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Dump The monthly payment mentality. Focus On Total Price & Saving Instead

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  • Dump The monthly payment mentality. Focus On Total Price & Saving Instead

    I see this a lot when I talk with people about money or when I'm shopping.

    The last time I had a conversation with a mortgage broker, he wanted to talk with me about affordable monthly payments, the same thing when I last got a cell phone. I get the impression they've been trained to talk about affordably in monthly terms because that is what consumers want. I fully admit I've slipped into this perspective as well.

    And, its a dumb mentality for several reasons.

    First, it obscures the more important point - the total cost of whatever you're buying. If it is a mortgage, a lender can always extend the term of the contract or do some fancy restructuring to lower minimum payments. This often results in a loan thats more expensive in total cost - sometimes by tens or hundreds of thousands of dollars.

    Second, it also makes it a lot harder to compare products. This is especially the case with insurance.

    Third, it encourages people to take on credit card debt. For example lets say you want to get some fancy headphones at $150 or a gallon of milk at $4. If all you are thinking about is the $5 minimum payment it would cost to carry the debt, you'd be looking at paying $180 for the headphones and 5 bucks for the milk after interest is factored in.

    Fourth, it makes people focus on spending, rather than on saving. Its far better to save then spend, rather than go into debt for things you can't afford. If you have a monthly payments mentality then you're focused on what you afford to buy, not how much you can save.

    Bottom line: Avoid the monthly payments mentality, instead focus on total cost and saving.
    james.c.hendrickson@gmail.com
    202.468.6043

  • #2
    I agree on the total price thing. The monthly payments thing, I'm OK with. Monthly mortgage payments are a forced savings for me. If I didn't have them, no doubt I'd whiff the cash on stupid stuff.
    How can you have any pudding if you don't eat your meat?

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    • #3
      You're right on point. The indisputable masters of this tactic are car salesmen. In car sales, they can be even more "creative" with the loans to make it seem "affordable" because there are far fewer regulations & lending standards involved ("conforming loans" aren't a 'thing' with car loans). Thus, the 84-month car loan is gaining traction across the industry. !!! 84 MONTHS !!! Pushing 7-year car loans is ludicrous and (IMO) predatory. The practice exploits the short-term, paycheck-to-paycheck mindset that so many people get sucked into. Concerning yourself with the total, all-in cost demands a long-term view that far too many people never utilize.
      "Praestantia per minutus" ... "Acta non verba"

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      • #4
        Originally posted by kork13 View Post
        You're right on point. The indisputable masters of this tactic are car salesmen. In car sales, they can be even more "creative" with the loans to make it seem "affordable" because there are far fewer regulations & lending standards involved ("conforming loans" aren't a 'thing' with car loans). Thus, the 84-month car loan is gaining traction across the industry. !!! 84 MONTHS !!! Pushing 7-year car loans is ludicrous and (IMO) predatory. The practice exploits the short-term, paycheck-to-paycheck mindset that so many people get sucked into. Concerning yourself with the total, all-in cost demands a long-term view that far too many people never utilize.
        Wow. Thanks Kork!
        james.c.hendrickson@gmail.com
        202.468.6043

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        • #5
          This certainly isn't new, but I do think it has gotten worse. The 7-year car loan is a perfect example. Payment plans on cell phones are another. But with the latest smart phones costing $1,000, it's no surprise that they do this. The good thing, at least in the case of the phones, is that the loans are interest-free. Obviously not the case with the cars and that really encourages people to buy more car than they can really afford just because they can manage the payments. If you need a 7-year loan to "afford" it, you can't actually afford it.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

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          • #6
            This has been discussed on here before, but I do agree that it's gotten worse.
            Basically every major purchase out there has a monthly payment plan option. Even some smaller purchases have a payment option.
            Brian

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            • #7
              Exactly the reason I always do 15 year mortgages instead of 30. I can't stomach the difference in interest and total payments. Most 30 year mortgages, even with low 3-4% interest rates, you end up paying double the purchase price of your home when interest factored in. It's mind blowing to me that this is the standard.

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              • #8
                Originally posted by bjl584 View Post
                Basically every major purchase out there has a monthly payment plan option. Even some smaller purchases have a payment option.
                And I can understand it on some necessary purchases, like a home or car (within reason). But then you see them on total luxury and frivolous purchases.

                Disney recently raised the price of an annual pass in Florida. I saw a lot of posts on the Disney forums by people complaining that with the price that high, they really need to offer a monthly payment plan. Well maybe if you can't afford to buy the pass outright, you need to reconsider if it's something you really should be doing. Either that or perhaps you need to SAVE UP FOR IT and then buy it. What a concept.

