The Low Monthly Payment Trap

credit: freedigitalphotos.net by bplanet

credit: freedigitalphotos.net by bplanet


My wife and I have been looking to buy a place and we actually made an offer recently. After a counter-offer by the seller and one by us, we are $10,000 apart. My realtor, also my aunt (more about this in a later post), said something to me that I found odd. She pointed out to me that a $10,000 difference over the life of a 30 year mortgage with an interest of 4.5% would only amount to a $45 difference. So basically, it’s only $45 a month more. No big deal right? But, if you look at it another way, $45 more a month would amount to $16,2000 over the 30 year mortgage.

On an emotional level, the statement made some sense. That amount doesn’t seem to be a large amount, so why bicker over $45? But on a logical level, I’m thinking $10,000 is still $10,000. In any case, I think the fair market value should be based on comparative sales and not what I can or can’t afford.

On my way home yesterday after this conversation, I heard an ad on the radio for an Audi dealership. One person says to the other, “Wow, that’s a nice Audi! (I forget the model) I thought you were looking into early retirement?” The other person responds, “It only costs $398 a month!” We are never told how much this Audi costs, just how much you would have to pay each month. This type of advertising and low monthly payment trap seems to be everywhere. From those informercials that encourage you to buy their product saying you can have it for “just 4 low payments of $25,” to small fees your cell phone provider or credit card charge. Often times people will buy a product because the monthly payment is low or ignore a recurring fee because it’s just a small amount of money. However, it’s important to remember the total amount you are paying for something.

This mindset of thinking that a small amount each month is no big deal is one of the reasons why people have gotten into debt. If you focus just on the monthly payment, you might buy more house or car than you can actually afford. You might ignore small leaks in your budget because they seem inconsequential. When you buy something or making a financial decision, always look at the total and true costs and not just what you’ll pay each month. While it is still important to know what the monthly payment comes up to so you can determine whether it fits into your monthly budget, it should not be the main focus.

So how do you avoid falling into the low monthly payment trap?

66 thoughts on “The Low Monthly Payment Trap

    1. livingrichcheaply@gmail.com Post author

      Thanks! I just noticed that recently and it’s everywhere. Very dangerous to those who don’t have the discipline to refrain from spending.

  1. Kali @ CommonSenseMillennial

    I avoid the monthly-payment trap by trying not to buy anything that has a monthly payment! I hate having to pay stuff off, so if I can’t afford the whole price, or can’t afford to save up for it, it’s something that I obviously don’t need. The exception to this would be my house – sadly I could not afford to drop cash down on that purchase! But with that, we were looking at the total price first based on how much of a down payment we had.
    Kali @ CommonSenseMillennial recently posted…Why Hipsters Should Be Our New Financial Role ModelsMy Profile

    1. livingrichcheaply@gmail.com Post author

      That’s true…usually more expensive things such as real estate and cars are made with a monthly payment. Although sometimes services charge monthly too and it gets people to spend more than they would have. I haven’t cancelled or suspended my Netflix account even though I haven’t really used it much recently. But I just figure, hey, it’s only $7.99. I should look into that.

  2. DC @ Young Adult Money

    I don’t avoid it! Just kidding. I do get a bit fatigued when I’m paying off something over the course of three years, even if it is low monthly payments. I just want to get rid of it! I did do $200/month for 5 1/2 months for appliances for our rental unit, but that came out of their monthly rent checks so it wasn’t too bad. It definitely was nice getting rid of the payments, though.
    DC @ Young Adult Money recently posted…The Weekly Quick Hits RoundupMy Profile

    1. livingrichcheaply@gmail.com Post author

      If it’s coming out of the rent check, then it doesn’t hurt as much. It does get tiring having to pay money every month though. That’s how I feel about my student loan debt.

  3. Done by Forty

    You’ve hit on a really interesting distinction in how we understand prices. Total cost of ownership is one way to analyze options, but it’s scary to someone who has very little or no wealth, or at least insufficient assets to pay for the item. Even an inexpensive car when packaged in its total cost, say a $11k Nissan Versa, seems unattainable because the consumer thinks, “I don’t have eleven thousand dollars right now.”

    Monthly payments are more palatable to that consumer, because while he may have no assets, he does get a monthly paycheck. If we ignore the interest involved with loans, advertisers are simply packaging the purchase into terms that this consumer can actually deal with and understand: “I can pay $398 a month because I get paid $3980 every month.” In this context, the Audi appears to be more attainable than the Versa.
    Done by Forty recently posted…Leaving on a Jet Plane…My Profile

    1. livingrichcheaply@gmail.com Post author

      Good explanation and analysis. And thanks for providing an example too!

  4. Jen @ The Happy Homeowner

    Excellent point! It’s so true that people get roped in way too easily with those low payment offers. Far too many people fail to calculate the true cost…kudos to you for seeing the flipside of the $10K!

