With financing terms on new cars extending to 7 or 8 years from the purchase date, don't be fooled into what $18.00 can buy you.
If you purchase a new $30,000.00 car on an 84 month 0% interest financing term, your bi-weekly payment will be $178.57. For just $18 more per payment, you can upgrade to a $33,000.00 car. No doubt, your car dealer will ask, where else can you get a $3,000 upgrade for $18? Oh, let me answer: nowhere...not even here. Schemes like this exist in many sales cycles and with amounts at stake that should warrant more character from sales professionals than appears to be common today. With debt levels where they are at today, you would think more sales staff would have some degree of compassion for their customers and look out for their best financial interests, instead of purely chasing the sale. Sadly, that's not happening, so the only advocate you have left is you. Its your money, so make sure you are spending it because you want to spent it, not because of some parlor trick that makes you think you're getting a discount on something for which you are actually paying full price.
Payday Loans
There's a payday loan company who takes this idea one step further. Their marketing campaign tells potential customers they can get $300 for $20. In my opinion, that kind of advertising is misleading, and really should be the subject of a lawsuit. All payday loan companies prey on those whose command of financial concepts is fairly low. After all, if a person was wise relative to money, he or she would never use a payday loan. Once in the cycle of paying off a payday loan, things only get worse. Eventually, you will likely take out a new payday loan to pay off the last one.
The implication of a marketing campaign that says customers can get $300 for $20 is that customers are literally going to receive $280.00 for free. Obviously, that's not the case. Customers of a payday loan must repay the original principal amount in addition to the $20. A more accurate slogan you be Pay $20 for the opportunity to pay an additional $300 in 14 days!. Failure to repay that amount within a tight time frame will result in severe penalties. And extended to an annual basis, where you are obligated to repay $20 every 14 days, that $300 for $20 is more like an annual percentage rate of 173%. How many loans would you take on with an annual interest rate of 173%?
Homes
When you purchase a home, you make one of the most significant financial decisions of your life. Homes are unaffordable to almost everyone, so much so that we don't even bat an eye when people use a mortgage to help finance it. The very fact that a loan to buy a home has the special name mortgage is attributable to the fact that virtually no one can buy a home without one. Mortgages also have extremely long repayment terms. Repayment terms get confusing in a hurry. The overall payback term is called the amortization. Because amortizations are typically about 25 years or even more, banks want something shorter than 25 years to help minimize their risk. That's why a mortgage also has a term, which is typically about 5 years. Aft 5 years, the mortgage renews, and if rates have increased, the borrower needs to pay those higher rates starting at that point.
When you consider the impact of a mortgage amortized over 25 years, big impacts on the overall price you will pay might not be apparent in each bi-weekly payment you make. For example, a $350,000.00 mortgage with a 5 year term and 5.59% interest rate amortized over 25 will have a bi-weekly payment due of $1,046.50. Adding just $18 to that bi-weekly payment will entitle the borrower to a mortgage of $356,000. Once again, it seems as though $18 can buy you $6,000.00.
But with a mortgage, the true impact is much more clear. Over 5 years, with a $350,000.00 mortgage, the amount of interest paid will be $91,405.50. With a $356,000.00 mortgage, that number jumps to $92,972.51, which is a difference of $1,567.01 and that is money you will never get back. Interest is the pure premium you pay to a bank for the opportunity to get a mortgage.
Summary
If you are ever offered a scheme in which paying a small incremental amount will result in greater purchasing power, you need to cast a very critical eye on the offer. Always understand the full ipact of the financial decision over the entire loan term, not the incremental difference of $18.00 per payment. Sure, you can probably handle $18.00. But if that $18.00 means you will watch $1,567.01 go up in smoke over 5 years, you really need to question the logic of making that additional purchase.
Do you have experience in being offered additional purchasing power for a seemingly minimal addition to your bi-weekly payment? Did you accept the offer? Or did you challenge the salesperson to explain the impact of that decision over the term of the loan?