By Joseph Ganem
Just about every financial decision we make involves comparing numbers. But, often the numbers shown are not the ones you should compare. The sellers of automobiles and related products are masters at leading people down the wrong financial road with misleading numbers. Whether buying a car or a tank of gas, it is easy to be distracted by the numbers in large lettering on the signs. But always think about the difference between the total amount of money in your pocket before and after the transaction. That sounds obvious, but consider these common examples where numbers send the consumer off in the wrong direction.
Buying a car
Dealers have found 0% financing offers to be one of their best marketing tools. The idea is to distract buyers from looking at used cars by making it appear that they will save money financing a new car. But if you look at the fine print, almost all 0% financing offers are in lieu of a rebate.
Consider a new car advertised for $26,000 with 0% financing for 60 months or a $5000 rebate. What that means is that the car costs $21,000 because if you have the cash you will drive away with $21,000 less in your bank account. If you don’t have the cash the so-called “rebate” is actually a $5000 pre-paid finance charge. Whether that’s a good deal depends on the alternative sources of financing available.
For example if your bank will finance the $21,000 for 5 years at an 8% annual percentage rate your monthly payments will be $425.80, which is $7.53 less than the $433.33 monthly payment that results from the 0% finance offer.
You should still be wary of the 0% finance offer even if the monthly payments that result are about the same or slightly more than payments on a loan from the bank. That is because no matter what happens in the future you will be responsible for the $26,000 owed to the dealer. But if a bank loan is paid off early because you totaled the car or trA 0% finance agreement is the kind of deal I call a “two-headed quarter” for the dealer because it insures that the finance charge will be paid to them no matter what events happen in the future. As a general rule it is better to shop for the lowest cash price for a vehicle and then compare different financing offers.
Auto manufacturers have created other complicated offers in place of rebates to distract buyers. With the high cost of gas making the news some manufacturers are offering discounts on gas for the first three years of ownership. But before you agree to exchange your rebate for gas you will need to do an extensive mathematical analysis of your driving habits, gas buying, and most importantly all the complicated rules and restrictions attached to the offer. It’s a good bet that the cash from the rebate is the simpler and more profitable option.
With gas prices hovering around $4 per gallon, it is now common to spend more per month filling your tank than making your car payment. It certainly pays to search out the station offering the best price on gas. But like buying a car, if you focus only on the numbers shown on the signs you might pay more. Before you set off on a trip to the station with the lowest price, think about the total cost.
Let’s do the math. If you drive 5 miles out of the way to purchase gas in a car that gets 20 miles per gallon, that 10-mile round trip will burn 0.5 gallons. If you drive that distance to pay $3.95 per gallon to fill a 15-gallon tank, instead of paying $4.00 at your local station, you only save 75 cents. But your trip to save $0.75 will cost nearly $2. Instead of saving a nickel per gallon you will actually spend about 8 cents more per gallon.
If that computation took you back to those impossible word problems in high school math, you can easily find out if your trips to purchase low-priced gas are burning more money than you save with this calculator that will compute your net savings on gas after accounting for the cost of the trip.
Most auto dealers will push an extended warranty or service contract when you purchase a vehicle. I find it amusing to be sold on how great a product is, only to be told horror stories on all the problems that can occur once I make a decision to buy. But, the reason for pushing service contracts is that the money spent on them is pure profit for the dealer. Extended warranties on cars typically have deductibles and exclude many parts — usually the parts most likely to fail. If you do have a problem you will have to make a claim and negotiate a payment that may not cover the entire cost of the repair.
The deception of extended warranties is that you will always find someone who needed expensive repairs on a vehicle shortly after the manufacturer warranty expired. But those cases are the exceptions. If you make it a rule to always decline extended warranties, you will save more than enough money in the long run to pay for the repairs that you actually need. Warranties do not cover routine or regularly scheduled maintenance. If you invest in upkeep rather than an extended warranty, the chance of an expensive unexpected part failure will be reduced.
Whether buying a car, filling its tank, or having it serviced, shop for the best cash price. Avoid complicated gimmicks and contracts laden with rules and exclusions. Despite what the salesperson says, if you do the math you will usually find that cash is your best bet.
Image courtesy of Ben McLeod
Joseph Ganem, a professor of physics at Loyola College in Maryland, is author of the award-winning book: The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy. His Website is TheTwoHeadedQuarter.com.