Question of the Day: When it comes to the cost of a car, research shows that most consumers focus on the ___________ payment during the car buying process.

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Oct 28, 2020
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Question of the Day, Purchase Decisions, Behavioral Finance

Answer: Monthly

Questions:

  • Do you think the monthly payment captures how much the car will cost you? What else do you need to know to calculate the total cost?  
  • Why do you think that most consumers focus on the monthly payment instead of the overall cost of the car?
  • When you stretch out the term of an auto loan (e.g., from 4 years to 7 years), what happens to the monthly payment? total interest paid on the loan? 

Here's the ready-to-go slides for this Question of the Day that you can use in your classroom.

Behind the numbers (from MIT research): 

In this paper, we ask how households make decisions about optimal debt contracts in practice. We show that many consumers appear to target specific monthly payment amounts rather than minimizing total borrowing costs or satisfying debt-service coverage constraints...we show that borrowers’ monthly payments bunch disproportionately at salient
monthly payment amounts, especially $200, $300, and $400 per month."

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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.