Financing Is Cheaper! (Said Someone Who Was Mistaken)

We as a society might be in much worse shape than I thought. While I’m not a financial wizard, I do understand simple mathematical concepts like interest rates. Perhaps I shouldn’t have assumed that everyone understands this.

2016 Kia Soul
Pictured here is the vehicle in question.
(Copyright © 2017 by Wil C. Fry.)

The following is a conversation I had a few months ago, which I will relate as accurately as possible. This was just after someone learned my wife and I bought a new car (2016 Kia Soul). I will use fake initials (“GA”) because this isn’t about one person. “GA” represents many Americans.

GA: “How low are your monthly payments — if you don’t mind me asking?”
Me: “We don’t have payments. We didn’t finance it; we just bought it.”
GA: “How does that work?”
Me: “We saved up the money over the past few years. Once we signed for this car, we just went to the bank and got a cashier’s check and brought it back to the dealership.”
GA: “That’ll cost you more in the long run.”
Me: “What? How? No, it saves money in the long run.”
GA: “But you’re paying for repairs; there’s no warranty.”
Me: “Yes there is. The warranty still applies; it’s the same whether you pay cash or finance.”
GA: “But now you own something that will depreciate. In a few years, it won’t be worth much.”
Me: “Which is the same thing that happens if you finance. Except we’re not paying interest.”
GA: “I just couldn’t do it. I saved money by making payments on my car.”
Me: “How so?”
GA: “Because it’s only [dollar amount] per month.”
Me: “But the total cost is more. You’re paying the cost of the vehicle plus interest. And usually a financing fee.”
GA: “I don’t remember all the numbers now, but they explained how I’d be saving money by financing.”
Me: “But you don’t have to remember the numbers. X is always less than X-plus-interest.”
GA: “But now I’m done making payments and I own the car.”
Me: “Same here. Except it took zero months instead of 60 months.”
GA: “So what happens when you need to buy the next car?”
Me: “Instead of making payments for five years, we’re putting that money away. When we need the next car, we’ll have enough saved up for it.”
GA: “But what if you lose your income?”
Me: “Then we’ll still have the car, because it’s paid for. If we were making payments and lost our income, they would come take the car.”

It kept going for a while until someone interrupted. We came back to this conversation a month or two later and it ran almost identically to the above.

This person is utterly convinced that financing a car costs less in the long run than paying the full price up front. I tried to use the example of a home purchase — that a $300,000 check for a house would cost less than getting a 30-year mortgage on a $300,000 house — and kept coming back to the same principle, that X is always less money than X-plus-interest. It never sank in.

Obviously, it’s more difficult to save up for a house purchase than a car purchase, but the idea is the same.

I didn’t think until later that perhaps I should have use a less expensive example, like rent-to-own furniture stores. Instead of buying a sofa for $800, you go to a store that sells the same sofa for $1200 but would rather you divided that into 24 monthly payments, plus interest, plus a financing fee, so it ends up being $2100 in the end. (I knew someone who got all his furniture this way.) I wonder if “GA”, who has never made payments on furniture, would have seen my point then.

Keep in mind, I didn’t bring up the topic; “GA” did. I don’t care whether you finance your car (or your sofa or your coffee maker). Just don’t try to convince me that financing costs less than buying outright.

It got me to wondering how many people think like that. Have you ever met someone who’s convinced that financing a car is cheaper — in the long run — than paying cash for the same car? Is this problem widespread? And if so, I wonder how much of our collective debt is due to this mistaken belief (which is directly debunkable via simple arithmetic).

It also reminded me of other beliefs people hold that they can’t be convinced out of. That certain numbers are unlucky (they’re not). That each coin flip increases the chance of getting a desired result (it doesn’t; it’s 50-50 every time). And many others. Except I thought this one would be different because the math problem is simple.

Note: I do understand that sometimes the dealership offers steep discounts for financing a vehicle. But that wasn’t under discussion here.

Note 2: The only other way I can think of for financing to cost less in the long run is: If you DO have the money to pay full price, but choose instead to make a downpayment and finance the rest at a very low interest rate, AND invest the remainder at a rate-of-return that’s higher than your finance rate. Which I think would be unusual, if not outright risky.

  1. michaelzeiler says:

    Here’s a stupid thought. What if their brain keeps latching onto the ‘per month’ part of the equation. Then their view is that you paid 16k in the first month while they paid 300. By the second month you had paid 8k per month and they still only paid 300. Even after 16 months, you’re only down to 1k per month and they’re still at 300. For 53 of the 60 months financing (Please excuse the simple math, we both know it doesn’t work this way.), your average monthly payments stays higher than theirs. And if they plan on starting all over at 48 months with a new car….

    • Wil C. Fry says:

      I probably wasn’t clear, but “GA” had already paid off their own car. So while your example is perfect for someone who’s halfway through a car loan, it didn’t make sense in this case.

      My best guess is that they got a deal — as I mentioned in my first note at bottom — and didn’t understand it. But it never came up in the conversation, so I really don’t know.

      Mostly, I kept reducing it in my head to “X is less than X+I”, and was frustrated that GA couldn’t see it.

  2. Janice C Rawlings says:

    I can’t believe that an adult able to buy a car can think that way. As I started reading, my first thought was about your comment #2. That can happen, but rarely.

  3. Dana says:

    Yes, I’ve had this discussion many times (I paid for my car in full; I’m not the one financing). Usually when I’ve had the conversation it’s with people who intend to trade in their car after a couple of years and don’t intend to ever own it outright.

    Also, people can’t imagine putting away $300/month for five years in order to get a car outright, but can usually scrounge up enough for payments each month (with nothing being put aside into savings). It’s an instant gratification factor; I want/need a car and I want/need it now.

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