Beware of the Winner Effect When Buying a Car
Winner effect is the tendency to believe that a decision is good for us just because everyone else makes the decision. When it comes to money, it’s easy to take advantage of the winner effect, especially when it comes to buying a car.
The math doesn’t always work that way, but Fun financials, a personal finance site, makes an interesting point about car financing. Dealerships often reach out to customers offering lower monthly fees. Even if it doesn’t really matter in the long run, many customers jump on it because paying for a car is considered the norm. They explain a scenario in which someone can finance a $ 25,000 car over five years with a monthly payment of $ 450.
After paying for it over 3 years, they are forced to buy a new car, even though their current car is working fine. The main advantage of the new car? Less monthly payment. this man only owes $ 10,000 for a car after 3 years; but the dealership persuaded them to extend the loan to 5 or 6 years. They “seem” to be saving $ 50-100 a month when in reality they are costing themselves an extra $ 15,000. Reducing payments is one of the most popular sales tactics at car dealerships, and they fool people all the time.
This is one example, and again, this is not always the case. Often times, people finance a car simply because they don’t have tens of thousands of dollars to pay for it up front. So it’s not so much about the enthusiasm for the winners as about the lack of options. I know a couple of people who financed a car, not because they jumped on the bandwagon, but because the interest rate on the loan was so low that they invested thousands that they would have paid instead. So there are some caveats. However, car payments are the norm, so if customers can lower their payments, they often want to be happier despite the general math.
In any case, the point here is not to make a general judgment about the decision , but to point out that ubiquity is common when it comes to buying a car, and dealers often use it as a selling tactic. … When you understand this, you can make the smarter decision that works best for you.