The bandwagon effect is the tendency to believe a decision is good for us just because it's a decision everyone else makes. When it comes to money, it's easy to jump on the bandwagon effect, especially when it comes to buying a car.
Photo by Kaique Rocha
The maths doesn't always work out this way, but personal finance site Funancials makes an interesting point about financing a car. Dealerships often appeal to customers by offering a lower monthly payment. Even if it isn't a great deal in the long run, many customers hop on it because a car payment is considered the norm. They explain a scenario in which someone might finance a $25,000 car over five years with a monthly payment of $450.
After paying on it for 3 years, they get suckered into getting a new car even though their current car runs just fine. The primary benefit of the new car? A lower monthly payment. this person only owed $10,000 on the car after 3 years; but the dealership talked them into extending the loan back to 5 or 6 years. It “feels” like they’re saving $50-100/month when, in actuality, they’re costing themselves an additional $15,000. Lowering payments is one of the biggest selling tactics at car dealerships and they fool people all the time.
It's one example and, again, it doesn't always work out this way. Many times people finance a car simply because they don't have tens of thousands of dollars to pay cash upfront for it. So it's less about a bandwagon and more about a lack of options. I know a couple of people who financed a car not because they jumped on a bandwagon but because the interest rate on the loan was so low, they invested the thousands they would have paid instead. So there are some caveats to consider. However, car payments are the norm, so if customers can lower theirs, they're often willing to be happier now despite the big picture maths.
Either way, the point here isn't to put a blanket judgement on a decision, it's just to point out that the bandwagon effect is common when it comes to buying a car, and dealers often use it as a selling tactic. When you're aware of it, you can make a more well-rounded decision that works best for you.
5 Big Mistakes Broke People Make with their Money [Funancials]