Ever wonder why everything is sold as a monthly payment? It’s not an accident.
Marketers have realized that if you take a big price and break it down into a series of smaller, more palatable payments, we are more likely to buy something. This phenomenon is known as the Monthly Money Trap.
Depending on where you live, a house can range from a few hundred thousand dollars to several million. The median sales price of a home sold in the United States is currently $416,900.
That’s why a real estate agent might say that after a 10% down payment and a 30-year loan at 6.5%, the monthly payment is less than $3,000. (This assumes $3,000 in property taxes and an annual $1,500 home insurance premium)
A $416,900 home with a 30-year mortgage? That sounds intimidating.
But a $3,000 monthly payment? That feels manageable. And that’s the trick.
But it’s also where the trap comes in.
Reframing the total cost makes expensive items feel affordable, leading us into the monthly money trap.
The Psychology Behind Monthly Payments
The monthly money trap is how we break down the total cost into manageable monthly payments and convince ourselves we can afford it—or allow others to convince us. This is how the trap works: the human brain struggles with long-term planning. We can easily envision life a week from now and have a decent idea of what it will be like in a year. But when it comes to imagining life five or ten years down the line, it becomes challenging.
If you had asked 20-year-old Jim what life would be like at 30, he would likely have been way off. At 40? Forget it.
Salespeople understand this cognitive bias. By breaking down a large purchase into easy-to-digest monthly payments, they help you see how it fits into your budget.
In reality, we should focus on the total cost of ownership and assess its impact on our finances.
On its own, this breakdown isn’t inherently bad. It can aid in planning, but only if you maintain a broader perspective.
However, if you base your decision solely on the monthly cost, you risk spending more overall because the monthly payment seems acceptable. You might adjust various factors of the purchase, but the monthly cost only increases slightly.
How Car Dealerships Use This Trap
Car dealerships are notorious for this tactic. They encourage you to ignore the sticker price, total cost of ownership, and fuel efficiency, focusing solely on the monthly payment.
In fact, they often manipulate various loan terms to arrive at a monthly payment you can accept. They adjust the loan length, interest rate, trade-in value, down payment, and even offer incentives—all to get you to say yes.
If you can afford to pay $750 a month for a car, here’s how different loan terms affect the price you can pay with a 5% APR loan:
As illustrated, a longer loan term allows you to afford a more expensive vehicle, but you end up paying more in interest.
Additionally, remember that this is just the sticker price. It doesn’t account for other costs like insurance, fuel, and routine maintenance. For that, Kelley Blue Book and similar resources can help you determine the total cost of ownership for your desired vehicle.
How Do You Avoid This?
Recognizing this tactic is crucial. Just as you would identify scare tactics or urgency cues (like “time is running out!” or “it’s the last one!”), the monthly payment trap is a tactic too.
Always look at the total cost first. In the car example above, all three loan terms were supported by a $750 monthly payment.
Ask yourself whether you want to pay all that interest for a higher-priced car. If your plan is to switch cars every five years, a five-year loan may not be the best option. By the time you’ve paid off the loan, the car’s value will have depreciated significantly.
KBB states that new cars lose 30% of their value in the first two years and then 8-12% each subsequent year. Assuming an 8% depreciation rate after the first two years, your $39,750 car could be worth only $21,667 after five years—a loss of $18,083.
If you plan to drive the car until it’s no longer functional, which could take 15 years, then depreciation isn’t a major concern. The $48,385 spread over 15 years translates to just $3,225 a year or $268 a month. Even when factoring in additional costs (insurance, fuel, etc.), it still makes sense.
So the next time someone tries to sell you on a purchase based solely on the monthly cost, you’ll be prepared.
Your monthly payment is just one piece of the puzzle. Before you commit, consider what the purchase truly costs and whether it aligns with your future plans.
