Car loan question

[ISUAlum2002]

...Or you can but it doesn't make sense to pay off a 3% loan . The difference in interest in my latest loan between 4 and 5 years is $296. Im betting I can make more than that in the market over 5 years.

This. The old schoolers who think 60 months is too long to pay on a car are still living in the days of double digit interest rates. Generally speaking, I don't like having too much principal sitting on a depreciating asset, but it makes sense to make more money in the 401k than it does to pay off that depreciating asset in many situations. You know, if you actually know what you're doing with your money.

 

[Cyclonesince78]

This. The old schoolers who think 60 months is too long to pay on a car are still living in the days of double digit interest rates. Generally speaking, I don't like having too much principal sitting on a depreciating asset, but it makes sense to make more money in the 401k than it does to pay off that depreciating asset in many situations. You know, if you actually know what you're doing with your money.

How many people actually say to themselves: "Just saved $75/month on my car payment by doing a 5 year loan, I better go increase my 401k contributions"

 

[00clone]

How many people actually say to themselves: "Just saved $75/month on my car payment by doing a 5 year loan, I better go increase my 401k contributions"

Well, and the other implications of a 401K are also not negligible. Sure, you can probably beat that interest rate in long term investments, but upping your 401k mean that you can't access it until retirement. For some people, 'making more in their 401k' means they're still broke now. There isn't one right answer for everyone, but there are several circumstances where borrowing money on a depreciating asset are not a good strategy. There are some where it is, but only if you have a lot of flexibility in your budget, and if you have a lot of discipline to actually do what they should with the equivalent amount of cash.

 

[clonetone]

If you need 60 months to pay off a car you can't afford that car.

If you pay for a car up front instead of financing at 2% APR over 60 months, then you might not be in the best position to offer financial advice

 

[DoctorUncle]

Can you "make more than that in the market over 5 years", though? It's not risk free and it seems foolish to even try to lever a loan on a wasting asset in this manner. Buy something you can afford (pay cash).

...Or you can but it doesn't make sense to pay off a 3% loan . The difference in interest in my latest loan between 4 and 5 years is $296. Im betting I can make more than that in the market over 5 years.

 

[agrabes]

...Or you can but it doesn't make sense to pay off a 3% loan . The difference in interest in my latest loan between 4 and 5 years is $296. Im betting I can make more than that in the market over 5 years.

It all depends on your situation and your appetite for risk. You have to put your money in relatively risky funds to earn better than 3% in this market. Personally, I don't want to have a loan hanging out there for 5 years on an asset that is worth less than the loan amount. If you put your money in the stock market, over a 5 year term you could lose money. If you lose your job and your stock investment is down, your car will be repossessed. I'm not saying this is something that will definitely happen, but it's something that is not out of the question. If you're willing to take that risk, then don't pay off the loan. If you'd rather not, then don't.

It all depends on your money philosophy. You could choose to leverage yourself to the point where you have a zero balance in your checkbook every month and get the most possible bang for you buck. Many people live that way, but it's not for everyone.

 

[00clone]

Take a look at the responses. The "do this or you're dumb" responses are all in the 'take out a loan' camp. I've generally found that the most black and white positions without considering all possible scenarios and whether they may have consequences are the worst ones to take. Sure, the math indicates that investing money at 5% against borrowing at 2% seems dumb, but there are other factors that come into play.

 

[Cyclonefan710]

If you pay for a car up front instead of financing at 2% APR over 60 months, then you might not be in the best position to offer financial advice

The fact of the matter is a lot of people now days determine what they can afford based on if they can make the monthly payments. Most people that take out 5+ year car loans aren't doing it so they can keep flowing money into their 401k and mutual funds. They're doing it to lower their payments to an amount they can "afford". I'll be paying cash for my next used car I don't care what the interest rates are.

 

[bringmagicback]

If you need 60 months to pay off a car you can't afford that car.

If you make a house payment you cant afford the house.

 

[KnappShack]

The fact of the matter is a lot of people now days determine what they can afford based on if they can make the monthly payments. Most people that take out 5+ year car loans aren't doing it so they can keep flowing money into their 401k and mutual funds. They're doing it to lower their payments to an amount they can "afford". I'll be paying cash for my next used car I don't care what the interest rates are.

