And All You Were Worried About Was the Monthly Payment...THINK AGAIN!!!

You know, these days all consumers seem to be concerned about is how much something is going to cost them on a monthly basis.  “Yeah, I’ll buy that iphone, I’ll buy that HDTV, I’ll buy that new refrigerator…it’s not too expensive when I put it all on my credit card.”  Yeah, right!!  You may be paying for something several times over once it’s paid for and you’ve paid all that interest.

By the time you’ve paid off your 30-year mortgage, you’ve paid for your house three times!!!  Let’s talk about another expenditure we typically finance:  our car.  Not to be forgotten are the extras we put on the car.  A good salesperson (or bad, depending on which side of the fence you happen to be on) will exclaim that the options you’re adding to the cost of the car will only cost you so much per month; they really don’t tell you the cost of the option.  For that matter, they don’t even tell you the cost of the car; they simply tell you how much it will cost you per month.  Researchers say few car buyers know the actual full cost of their vehicles or stop to consider how much more it’s going to cost them by extending their loan on the vehicle.

I’m absolutely amazed at the length of some car loans.  When I was growing up in the days when cars slept up to nine people, three years was the longest one would ever consider paying off a car.  Now days, one can finance a car for eight or even nine years!!!  Jonathan Welsh writes in The Wall Street Journal, if one extends one’s car loan from five years to seven years, it will increase the average cost, or how much the buyer will pay out, by about $3,000 in interest.  The average maturity on a car loan today is 70 months, up from 62 months just a year ago, and those longer term loans carry higher interest rates.  Take a look at these figures:  a five year loan at 6.05% interest will cost about $5,700 in financing, but a seven year loan at 6.59% interest will cost about $8,850 in financing.

All I can say, that better be a trouble-free car for a contracted period of time if you plan to pay it over nine years.  Imagine if the car died after six or seven years and you still had a couple of years left on your loan.  Not fun!

As the average car loan increases, more people are trading cars in before they are paid off.  Unfortunately, at that point the owner owes more on their car than the car is worth.  In 2006 about 29% of car buyers who traded in a car to buy a new one were in this position.  This statistic is up from 20% just five years ago.  Mr. Welch further states in 1990 the average a buyer owed on the car they were trading in was $617, which increased to $1,726 in 2000 and $3,062 in 2006.  This is NOT a good trend.

One of the components of inflation is what I call “technology inflation.”  Take cars for example.  A 1987 Chevy Caprice is not the same as a 2007 Chevy Caprice due to all the technological advancements, such as satellite navigation and entertainment systems, once reserved for the premium vehicles only.  This makes new cars that much more enticing.

What’s the answer?  It’s not necessary to seek out the latest and greatest.  When one buys a new car, all one has to do is drive it home and suddenly it’s worth a lot less than what one paid only a few minutes earlier due to the fact that it’s now considered a used car, and the first payment hasn’t even been made yet!  It used to be when one purchased a used car, one was literally buying someone else’s problems.  The fact is, cars are being made better today.  My suggestion is to buy a decent “pre-owned” car and purchase an extended warranty along with it.  Let someone else depreciate it.  You’ll be a lot happier in that you didn’t pay an arm and a leg for your car and you’re not paying for the rest of your life on the car!