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Retailers, car dealerships, appliance and furniture stores will do pretty much anything to get you to buy something from them. You've seen the ads showing you what the monthly payment will be on your purchase of that new television or the new furniture set that you have just been dying to own. It may even be your next car payment.
The fact is, today, people are not seeing what the total cost of a product is. What they are seeing is the monthly payment for purchasing the product on credit will actually be. By throwing out a number that looks "affordable", people are lured into thinking that they can buy it now, regardless of the total cost of the purchase over time.
By showing you what the monthly payment on a product is, the financing seller can easily convince you to purchase the product. You dont necessarily see and realize the total cost of something. If you are told that you can purchase a new car for $20,000, you may think, wow, thats most of my yearly salary. But, if you are told that you can buy the car for just $199 per month, this looks a lot less and it looks like something that you can actually afford. But, can you?
Can You Afford Monthly Payments?
Sure, the number looks like a good deal. You have something that you really want to have and it has a monthly payment that you can actually make each month. But, you need to carefully consider where you are going with this, first. What you are not seeing here is the interest. You do not see just how much interest is being compounded against the purchase of the product.
A $20,000 vehicle that I pay $199 on per month will only take me a few of years to pay off. You think, "This is a good deal!" The problem with this is that your $199 payment will not all go to the principle or the cost of the car. In fact, most of it will likely go to interest at the beginning and the result is that you will pay much, much more, most of which is pure profit for the seller.
Here's an example:
If you purchase a new Sony 52" LCD HDTV for $3500 that is being offered to you at just $72.65 per month at a 9% interest rate, what is the real cost that you are paying for this TV? In this example, you will pay on your HDTV for 60 months and pay an extra $859.25 in interest, bringing the total cost of the TV to $4359.25. Now, would you hav bought it if that was the price in the store? Probably not, and therein lies the monthly payment deception. Plus, by the time you pay it off, your TV will probably be obsolete.
With this in mind, the total payment for the TV television does not seem worthwhile anymore. The total cost is far more than what the television is actually worth. In fact, you are paying $859.25 of your hard ended money in finance charges. If you were to deposit these funds into an investment account for yourself, earning a modest 9%, even without adding a penny to it, you are missing out on $1,345.31 that you could have had in your bank account.
Whats The Bottom Line?
When it comes to purchasing things as a monthly payment, really think twice about how much money you are paying in interest in the purchase of that product. You should look at the total payment and the total cost of the loan as this is what you will actually pay, not what the lender wants you to think. Paying cash is by far the best thing to do. Simply, if you do not have the cash to purchase something, especially things that you do not necessarily need, you shouldnt buy it. Paying cash can save you from paying lots of interest, and can keep your hard earned money in the bank.
Mvelopes Personal is an online budgeting system that makes it easy to create an effective personal budget and track every aspect of your spending as it happens. It will help you always know exactly how much you have left to spend, instantly know the impact of every spending decision, effectively manage credit card spending, and quickly create an easy to use household budgeting plan. Click here to learn more
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Did You Know... |
49% of adults, and 66% of US high school students got F's on a national test on their knowledge of basic economic principles.
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Food for Thought... |
"I'd rather go to bed without supper than rise in debt."
-Ben Franklin.
