‘Less is more’ not always a good thing when financing a car

Less is more.

You probably have heard that stated a million times.

But it may never be truer than when you finance the purchase of a vehicle.

Think of it as a note of caution.

Many vehicle buyers go into the financing conversation with a maximum monthly payment in mind. Something that will fit their monthly budget – what they can afford. Unfortunately, that often results in extending the financing to get a lower monthly payment on a more expensive car.

Black man thinking less is more

But that’s not really what we mean by saying less is more.

In this case it means keeping a payment “more affordable” by extending the term costs more interest in the long run and probably is not a good thing here.

So how does that work?

Let’s say you can afford a $500-a-month car payment over 48 months, financing $21,600 at 6 percent interest after a $1,000 down payment, but that you really have your eye on a newer $32,600 vehicle.

It’s possible to make that dream come true – even if it turns out to be a dreaded less-is-more scenario.

If you are able to extend the financing term from 48 months to 72 months, your car payment will be a little more than the $500 you set as a target payment. However, lurking in the background is the additional interest you will pay over the life of the financing agreement.

It’s the difference between $1,736 interest on the 48-month agreement and $4,920 over 72 months. That’s about $3,200 – not to mention the extra $10,000 spent on the vehicle.

Or about $534 – an extra car payment – annually for six years!

Of course, it gets even worse as you go from about the average $22,600 price of a used car to the $37,600 average price of a new vehicle, based on Kelley Blue Book data.

Do we even have to run the numbers?

OK, add another $1,100.

It’s not that difficult to see how easy it can be for a car shopper to get into financial trouble by calculating their purchase decision based on the monthly payment rather than the price of the vehicle.

You might be able to squeeze the car payment enough to fit your short-term monthly budget, but it’s going to cost you a lot over the life of your auto finance agreement.

But we also could put a positive spin on the saying because less payments result in more money saved.

That should interest everyone.

These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

Santander Consumer USA is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.

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