I have seen too many car commercials lately where a person is able to purchase a vehicle that they could not otherwise afford because they are able to pick their own payment. These types of commercials make me think about the need for more financial literacy training in Canada. The facts are that if you take longer to pay for a vehicle you will pay more interest.
In fact the lower the payment is – the more interest that will be paid. Paying more interest does not make financial sense. It is possible that the car will be used up long before this attractive couple stops making the payments. They could end up with no car and still have a monthly payment.
The concept here is the difference between cash flow and expenses. If you reduce the amount that you are paying on a loan, the loan will take longer to pay off and you will pay more interest. A calculation should be done to figure out how long one can stretch the payments out and still pay for the car before it is junk. If you don’t have the cash flow to pay off the loan before the car is used up – then you can’t afford the car. Buying the car when you can’t afford it will mean that you will have loan left when the car is gone. Not smart.
What this commercial is encouraging is instant gratification – you can have this now and pay for it later. This works well when you are purchasing assets that last a long time and go up in value like a house, not as good a strategy when you are buying a depreciable item like a car.