Why A 7 Year Car Loan Costs $4,090 More

The salesman asked what I wanted to spend a month. I said six hundred. He disappeared for forty minutes and came back with a car I had not looked at, at six hundred and four a month, and I signed it.

I never asked the price. I found it three days later on the contract, inside a box I had already initialled.

Why they ask for the monthly number

A payment is four variables wearing one number: the price of the car, the size of your deposit, the interest rate, and how many months you pay for. Hand somebody the payment and they can move the other three however they like and still deliver exactly what you asked for.

The one they will move is months. It costs the dealer nothing and it is the variable you are least likely to check.

The same car, three ways

Take a $32,000 car financed at a 7.5 per cent APR, the annual percentage rate, which is the yearly price of the loan. Hold the car and the rate still and change only the term.

Going from four years to seven drops the payment by $282.90 a month and adds $4,090.50 to the cost of the car. Same car, same rate. The extra money buys nothing at all except a smaller number on the form.

Four thousand dollars.

The version that costs more

That is the passive trap. The active one is worse, and it is the one I walked into with my eyes open.

Hold the payment fixed instead of the price. $773.72 a month across 48 months buys a $32,000 car.

The same $773.72 across 84 months buys a $50,443 car. A dealer who knows your payment and controls your term is working with $18,000 of headroom, and every dollar of it is car you did not walk in asking for.

Which is why the trim level keeps climbing while the payment sits still. Nobody has lied to you. You handed over the only variable you were defending.

The other cost of a seven year loan

Cars do not last seven years in a financial sense. Most of the depreciation lands in the first three, so a long loan leaves you owing more than the car is worth for a long stretch in the middle, which is called being underwater and is completely normal on an 84 month note.

It only becomes a real problem in two moments: when you want to trade the car in, and when it gets written off. An insurance settlement is calculated against what the car is worth, not against what you still owe, and the gap between those two numbers is yours.

What to do instead

Negotiate the out the door price and say nothing about financing until that price is written down. Out the door means the price including tax, title, registration and every dealer fee, because that total is what the loan actually gets built on.

When they ask what you want to pay a month, and they will ask inside the first ten minutes, answer a different question. Say you are settling the price first and will talk about payment afterwards.

It is a mildly awkward sentence. Say it anyway.

Get a financing quote of your own before you go. A bank or a credit union will put a rate in writing, and that piece of paper turns the finance office from a negotiation into a comparison. Quite often they will beat it, because the dealer earns on the loan, and beating your rate is cheaper for them than losing the sale.

Four numbers on the contract

• The out the door price, which should match what you agreed, to the dollar.
• The APR, which should match the rate you were quoted rather than a rate that appeared somewhere in the last hour.
• The term in months, which is the one that quietly grew while you were checking the other two.
• The total of payments, which the Truth in Lending disclosure has to show you, and which is the honest price of the car.

That last box on the 84 month version of our example reads $41,229.29 for a $32,000 car, printed in plain type on a page you are required to receive. Almost nobody reads it, because by the time it appears the pen is already in your hand.

If you have a car loan running right now, call the lender and ask for the payoff amount, then look up what the car is worth. If the payoff is bigger, you know where you stand, and you know what you are choosing the next time somebody asks you what you want to spend a month.

The room at the end of the hall

Once the price is agreed you get walked to a finance office, and that room is where a payment buyer is worth the most money. Everything offered there is priced to you as a few dollars a month, which is the same move that got me the car in the first place.

The usual five: an extended warranty, gap insurance, paint and fabric protection, tyre and wheel cover, and VIN etching. Some of it has genuine value. Gap insurance, which covers the difference between an insurance settlement and your loan balance, is worth real money on a long loan and can often be bought from your own insurer for less.

Ask the price of each one as a single number rather than as a payment. Then ask what the payment is with none of them attached, and compare the two totals instead of the two monthlies.

Keep the trade-in separate

If you have a car to trade, settle its value as its own negotiation and do not let that get folded into the payment either. A dealer can offer a generous trade-in figure and take it straight back out in the price of the new car, and if you are watching one number you will never see it move.

Three prices, three conversations. What they are charging you, what they are giving you, and what the money costs.