    I tend to do the same thing with making sure I consider all sides of the coin (pun intended) before signing on the dotted line.
    Jen @ The Happy Homeowner recently posted…How Much Exercise is Too Much Exercise?My Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks Jen! I think the marketers and advertisers are counting on people not calculating the true costs when making these decisions.

    1. livingrichcheaply@gmail.com Post author

      Thanks. Most people just look at the “EASY” payments and don’t add up the total figure. When you stretch out the payments, it’s always gonna look more palatable.

  5. jefferson @SeeDebtRun

    The monthly payment is just one piece of information when making a large home/car purchase, but it shouldn’t be the main driver. As you mentioned, salesman tend to try to make a mediocre deal seem fantastic by spinning the monthly payment angle. You need to do your research ahead of time and make sure that the entire purchase price is a good bargain.
    jefferson @SeeDebtRun recently posted…Debit Advice: Ignore the Experts, Stop Using Cash!My Profile

    1. livingrichcheaply@gmail.com Post author

      Yep, they’re working the monthly payment angle so bad that they keep extending the monthly payments. Some car payments are extended to 6 years nowadays. Crazy!

  6. C. the Romanian

    In this case it appears that $10,000 is still $16,000, after all :)) When it comes to small payments and items that aren’t too expensive, I always try to pay the entire sum when purchasing. I always try to plan ahead our needs and if we don’t have money, we start saving. A product that would be $100, would cost, let’s say, $125 if we pay 5 low monthly payments of $25. So we do the math, save $25 per month, but we only need 4 month to get there – and we save $25 in the end.
    C. the Romanian recently posted…100 Books to Help You Make Money… for PenniesMy Profile

    1. livingrichcheaply@gmail.com Post author

      That’s true if the installment payments make it more expensive. But even when they don’t, the installment payments make the product seem cheaper than it really is by tricking the consumer.

    1. livingrichcheaply@gmail.com Post author

      Yes, the advertising people are paid to find ways to get people to buy and they’re good at their jobs!

  7. E.M.

    I think it is easier for people to justify purchases on the basis of how much they are paying monthly for it. They only think of that one number; they don’t add it up over the course of months or years. I try to look at the whole picture and make sure I can really afford it. With buying a house, it can be tricky. I think a smaller difference, like $1k-2k wouldn’t be too bad, but $10k is a lot. I think you’re right in looking at it differently. I would rather compare it to fair market value, too, though that’s not always possible when there’s so much competition. I would much rather have a house I can easily afford, versus one I can probably afford.
    E.M. recently posted…Being Grateful – Seventh EditionMy Profile

    1. livingrichcheaply@gmail.com Post author

      Absolutely true. The monthly amount seems smaller so in their mind, they don’t feel the pain of the high cost. It definitely is hard with houses. It’s my first time and I really don’t know how to negotiate or whether it is fair market value. I’ve noticed that there was some extra competition because many people are scared the interest rates are going up. But the winter months are usually slow for home buying.

  8. dojo

    You should ALWAYS calculate all the details: monthly payments (OK, we know they’re small), interest, other fees, what it will all cost IN THE END. Some of the sneakiest loaners in my country (I think it’s something like a payday loan) brag about how little you pay every week. When you make a short calculation their interest is actually sky high and no person in their right mind would choose such a loan. So yes, it’s a very easy way to trick people who don’t bother with a bit more math 😉
    dojo recently posted…How are you gonna spend the holidays?My Profile

    1. livingrichcheaply@gmail.com Post author

      Oh those pay day loaners are horrible. They are sneaky and prey on those who need the money but the math doesn’t lie…it is a horrible deal when the interest rate is that high.

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  10. Simon @ Modest Money

    Low monthly payments seem to exploit a flaw in our psyche for simplicity and convenience and few people actually realize the math is stacked against them. In all honesty though, who wouldn’t want an item for which they’d just make one simple contribution each month – clever pricing, clever advertising and the costs end up going beyond what you planned or hoped for.
    Simple put, do the math, if you can, pay the whole amount at once or save till you can!
    Simon @ Modest Money recently posted…Barclaycard Arrival World MasterCard ReviewMy Profile

    1. livingrichcheaply@gmail.com Post author

      Oh I agree…it definitely exploits a flaw in our psyche. When broken down into small little payments it seems very affordable and lures people into spending more than they plan on spending. It definitely is good to pay the whole amount all at once but for a house or sometimes a car, that is very difficult.

