Cruising Into Debt: The High Cost of Low Monthly Auto Payments


Back in college, my biggest financial pain-point was my car payment. Since I was going to a commuter college without reliable public transportation, I bought a used car my freshman year. I paid religiously on that loan for five years and could NOT WAIT until the day it would be paid off.

The day I paid the loan off, I felt like I had been granted a raise to the tune of several hundred dollars a month. A few days later, I was driving to a 4th of July party when someone ran a red light and hit me. I walked away unscathed but my car was totaled.

Determined not to have another car payment after 5 years of that frustration, I took my meager insurance payout check and went to buy a beater. Then I saw it: a two-door, hunter green Honda Accord with tan leather interior. I wanted it. I was practically salivating over it – and I’m not even a car person! As I took it on the road for a test drive, I thought, “maybe a small loan wouldn’t be so bad…” Luckily, my mom was with me and told me to sleep on it. Once I was home and could think clearly again, I went back out to another dealership and bought a much less nice car – but one that I could afford in cash.

It was a close call. But what would you have done? Car dealers are the quintessential salespeople, notorious for sweet talking you into a purchase before you even know what happened. Now, the FTC is doing something about it. They’ve been taking note of deceptive practices by auto dealers and are now sharing their findings. Read on to learn what traps NOT to fall into when buying a car.

The FTC On Your Side

If you haven’t visited the FTC’s website, take a look. There’s a multitude of information to help consumers make educated financial decisions, including the deceptive car ad information we’re talking about here. So why the focus on auto loans? Because research has shown that not all auto dealers advertise honestly. According to the FTC:

“Details about special offers and promotions may be buried in the fine print, clicks away from online claims, may not be disclosed at all, or may not be disclosed until you get to the showroom or the finance office. But the law requires that if a dealer advertises discounts, prices, or special low payments, the ads must clearly explain the important details of the offers and how a buyer may qualify for them.”

Now the FTC is going after these dealers in something called “Operation Steer Clear,” a nationwide sweep of auto dealers that has already caught several dealers engaging in deceptive practices and has punished them accordingly.

But you might be wondering how consumers get trapped, especially if they catch the hidden costs before signing… so let’s return to my example above for a moment. I had no intention of taking out a car loan. I had a price in mind, dictated by a very real check in hand. But that didn’t stop me from wavering when I saw a car that I didn’t even know I wanted (the green Honda). Test driving that car gave me sudden visions of a new and better life. I started rationalizing that I deserved it – after all, I was working two jobs while going to school full time and driving over 30 miles a day! It wasn’t difficult to justify how a nicer car might be a smarter financial decision.

And that’s how car shopping is for so many of us. We show up to the dealership and the salespeople work hard to increase our expectations. They take us to a nicer model, just slightly better than the one we were asking about so as not to give us sticker shock. An upgrade here, another upgrade there, a little bit of promotional financing, and suddenly we’re getting ready to sign off on a totally different car and price than planned. It can happen in the blink of an eye.

Deceptive Ads to Watch Out For

While we can’t all have an accountability buddy (like my mom) shopping with us to keep us grounded, we can keep an eye out for red flags. Here are a few that the FTC is warning consumers about:

Advertising by the monthly price. Debt is debt, no matter the monthly price. But smart salespeople understand that debt is easier to swallow when digested in low monthly amounts. That’s why some auto dealers focus on the monthly price, not the total cost.

As if that weren’t bad enough, the advertised monthly price may not cover all the costs of the purchase (which you wouldn’t find out about until much later). Ignore the monthly price. Set a total purchase budget and don’t stray from it.

No money down. First, foregoing a down payment on any large purchase can cost you quite a bit in interest down the road. Down payments are a tool that can greatly offset the total amount of the debt before the interest kicks in, so they use them to your advantage.

Second, dealers advertising no down payments may not be telling you about other fees that you will have to pay upfront. Plan on making a down payment – or save up until you can – before you purchase a car.

Low interest rates. Any kind of promotion a dealer offers – whether it be low interest rates or a special deal on certain models – may come with hidden exclusions. Make sure the interest rate applies to the car and purchase price you’re specifically focusing on and make sure they’re saying “APR” (annual percentage rate)  and not “interest” for the most accurate breakdown of what you’ll pay.

These are just a few of the red flags to warn about. The FTC’s website not only lays out these red flags, but they also give you action steps to follow before you sign. So before you make that car purchase, give this page a thorough read-through!

Image credit: welcomia

Receive updates:      
You can always unsubscribe by clicking on the link at the bottom of each e-mail.

  • Dee

    Great tips. My hubby and I both currently drive older cars but recognize that any day either of them could come up with an expensive problem that we do not want to fix. I have to admit, part of the reason why we have put off replacing our cars is that we don’t want to have to deal with car salesman! Good to know there are some laws out there protecting consumers, but there’s still a lot to look out for! Thanks for the info.