                Somewhere along the line we forgot that last part - saving up for what we want to buy. It's all instant gratification now. Buy it now and pay for it in 12 or 24 or 84 easy payments.
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

                Comment


                • #9
                  Originally posted by bjl584 View Post
                  This has been discussed on here before, but I do agree that it's gotten worse.
                  Basically every major purchase out there has a monthly payment plan option. Even some smaller purchases have a payment option.
                  It is getting worse..... i heard of an idea of a 40 yr mortgage to spread out payments farther again a idea to put people into a home they most likely cannot afford.
                  i thought 5yrs on car was insane but now they can go 7 years.
                  i have seen a monthly payment plan for a new mattress / furniture and many electronics. i guess those of us that could afford it are just not generating enough demand for these items.
                  i have been truly amazed at some of the juggling some co-workers do to make all of their payments. Some people digging deeper each day.
                  If they spent half the effort into putting money aside they would be way ahead.

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                  • #10
                    Originally posted by Smallsteps View Post

                    It is getting worse..... i heard of an idea of a 40 yr mortgage to spread out payments farther again a idea to put people into a home they most likely cannot afford.
                    i thought 5yrs on car was insane but now they can go 7 years.
                    i have seen a monthly payment plan for a new mattress / furniture and many electronics. i guess those of us that could afford it are just not generating enough demand for these items.
                    i have been truly amazed at some of the juggling some co-workers do to make all of their payments. Some people digging deeper each day.
                    If they spent half the effort into putting money aside they would be way ahead.
                    The 40 year mortgage does not drop your payment much at all over the 30, and the interest rate is typically a bit higher. I don't see how they can help you buy "more" house, at least not much more.

                    Although some feel a 30 year mortgage is a bad idea because you do pay more interest, if you factor in the time value of money, you can do A LOT better taking a nice low-rate 30 year and investing the difference (between the 30 year and 15 year minimum payment). While some do choose the 30 without giving it much thought, others do it quite deliberately.

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                    • #11
                      Consumer debt is going up (link)

                      Is this because our incomes haven't matched inflation? Is that why everyone has to buy on credit to maintain their position?

                      Or are we just expectant of more stuff? Do we feel like we should have all that we want?

                      Is this an economic downturn or a social problem (which I guess still causes an economic down turn as we sell tomorrow's earnings for today's consumption)?
                      -Milly
                      Personal Finance Blogger, Mechanical Engineer, and Mother of 3 Toddlers
                      milly.savingadvice.com

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                      • #12
                        I think people are just more materialistic these days and don't want to wait and save for things...we ususally save for what we want even cars....only expense I want ongoing is a morg when we eventually get one but i am looking for one that has no yearly maximum payment options...I want to be able to pay the house off asap...but Im not materialistic I love to grow our own vegies, I use things till they break and cant be used anymore...some people just love having the latest and greatest with things as thats what they have been taught....I know people who use their CC to pay for christmas...spend all year paying it off (most with 20% plus interest) just to turn around and do the same thing...its boggles my mind...its like it comes once a year...you could pay for christmas with what you are paying for interest on that card...but they dont listen

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                        • #13
                          In 1958 American Express figured out that there was a lot of money to be made offering a revolving line of credit to customers.
                          The rest is history.
                          Brian

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                          • #14
                            Originally posted by Milly View Post
                            Consumer debt is going up (link)

                            Is this because our incomes haven't matched inflation? Is that why everyone has to buy on credit to maintain their position?

                            Or are we just expectant of more stuff? Do we feel like we should have all that we want?

                            Is this an economic downturn or a social problem (which I guess still causes an economic down turn as we sell tomorrow's earnings for today's consumption)?
                            #!.I really think many in debt over their head are there simply because " everyone is doing it". NO one HAS to buy on credit it is a choice.

                            #2 It is not about what we WANT but what someone has to sell.
                            Look at any gadget / service when they are close to reaching their original target audience they tweak their ads/ business plan to appeal to yet a bigger audience ( more customers).

                            #3 credit cards are/ were marketed like #2 … when they reached the limit of credit worthy customers they simply made a product ( high interest) to reach those whose credit history would have shown a probable issue.
                            While there are some many on this forum that pay in full, more people feel ok to spend on credit cards and they may PLAN on paying as much as possible or in full ......but they did not add up all their purchases OR other items come up and they end up paying the minimum and tell themselves "I'll catch up next month" and then next month etc. this goes on and when they feel semi caught up they tell themselves they can charge more as they are almost paid up.

                            Ever since I started working ( in many industries and settings) there was ALWAYS.... the math impaired.
                            IF an overtime day or holiday pay coming up they start making plans before the day is even worked.... that they can pay a debt or buy something...... by the time the check is cut their plan has whittled down to almost nothing.
                            Their money plans always fell apart due to miscalculations and the fact stuff happens …. scheduled for an extra day ( OT) but then had a sick day so the extra day is just regular time not OT. Yet they actually came to HR to argue their check was wrong.

                            I have seen completely clueless employees about the REAL bottom line or plans of the company they work for.
                            They simply think "we seem busy and had customers" but not was the business making profits. So when they show up and door is locked or they get the news that their job is going away they ACT blindsided, even in instances where it was not a surprise to many people/ customers from the outside.

                            Look at the low number that have an EF or plan in case of …any crisis.
                            .



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