Before you go out and get financing to buy that new car, furniture or even stereo you should always know what it's REALLY gonna cost you. Sure it says $20K but how much will it run you in the long run. That funiture might be on sale for ONLY $2K, but be sure that they will get their money in financing. In fact, Sears makes more money on their financing services than they actually do on the products they sell. That is why retails stores usually ask if you would like to put it on their card because it brings in BIG MONEY. Car dealerships used to just go through banks for financing but then they discovered the beauty of compound interest...That's interest that just keeps piling on to itself. Compound interest can be what makes you rich or puts you in the poor house making payments for 6 years on that Pinto.
Regardless how bad you want that new leather couch or nice race car to cruise around with let's look at some numbers. BEWARE, you might not like what you see but I do it in the hopes that you will open your eyes and save your money.
Let's start with a $20K car. Now picture this bad boy. It's got all the extras. It's got the racing seats and 20-inch rims and bluetooth sound system. It's flawless and a major neck-breaker. When you first saw it at the dealer, it was just calling your name. The salesman says, it's only 20 thousand dollars, way below what they are charging across the street. Plus, we have all these rebates. Here you are, a first time buyer with not-so great credit. The salesman says he can get you very low payments if you just sign on for 6 years. Six years isn't anything right, plus this car is worth every penny. Here are the numbers.
On a $20K loan at CRAZY 15% interest for 6 years, your monthly payment will be $422.90 At the end of your loan, you would have paid $20K PLUS $10, 448.82 IN INTEREST. The total for this car is $30,448.82 Here is the chart for it.
Click here for the Amortization Chart
As you can see, you don't actually start paying more on the car than on interest until the 19th month. That's over a year and a half...and that's by only a few bucks. Can you believe you are going to pay over $10,000 in interest... that's another small car!! Just imagine how much you could save if you got a cheaper car.
When I wrote about making mistakes yesterday, I was serious. I've made this mistake. I've been there, done that, and lost out on thousands. Please don't let this be you. Think twice next time you want to finance something.
As an extra, I added a amortization chart that you can fill out everytime you want to know how much you are going to REALLY pay for something on credit. Just scroll all the way to the bottom and fill out the info.
Labels: Use Cash