Caution! Low monthly payment
When financing a large ticket item, choosing to have a low monthly payment doesn’t equate to being affordable. In fact, you end up paying more.
The cost to borrow money is the total of the interest, fees, and service charges. Let’s say you are borrowing $40,000 @ 5% for 36 months. You will pay interest for 3 years. If you decide you want a lower payment and you finance for 72 months, then you will pay interest for 7 years. In addition, the interest rate will most likely be higher with the 7-year loan vs. the 3-year. Let’s take a look,
$40,000 @ 5% for 3 years = $43,158.09 Total Interest Paid $3,158.09
$40,000 @ 6% for 7 years = $49,084.74 Total Interest Paid $9,084.74
In this example, there is a difference of $5,926.65 that could go towards something else. It is money you could save, invest, or pay towards other debts. Maybe there is a business opportunity you could take advantage of or a family member you could help or a worthy organization that you could donate to. It is also an additional 4 years of your time and energy. Lastly, it is $5,926.65 you would be giving to someone else, in turn, making them richer instead of you and your family.
So, the next time you are considering going with a lower payment, ask to see a comparison of the total amount of interest and fees before making your decision.
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