  11. Matt Becker

    Congrats on making an offer! And of course I think you’re spot on. When we were buying our car we came up with a formula to calculate the total cost over the life of the car, whether it was new, used, paid for in cash or with a loan. That total cost of ownership is what we focused on, not the monthly cost or even the up-front cost.
    Matt Becker recently posted…What Does Financial Freedom Mean to Me?My Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks Matt…we’ll see how it goes. Focusing on the total cost of ownership is definitely a great way to determine whether you can afford it. Those car salesmen are pretty persuasive so it’s good to have a formula worked out before hand.

  12. Demaish @ Borrowed Cents

    I have fallen for these tricks before. I remember when I bought a vehicle when I was 21, I was just told it would only cost me $130 every 2 weeks which was $260 a month. What I forgot is I would be paying full coverage insurance and putting gas in the vehicle. The cheapest insurance I got was 215/month and so the car was costing me $475 a month without gas and other repair costs. Life became so hard for me but when I got my tax returns after 2 years, I paid it off. Never again.lol
    Demaish @ Borrowed Cents recently posted…Forget pay day loans and build an emergency fundMy Profile

    1. livingrichcheaply@gmail.com Post author

      Really every 2 weeks? I hadn’t heard of that trick before. Next thing, they’ll say that it’s only $65 each week or $9 a day!

    1. livingrichcheaply@gmail.com Post author

      Yea I’ve heard bad things about Rent A Center stores. The low weekly payment sounds low but when you do the math, you’re paying so much more in the end.

  13. Tara @ Streets Ahead Living

    I bought a laptop earlier this year on a no interest card. While the payments were low and it was no interest, I hated making that payment each month. That monthly payment could have been going to my student loans! I needed a new computer but my experiences with this laptop payment (it’s paid in full now) made me realize how faulty those payment plan options are.

    It’s obviously for the people who don’t have the money in full to buy something in the first place and I don’t ever want to be that person again!

    As far as the home buying goes, I can’t say to go for the $10,000 difference or not but I hope it works out for you all.
    Tara @ Streets Ahead Living recently posted…Would you pledge a dollar for a “Friends” movie?My Profile

  14. anna

    It’s probably just me, but I think $400/month for car payments is a lot! I agree about looking at the total cost, including any interest that might incur. I did too little of that in my 20’s and paid for the price – literally! So exciting about getting your own digs, I hope a great deal works out for both of you! 🙂
    anna recently posted…You Know What’s Awesome…My Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks Anna! And yea I don’t think $400 is that affordable…oh I mean $398!

  15. Kim@Eyesonthedollar

    We are a society of monthly payments. You can make payments on just about anything these days. We used to have so many of them, I lost count. Even if you can make payments at 0%, that’s money that you aren’t using for your benefit. Other than mortgages, I don’t ever see us doing a monthly payment for anything again. Congrats on your place. I hope it works out.
    Kim@Eyesonthedollar recently posted…Ways Anyone Can Make an Extra $500 Per MonthMy Profile

    1. livingrichcheaply@gmail.com Post author

      Actually I like 0% financing if you are disciplined. When I had 0% interest on a credit card for a year, I paid the minimum and made sure I saved the actual balance in my savings account (this was back when bank interest rates were higher). And when the 0% interest rate promotion was over, I paid the balance in full. Of course, this is not a good strategy to use if you’re someone who will spend more because of the 0% interest or someone who will not save the money and pay off the balance when the 0% financing ends.

  16. Fast Weekly

    Funny how the payment game works, isn’t it LRC. The Truth In Lending Law was passed to inform buyers of their total costs over the life of a loan. How do my wife and I avoid this trap? As boring as it sounds, we have a conversation about the pros and cons of the purchase. It also helps that we restrict ourselves to only financing things that COULD at least appreciate (real estate or businesses). I worked in sales briefly and that “buyer beware” caveat is a big one.
    -Bryan
    Fast Weekly recently posted…Why Pay Off Your Debt?My Profile

    1. livingrichcheaply@gmail.com Post author

      Hey Bryan, it’s great that you and your wife go over the pros and cons of a purchase before buying it.

  17. Shannon @ The Heavy Purse

    Marketers and sales people have learned that we love low monthly payments because we then think we can afford something we probably really can’t. It is very interesting the way people look at money differently. One one hand, what you Aunt said is true. It is only $45 a month, which taken alone doesn’t really seem like that big of deal if you really love this house. On the other hand, when you look at the big picture, as you did, it becomes $16,000 which feels completely different. I hope you do end up with this house but at a price you want to pay!
    Shannon @ The Heavy Purse recently posted…How to Develop a Gratitude Mindset in KidsMy Profile

  18. charles@gettingarichlife

    Andrew,
    Can your aunt rebate part of the commission to you to close the gap. You can also give the seller the price and ask them to pay your closing costs which depends on the area is around $7,000. So the difference would only be $3000.

