month and feeling pretty good.


You've figured out your budget in your head, whether you can afford $281.82 each month for the new car, whether you'd trade $281.82 of other stuff in your budget in order to .... See how you've already made the purchase in your mind?


That's when the salesperson says: "Why not get the next model up? For the same monthly payment, we can restructure your loan so that you keep that $281.82 a month, except we stretch it out only two more years." Wow, not a bad deal, right?


You think to yourself, "That is a nice car. I can afford $281.82 a month. Why not?"


The "why not" is because your total original cost was $13,527.36. The total cost of the higher model is $20,291.04, a staggering difference of $6,763.68. While the total cost increased, your monthly amount remained the same.


Don't fall into the monthly payment math trap.


Other articles of interest at Blueprint for Financial Prosperity:


Published July 15, 2008
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More