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How Much You Pay is More Important Than How You Pay

Several years ago my wife and I were buying a vehicle and while we were waiting, doing paperwork, and waiting some more (there was a lot of waiting), a different couple walked in the door and one the salespeople said to them, "It's great to see you. What kind of payment are you looking for?"

Wait? How is that relevant? 

Unfortunately tricks like this work on many of us, and that's why they do it.

how to pay and what you pay


When we go to buy something we enter into what's known as a transaction. These days this involves money in exchange for the thing we want, but it doesn't have to be that way. It used to be you could exchange your services for something you wanted, and even further back you would exchange something you had for something you want - just trading. 

This is important because the transaction is what matters. How you pay is not the transaction. If you want a widget and the owner of the widget wants to sell it to you for a certain price, you can enter into a transaction. It doesn't, or shouldn't, matter to the person with the widget whether you pay in cash or get a loan to pay him or her. Further, the cost of your loan (the interest rate) shouldn't matter to the seller, either.  

Payments Can Be Transactions

Separate from the transaction that gets us the widget that we want is how we pay for the widget. If we aren't paying with cash we can think of this as a transaction, as well. If I can't afford the cash to buy the widget (or if I prefer to pay with credit for any other reason), then I can borrow money from someone. This borrowing of money is a transaction. I need money and someone else (usually a bank) has it. They will let me use it and there is a cost, just like there's a cost for the widget. The cost of using the money is interest and I'll have to spell out how I intend to pay back the bank with interest. 

Separate Transactions From Payment Method

So now we see that with large ticket items that many people take out loans for, like autos, there are really two transactions at play. There is a prices for the auto that we need to decide on, but then there is a price for the loan. This is two separate transactions.