    When we bought our house our agent agreed to give us 1% back from the selling price. I had a contingency in my offer if the property didn’t appraise out we would negotiate. It came $30,000 short on the appraisal. I told my agent I won’t go higher, so the seller came down $15,000 and each agent “rebated” the owner $7,500 each. So we all walked away happier, it was “only” 110 bucks to make up the difference. I hate it when they say that, why doesn’t the loan officer rebate you his commission to save you money.
    charles@gettingarichlife recently posted…Kailua Town Tourists And Sharing The Aloha Links #4My Profile

    1. livingrichcheaply@gmail.com Post author

      She hasn’t offered and I would feel odd asking for that. It’s family so I guess it’s a favor to her, but in the future if I buy more real estate I’ll probably take a different approach. I’ve always wondered why a seller would pay closing costs as opposed to just lowering the price. What is the benefit/difference? Wouldn’t the seller want the price to be lower rather than paying the closing costs? Wouldn’t they risk the property not appraising for what the contract price is?

    1. livingrichcheaply@gmail.com Post author

      Daily payment? Really? Now that’s just insane! When you breakdown any purchase by daily payment it’s going to seem like it’s cheap and affordable!

  19. Grayson @ Debt Roundup

    This happens all of the time. It kind of irritates me after some time. You never hear how much you actually will pay, but only what you will pay now. Car dealerships are one of the worst, but so are cell phone providers. You can get a brand new phone for only $100, but they will charge you $100 per month for the next two years to have it.

    If you would have just bought a phone and brought it to a low cost carrier, then you would have paid for the phone in 6 months and then pocketing the rest of the savings. Simple and easy math!
    Grayson @ Debt Roundup recently posted…The Black Friday Game PlanMy Profile

    1. livingrichcheaply@gmail.com Post author

      That’s how the cell phone providers get you. The phones are subsidized and they get you with the recurring monthly phone charges.

  20. Brian @ Luke1428

    The best way to avoid the trap is to pay cash for everything. Of course, that’s difficult with some things like houses and cars. However, we’ve been saving for over a year now to purchase our next vehicle with cash. I’m just not playing the monthly payment game anymore.
    Brian @ Luke1428 recently posted…Beauty and Function From a BeastMy Profile

    1. livingrichcheaply@gmail.com Post author

      I prefer using credit to get bonuses and rewards, but using cash is a good method if you are someone who gets tempted to spend more on credit. It’s great that you’ll be able to pay cash for the vehicle and not have to play the monthly payment game!

  21. KK @ Student Debt Survivor

    “low monthly payments” sounds horrible to me. I guess it makes me thing of my past student loans which makes me a little fired up. “Don’t worry about student loans, they’re “good debt” and you’ll only pay a few hundred a month” (for the rest of eternity!). I will never again buy something (except for homes-since we obviously don’t have half a million dollars lying around) that I can’t afford to pay for outright.
    KK @ Student Debt Survivor recently posted…The First Time I Needed My Emergency FundMy Profile

    1. livingrichcheaply@gmail.com Post author

      Same with me. I have a large amount of student loan debt, but when I consolidated and extended the payments to 25 years, it is affordable. But I’ll be paying the loans until I’m in my 50s! By that time, my son will be going to college!

    1. livingrichcheaply@gmail.com Post author

      The less monthly payments the better. And you’re right…you don’t really “own” it since you’re still making payments on it!

  22. Anthony @ Thrifty Dad

    Ya, everything here is now advertised as a monthly payment. Finance a car from only $199 a month or $599 and you can own this home! Craziness! But you’re absolutely right, over time, these small little fees can add up to a lot. You can avoid falling into the low monthly payment trap, but countering it with a monthly payment, you can truly afford. Before I bought my home, I figured out my ideal monthly payment — factoring in all expenses – just ask around and give yourself plenty of breathing room. Good luck with the house hunting.
    Anthony @ Thrifty Dad recently posted…‘Tis the season for online shoppingMy Profile

    1. livingrichcheaply@gmail.com Post author

      Thanks! Monthly payment is important because you want to figure out how much you can afford to pay for the house, but I don’t like it when people make something sound more affordable or cheap by breaking it down into smaller payments.

    1. livingrichcheaply@gmail.com Post author

      That’s true. It happens with small recurring payments with me. I have Netflix but haven’t had time to watch it the last few months. I figure it’s just a few dollars and don’t bother to cancel it.

  23. Debt Busting Chick

    I fell into this trap when I took out my car on finance. Big mistake! Just so that I could have lower monthly repayments. Which if I don’t pay off early, will end up costing me a lot. Also for a long time I was paying just minimum payments on my credit cards. Glad to say I no longer do this. 🙂

    1. livingrichcheaply@gmail.com Post author

      Oh no monthly credit card payments are the worse. The interest rate is way too high. It’ll take forever to payoff just by making minimum payments. I guess that’s what those companies want.

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