Television advertising of bank loans stress the amount of money we can borrow i.e. "you can borrow £25,000", but when it comes to paying the money back they state, "for only £225 a month".
Car salesmen, when working out a deal will ask, "how much are you looking to spend a month?"
A three piece suite may cost £750, but the headline display figure in large letters will be "for only £18 a month".
Why is it done this way?
It is a subtle and clever psychological ploy that is designed to make us consider whether we can afford the monthly repayment and not to consider the total cost of the purchase or loan.
Most people these days get paid monthly, therefore we have a tendency to budget on a monthly basis. Advertisers know this and by tricking us into thinking in terms of monthly repayments, rather than the cost, they can convince us that we can afford their products even when they are a very poor deal.
Costly, high interest bearing loans and borrowing are disguised by the trick of associating low cost with low monthly repayments. The real cost of borrowing is the interest that is charged on the borrowing. In order to reduce monthly payments, creditors need to increase the length of the loan; this significantly increases the interest on the borrowing.
The worst abusers of this ruse are financial institutions offering consolidation loans. This is a real, and typical, example from a mailing by a loan company. The couple's name has been changed to Mr and Mrs X, the underlining and bold are reproduced exactly:
Mr & Mrs X were paying over £1,000 every month on credit bills; credit which totaled £29,000. We arranged a low rate Credit Consolidation loan of £30,000 for them. Their new loan repayment was only £324.52 per month - a massive £700 less than before (£324.52 x 240 @ 9.5% APR).
The emphasis here is clearly on the monthly repayments. They are trying to convince people that by reducing the monthly repayment that they are saving money. It is also interesting to note that where they have shown the repayment sum (rather than the total repayable) it is the APR rate that is in bold; this is also designed to get people to avoid thinking about the cost by convincing them that the APR is low (in this case it 's actually not).
Let's do the sum though: £324.52 x 240 = £77,884.80 in repayments.
That's a staggering £47,884.80 in interest payments.
The monthly repayment of £324.52 consists of:
That's almost £200 per month in interest payments every month for 20 years.
This particular "low cost" consolidation loan was also intended to be secured on the customer's property.
Conclusion.
The monthly payment ruse is used frequently in creditors' advertising. It's not illegal; but it is a deceptive way of manipulating customers as to how they think about borrowing. The idea is to get people to think in terms of monthly repayments and make financial decisions on this one aspect of borrowing alone.
Consumers need to be wise to this practise and the real purpose of its use: to hide the real cost of the finance deal.
The monthly payment ruse appeals to our desires; it focuses our attention on what we want to see and distracts us from what we don't want (or the lender doesn't want us) to see.
This trick is a very successful one. With knowledge of how it works, we can defend ourselves against it.
More info:
UK Skeptics' loan calculator and analyser.
