Millennial financial decisions are often guided by monthly payments, and affordability is framed in terms of whether we can manage a certain payment every month. Nowhere is this more obvious than in the auto market, and dealers are taking note so that they can profit off our generation’s flawed way of thinking about money.
What’s the problem?
Millennials have come of age in an era where a “subscription-based culture” is pretty much the norm. When we’re shopping for a house, car, cell phone or nearly anything that typically must be financed, we are most interested in a monthly number.
On its face, this seems completely reasonable because we often run our household finances on a monthly basis. We think of our budgetary world as restarting the first of every month because bills typically reset monthly.
The problem with the monthly-payment mindset is that it doesn’t focus on the total cost of financing something. There are many things to consider beyond a monthly payment, such as term (how long is it going to take you to pay off the loan), and interest rate (how much are they charging you for the loan).
A monthly payment only paints part of the picture when you’re looking for long-term financing. As always, the devil might be in the details.
Car shopping as an example
For instance, if you’re shopping for a car and a dealer presents you with the car of your choice and quotes you a monthly payment you can afford, you need to stop and ask for all of the terms of your loan.
Dealers can play with the numbers to make a monthly payment seem palatable. In reality, you need to look behind the curtain to really analyze the mechanics of a transaction.
Off the top, you need to know what your purchase price is and whether you’re getting a good deal from the onset. If you’re paying full price, those monies are obviously going to be reflected in your monthly payment.
Additionally, you need to focus on your interest rate because if you’re paying some absurd rate to borrow money, it’s going to cost you a great deal more to pay back your loan.
Lastly, you need to be absolutely clear about your repayment timeline. Paying $300 a month for 36 months is not the same as paying $300 a month for 72 months. Realistically, you have to consider that if you don’t pay down your loan fast enough, you may be left with a car that’s nearly worthless while still owing money.
Takeaway: Monthly payments don’t paint the whole picture
When millennials shop around, there are often tools to search by monthly payment. Whether it’s houses, cars or cellphones, the financial technology companies that have sprouted up in recent years know that they can sell us their wares by pandering to our monthly payment mindset.
Of course, it’s convenient and easy to just think in terms of monthly payments. In the end, it’s shortsighted and slowly bleeds you over time.
Instead, when you make big purchases, think about financing from every angle. Loans are complicated and should be analyzed in-depth before you make any big moves. Your monthly payment is just one of many details that you should consider, or you’ll find yourself stuck on a hamster wheel of debt.
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