That's cool for you, but not everyone has that luxury. At 2% on a car a real case can be made to finance into a high quality vehicle vs. rolling in a hooptie up the Golden State Freeway at rush hour

 

[CYme]

If you make a house payment you cant afford the house.

If you retire and expect your retirement fund to hold value or appreciate, you should keep working. I plan on pulling my retirement fund out the day I retire and burying it under my shed. Otherwise I can't afford to retire.

 

[DoctorUncle]

specious. unless you live in your car.

If you make a house payment you cant afford the house.

 

[Three4Cy]

Looking into upgrading vehicles and the last part I am looking into in car loans, especially interest rates. Im looking into trucks that are 5 years old or less. I have a rate from my bank (6% fixed), but my dad is convinced I can get better somewhere else. Any ideas on where I should look and what rate I could get? TIA

If you are a State Farm insurance customer, check with your agent and see what they can get you through State Farm Bank. They throw in gap insurance as part of the loan. Showing rates starting at 2.91% on the age of vehicle you are looking for.

 

[clonetone]

specious. unless you live in your car.

Pretty sure this was a sarcastic way to point out the foolishness of the "If you have to make 60 car payments you can't afford the car" statement

 

[clonetone]

The fact of the matter is a lot of people now days determine what they can afford based on if they can make the monthly payments. Most people that take out 5+ year car loans aren't doing it so they can keep flowing money into their 401k and mutual funds. They're doing it to lower their payments to an amount they can "afford". I'll be paying cash for my next used car I don't care what the interest rates are.

So it sounds like your "rule" only applies to people with bad financial sense in the first place.

If you go to buy a car today and have good credit and can finance at 2%, you should do it and use the money you aren't giving the car dealership in another way. You will very likely come out ahead. Even if you don't, having the cash on hand in case of emergency is worth paying like $100 more over the course of five years.

 

[BCClone]

My advice is to keep it to three years if at all possible. Having had older and new vehicles that seems to be a common trade time. 5 year loans still leave a lot outstanding when you trade in. The older it gets, the more repairs you have. So you don't want to have 3 years of payments on a vehicle that is breaking down, my new ones even get issues at 3 years (why most things outside the drive train are 3 years or less for warranty).

Most seem to step up their purchase when going from 3 to 5 years. Buy a decent one for three and then trade it in in 3 years, paid off, for a nicer one with a three year note.

 

[jsb]

CF is amusing. Everyone pays cash for their car, pays off their house in 5 years, puts 35% in their 401k, and has 9 months in emergency savings.

 

[Cydewayz]

CF is amusing. Everyone pays cash for their car, pays off their house in 5 years, puts 35% in their 401k, and has 9 months in emergency savings.

AND his a huge Athletics Donor that only gives tickets away vs selling them.

 

[DeereClone]

I can understand the cheap interest thing and investing to gain a spread, but I also think that A. 98% of the people that borrow money for cars/boats/furniture/etc do it because that is the only way they can afford what they are wanting to buy and B. It is sometimes hard to get out of the habit of having payments on everything.

I have avoided debt payments on anything besides real estate and I think it has worked well for me. Financing a depreciating asset doesn't sit well with me.

 

[ruxCYtable]

This. The old schoolers who think 60 months is too long to pay on a car are still living in the days of double digit interest rates. Generally speaking, I don't like having too much principal sitting on a depreciating asset, but it makes sense to make more money in the 401k than it does to pay off that depreciating asset in many situations. You know, if you actually know what you're doing with your money.

You hit the nail on the head as to why auto loans and home loans are apples to oranges.

I think a good rule of thumb is to not owe more on a car than it's worth at any point during the term. Used to be a 36 month loan was the benchmark for making that happen. AM radio legend Bruce Williams used to say if you were financing, look at the 36 month payment and if that's too much for you then it's probably too much car. With today's lower interest rates that is probably not always the case, you just need to do the math.

If you make a house payment you cant afford the house.

Different situation. Cars are depreciable, houses (usually) are not, unless you're on the wrong side of bubble.