Why Total Cost Trumps Payment Methods Every Time

When making big purchases, like a car, home, phone, or computer, many people get hung up on how they will pay for it—whether through financing, leasing, or paying in cash. But in reality, the most important factor is the cost of the item itself, not the payment method. Understanding the total cost of an item can help you make smarter financial decisions and avoid stretching your budget too thin.

I spend a lot of time analyzing personal finance, and one thing I’ve realized is that it’s the overall cost of the purchase that has the most significant impact on your financial health. Whether you're buying a car, a home, or any other large purchase, the amount you spend upfront—or save to make the purchase—affects your ability to invest for the future. The lower the cost, the easier it is to afford, and the more you can set aside for savings and investing to build wealth over time.

Why the Price Tag Matters More Than the Payment Plan

Let’s break this down with an example. A new car in America costs around $48,000 on average, and a truck is typically priced just under $60,000. These are large expenses, and paying for them in cash can be difficult for most people, which is why many opt for loans. But have you considered how much more you actually pay over time if you finance?

If you were to put $10,000 down on a new car and finance $38,000 for 60 months at a 7% interest rate, you would pay a total of $55,146.73. That breaks down to about $752.45 per month. In comparison, if you were to save up $633.33 per month for 60 months and pay in full, you would spend $48,000 for the car. The total paid, when financing, is approximately 15% more than the cash purchase. So, while monthly payments might seem manageable, financing could cost you more in the long run.

The Benefits of Buying a Used Car

Let’s compare that with buying a used car. The average price for a used car is around $27,000, which is 43.75% less than the cost of a new car. Used car loans typically have interest rates around 12%, but for those with good credit, this could be as low as 8%. A used car loan, with a $17,000 loan balance ($27k - $10k cash down) for 67 months at 12% interest, would cost a total of $33,408, or about 40% of the cost of a new car. The monthly payment would be around $349.37, which is 53% less than the monthly payment for a new car.

Real-Life Example: My Own Experience with Buying a Used Car

I paid off my own car, a 2017 Chevy Volt, in full. I bought it in 2020 when the interest rates were lower, and the used car market was down due to the pandemic. My SUV’s engine had failed, and I needed a new vehicle. I purchased the Volt for $15,297, putting $3,000 down. With taxes and fees, the total financed price came to $13,899.11. The interest rate was around 3%, and the monthly payment was $251 over 59 months, which was a much better deal compared to the higher payments you’d get with a new car.

Now that I’m more experienced with personal finance, I realize I could have paid more upfront. But when I saw the 3% interest rate, I thought borrowing was a good idea. I could have saved more and paid less in interest. In the end, the total cost over time isn’t as bad as it could have been, but I could have made different decisions to lower my overall financial burden.

Why It’s More Important to Worry About the Cost, Not the Payment Plan

The important takeaway here is that most purchases, especially cars, have similar terms—whether you’re financing for 60 months or stretching it to 84 months. What you need to focus on is the total cost, because that is what will affect your long-term financial well-being. If you spend less on big purchases, you can free up more money to save, invest, and build wealth for the future.

When you consider a car purchase, for example, you may be tempted to buy the most expensive option, thinking the monthly payment is reasonable. But over time, those payments add up. You could save more by opting for a less expensive vehicle or a used one. It’s not just about how much you can afford per month; it’s about how much you can save in the long run, and how that savings can be used to invest in your future.

Don’t Let Your Purchases Drain Your Income

At the end of the day, a car is a tool to get you from point A to point B. It’s nice to have a stylish car, but the reality is that a car is just a car. There are hundreds of good options out there that will serve the same purpose. When it comes to making big purchases, always consider the cost, not just how you will pay for it. By focusing on cost-effective choices, you can free up more of your income to build a better financial future through smart investing and saving.