The High Cost of Low Monthly Payments

The following guest post is from the Engineer behind Engineer a Debt Free Life. After reading through the post, please visit his site and consider following his site’s feed for some great content.

Have you ever noticed how stores take all those nice things we can’t really afford and make it available for purchase in “affordable” monthly payments? It’s psychological marketing really, we see a new couch for nine hundred dollars and think “whoa, I can’t afford that”, but a new couch for a low buy it today price of forty dollars a month we instinctively say “I can afford forty dollars a month. I deserve this.”

For many years this was my Achilles heel, probably one of the biggest reasons why I ran us into so much debt.  For a long time we lived beyond our means, pretending we could afford a “better” life than we could afford.  It all started with needing a new car in college.  I thought I was being frugal and bought a 3 year old vehicle thinking I could easily afford the three hundred and fifty dollar a month payment (not the best idea on a part time income in college).  Soon after that we needed broadband at fifty bucks a month and on top of that all the credit card debt was running a couple hundred a month.

No worries, it’s just a few low monthly payments, right?  Well, the problem really starts to compound after a while when this psychological marketing has you thinking you can still afford more and that you deserve better.

So, fast forward another 5 years… oddly enough my income had more than doubled since finishing college yet I was poorer than before college. Why? Adding up the low monthly payments of two vehicles, furniture and all the things I thought I needed pretty much ate up my entire month’s salary.

Those “low monthly payments” weren’t so affordable anymore.  To make matters worse, all the debt… the real cost of these items… had taken a toll on my credit rating.  This not only made my interest rates go up but then my insurance rates went up too. What a nightmare, all these low monthly payments were making me dirt poor.

This psychological marketing is just that, psychological.  They advertise and hook you into thinking you need better material items than you do, that you need to keep up with the Jones’s.  They show you the price tag and then convince you that you can easily afford the low monthly payments.  The real tragedy here is what you end up paying in total with all your payments. You couldn’t afford a nine hundred dollar couch so you take the low monthly payments and end up paying two thousand for the same couch.  Doesn’t sound so affordable now, does it?

So the next time you think you need material items you can’t afford, tally up those monthly payments and ask yourself if you can afford to pay that amount. See for yourself, the next time you see one of those pay by the week rent to own furniture ads… add up the payments and see how affordable it really is.

Turns out psychological marketing is just putting lipstick on a pig.  Grandpa was right, if you can’t afford it, don’t buy it.


  1. I think the problem is a spending mentality rather than a saving mentality.

    This may sound crazy, but does anyone really “need” a couch? (smiles). We didn’t have one for many years until a relative gave us their old one.
    We keep it in the children’s playroom. We don’t have one in our living room.

    There are many things we are “convinced” to buy that we really do not need at all. I would much rather have money saved than a house full of things.

  2. I don’t think there is ever a reason to only pay minimums on monthly bills. The interest rates are so high and debt will pile up very fast.

  3. The simple solution to this is to make sure that any purchase over $200, make it with cash. Then you would really think otherwise about buying that item.

  4. In addition to the fact that it is hard for people to conceptualize a large price tag for something when it is spread out into “affordable” monthly payments, I find that people I talk to about it will justify the purchase by saying something to the effect of, “but it has a 0.0% introductory APR!!!” or “No payments until 2010!!!”
    It’s all just a very effective marketing scheme to get the conumer to empty his pockets coming and going. Regardless of affordable payments, low APR or no payments for X months, no industry wants to sell you something on a payment plan out of the goodness of their hearts.
    Another way to get consumers to part with their money that I’ve noticed is making a comeback these days is the idea of layaway…which is basically the same scam under a different name.

  5. Good point about the APR and no payments. Back in my spendy days I myself used to use that excuse from time to time.

    It’s also very true about conceptualizing the large price of material items. 1000 dollars, I’ll just get another credit line (old way of thinking)… It was only when I started working my tail off day and night to pay it back that I could truly “see” (and feel) how much 1000 dollars is/was.

  6. Yup, this is why I tell my readers everyday, “1/10th rule” for cars guys!

    So many people out there spend WAY MORE than 10% of their annual gross salary on a car it’s ridiculous. The rich don’t do it, why are the middle class and poor? $50,000 salary and $25,000 car? What a joke!

    Bill Gates isn’t buying a $100 million car is he?

    Stand strong people!

  7. I also had the same problem in college, luckily I was able to pay off the nasty credit card debt and haven’t looked back since. Now instead it’s “that couch is $900 have I saved enough money?”

  8. The best way I look at big purchaces is to figure out how many hours a week I have to work to support it. Say I have a car payment of $400 a month, $100 a week and I clear $12 an hour thats 8 hours and 20 minutes, about 1 day a week just for the car, $575 for my mortgage is 10hours and 56 minutes about 1.5 days, and so on, right there is about half a work week and I haven’t eaten yet or anything else.

    I don’t have the car payment just the mortgage

  9. I’ve bought one new car in my entire life (over 40 now). People forget just much cheaper it is to buy a “clean” used car. Agreed, the only payment I want is the mortgage.

  10. It’s not just material goods that snag you with this either – watch out for long term contracts for any kind of activity too.

    Contracts for things like karate can suck up thousands of dollars over the life of the contract, but you don’t think about it since it’s broken up into “affordable” monthly payments of $150.

    Sometimes I count myself lucky that that was the only long term sucker bet that I made with money coming off of college and into my first real full time job (hey, I’m employed now, I can afford it!) but it’s still been an albatross around my neck for over a year. You pay that sucker whether you go to class or not, and work hasn’t been lending itself kindly to making it to class.

    Learned my lesson with that one to either pay it all up front, or pay as you go!

  11. Exactly what happened to me. A few monthly credit agreements were no hassle when I was working but when I got laid off the reality of all those individual monthly finance agreements kicked in and I was in fairly big trouble. Things are better now butboy, have I learned my lesson!

  12. Exactly. While that $6 coffee from Starbucks may seem expensive but manageable just imagine what it would be like to have to pay the $14 or so for it all up front rather than in monthly payments and interest like some people do who buy stuff with their credit card and then do not pay it off every month … 🙂

  13. I guess I’m in the minority here. I have a household budget and we will from time to time buy something with X number of months same as cash. I take the number of months subtract one and calculate the monthly payment. I then check to see if we can really afford that. We then make those monthly payments and never pay interest. For us it works great. However, I know many people that I would NEVER recommend this to as this would allow them to get into trouble. For us it works and we never finance more than one thing (excluding the mortgage and 1 car payment, which we are paying off early). But I am also someone who saves money by putting all of our purchases on a credit card and paying it off each month. We have never paid interest on a credit card – the credit card companies must hate us.