Car Financing Smarts

This column is an excerpt from my best-selling book, Credit Card and Debt Management (ISBN 0964840197). It’s the beginning of Chapter 5: Math and Money. Enjoy!

I want to begin this chapter with a personal story. My father asked me to help him pick out a new car. After visiting several new car dealers in the area, we finally found one with a car that had the price and features we were looking for. Once the negotiations were complete, and the price was agreed upon, it was time for the dealership to add in those extras such as; tags, processing fees and anything else they could.

Finally, the balance due for the car was presented and we decided to finance it. The salesman told me the length of the loan and the interest rate. I already knew the amount to be financed so it was easy to calculate the monthly payments. It was at this time that we were instructed to go into a separate office to read and sign the loan agreement.

When the contract came out of the computer the monthly payment shown was $65 a month higher than I had calculated! That $65 per month for entire length of the 5-year loan would total $3,900! I expressed my concern and was told that, “you can’t figure out monthly payments with a simple calculator” and “the computer is right.” I informed the salesman that unless the payments were what I computed, the deal was off and I would be visiting the dealer across the street who would be happy to have my business. Furthermore, I was using a scientific calculator which can easily handle simple monthly payment problems.

Once they saw I was serious, it was explained that the computer “accidentally” added a charge on for an extended warranty and undercoating. They adjusted for this error that they “obviously had no idea occurred,” and told me the new payment. This time it was closer, but still off by $10 a month. This might not seem like much money but $10 a month for 60 months is $600 and I would rather keep the $600 than contribute it to the next dealership rob-the-customer-day party. I told them again that they were wrong and I was not going to allow my father to sign any agreement until the numbers were correct!

After searching, they finally “discovered” what went wrong. Another computer blip that they had no control over. It turned out that the interest rate on the agreement was not the one they originally quoted me. Once all the numbers were correct the computer spit out the correct monthly payment and we got the car.

I am not trying to imply the dealership tried to rip me off. Oh, no! But what is certainly true is that if I did not know how much the payment was supposed to be, my father might have signed that agreement and paid a huge unnecessary fee.

Since then I have helped many of my friends buy cars. In each case, the starting monthly payment was always higher than I calculated and later reduced to the correct number. These are real examples of the necessity of being able to solve simple math problems.

This is the most important chapter in the book. It is essential to know how to calculate, in advance, all the terms of a loan. You need this information to compare different credit agreements and determine which is best for your unique situation.