Not knowing the difference could cost you. How do you handle big ticket purchases? Do you tell a salesman how much you want to spend per month or do you focus on the total price? Let's see which approach has the best results.
The Monthly Payment Buyer
Whether you’re buying a car, jewelry, or a big screen TV, buying based on the monthly payment is a bad idea. We'll use the example of a car purchase (of course :)).
When you walk into a car dealership, one of the first things a salesman will attempt to do is get you to commit to a monthly payment amount. He does this because the other financing terms can easily be changed to sell you a more expensive vehicle. The monthly payment is just one factor going into the total purchase price. He can meet your desired monthly payment amount by changing the interest rate, length of loan, or amount of down payment.
For example: Adding one year to a $300/month loan will cost you an extra $3600.
Because the total car price is not the focus, the Monthly Payment buyer will typically end up paying much more in the long run.
The Monthly Payment Budgeter
On the other hand, you still need to know what monthly payment amount you can afford, but you don't have to discuss it with your salesman.
The monthly payment budgeter does her homework in advance. She creates a car budget and knows just how much she can afford on a monthly basis. She also lines up competitive financing offers before the negotiations begin. These can be used to haggle with the finance manager after a price has been agreed upon.
Once you've budgeted monthly payments, plug them into an affordability calculator. Based on financing terms you specify (not the salesman), the calculator will tell you a car price range you can afford.
Another reason why focusing on the total price is a better approach is that it allows you to get competitive bids. A single price can easily be compared to other offers and provides transparency to a deal. If you focus on monthly payments, you’ll find it quickly becomes difficult to evaluate and compare multiple deals to each other.
The Monthly Payment Budgeter has a clear advantage. If you focus negotiations on just one aspect of financing instead of the big picture you're likely to spend more than you had planned.
Photos by: purpleslog and alancleaver_2000