When most people are shopping for a new or used vehicle, they generally plan to finance at least a portion of the purchase.  With all of the zero down payment options, as well as the factory rebates that the dealers convince you to use as a down payment, more often than not the entire purchase is financed.  The term length of these loans has also gotten very generous.  Not long ago, it was impossible to finance a car for more than 48 months.  Now, as testimony to how the price of our vehicles has increased much faster than anything else, it is common to finance a car for 60 to 72 months. 

Unfortunately, this “generosity” is not really doing us any favors.  The amount of interest generated by the lenders on this type of purchase is tremendous.  A $15,000 vehicle financed for 60 months at 7.5% interest will cost $19,386 by the end of the loan term.  That is a 23% increase on the cost of the vehicle with a 7.5% loan, because of the compounding of the interest.  If you take the same loan parameters and change the loan length to 72 months, the overall cost of the care is then $20,073.

As shown above, the lowering of the monthly payment just means that the length of the loan is longer, thereby costing more in the long run in interest. The common sales technique, used by most new and used car salesmen, is to get you into a vehicle that you can afford the monthly payments on.  If the monthly payment is too high for you, they offer to extend the length of the loan to “lower the payment” for you. Unfortunately, by the time the car is paid off, it is equivalent to purchasing it with a credit card.

Cars are a tremendous status symbol in this country.  Since our mindset for several decades now, has been to impress those around us with the vehicle we drive rather than the house we live in, mostly because most of the people we come in contact with will never see our house anyway, the car salesmen have been able to use this to their advantage in selling vehicles.

Considering the urge in this society to always have a “newer” vehicle, the typical consumer is usually shopping for another car before the loan on the current one is paid off.  Then the offers from the dealership come in to “take care of” the previous loan.  What this means is that they will “roll over” the previous loan by taking the balance owed on your current car and adding it to the loan of the new car you want to purchase.  Then you are paying even more interest on the initial loan because you have, in effect, extended it over an even longer loan period.

Perhaps this knowledge will not affect the final purchase decision, but it will help make an informed financial decision.