Financing a car purchase (paying, rates, cost, year)

[FL2MT]

The reason that they most likely said they'd never finance anything for that long again is because they end up paying more total money due to the longer term.
Generally....a shorter loan term gets you a lower interest rate but let's assume that you finance a $30,000 car at 6% interest for both 3 and 6 years.
For the 3 year loan you will pay a total of.... $32,855.69
For the 6 year loan you will pay a total of.... $35,797.44

That's almost a 10% premium that you pay by stretching it out to 6 years. Now if you've got a 0% loan then by all means, take it, there's no particular reason to pay it off early. The last time I was new-car shopping it was either a 0% loan or $4,500 in incentives but not both so in that case the decision was fairly easy, take the incentives.

In addition, many people stretch the payments out to 5 or 6 years in order to buy a car they couldn't otherwise afford on a more traditional 3 or 4 year loan. Anytime someone has to 'reach' to afford something they set themselves up for trouble.

It's your money so you can certainly do what you want with it, but the longer the loan, the more you're paying in interest so if your goal is to maximize the money you keep for yourself over the long term you are generally going to be better off with shorter rather than longer term loans. Use those 'total loan cost' calculators, don't just look at the monthly payment.

[duster1979]

Here's a question: If your plan is to borrow for 5 years but keep the car 10 years, why not take the amount of the payment once the loan is paid off and put it in savings so you can pay cash for the next car at the end of the 10 years? And if you keep that up you would not only have cash to pay for a new car every time you needed one but a nice nest egg to boot.

[katestar]

Originally Posted by duster1979

You really think "they" paid it off?

What they did was jacked up the price of the car you traded for and/or hid the rebates. If the payoff exceeded that then they rolled the difference into your new loan. If the payoff was less than that they just laughed all the way to the bank with the surplus.

This promotion is a bigger scam than push, pull or drag sales. "If it sounds too good to be true...."

Yes I do. I got all of the rebates, $2500 at the time to be exact. And, they wanted to roll the old car loan to the new one and I said if they do that I'm not buying. They tried to play me a few times but I wasn't having it. I paid for this car what it cost, minus the rebates. It wasn't too good to be true, the car wasn't as cheap as I thought it was going to be, but I got a better car and better warranty that what I had hoped for.

[katestar]

Originally Posted by FL2MT

The reason that they most likely said they'd never finance anything for that long again is because they end up paying more total money due to the longer term.
Generally....a shorter loan term gets you a lower interest rate but let's assume that you finance a $30,000 car at 6% interest for both 3 and 6 years.
For the 3 year loan you will pay a total of.... $32,855.69
For the 6 year loan you will pay a total of.... $35,797.44

That's almost a 10% premium that you pay by stretching it out to 6 years. Now if you've got a 0% loan then by all means, take it, there's no particular reason to pay it off early. The last time I was new-car shopping it was either a 0% loan or $4,500 in incentives but not both so in that case the decision was fairly easy, take the incentives.

In addition, many people stretch the payments out to 5 or 6 years in order to buy a car they couldn't otherwise afford on a more traditional 3 or 4 year loan. Anytime someone has to 'reach' to afford something they set themselves up for trouble.

It's your money so you can certainly do what you want with it, but the longer the loan, the more you're paying in interest so if your goal is to maximize the money you keep for yourself over the long term you are generally going to be better off with shorter rather than longer term loans. Use those 'total loan cost' calculators, don't just look at the monthly payment.

I understand all this, but interest is the price we pay to defer payments, correct? Therefore that $3K difference or so between a 3 yr loan and a 6 yr loan is the price you pay to have an extra 3 years to pay it. If you understand that, then what's the problem? I know people who think they'll take 10 years to pay something and they're payments are so low and they're excited, when in actuality, they end up paying double the cost due to the interest. That makes no sense. I think $5K in interest on a $30K good vehicle that you will use is not that bad.

[katestar]

Originally Posted by duster1979

Here's a question: If your plan is to borrow for 5 years but keep the car 10 years, why not take the amount of the payment once the loan is paid off and put it in savings so you can pay cash for the next car at the end of the 10 years? And if you keep that up you would not only have cash to pay for a new car every time you needed one but a nice nest egg to boot.

That's the idea!

[FL2MT]

Originally Posted by katestar

I understand all this, but interest is the price we pay to defer payments, correct? Therefore that $3K difference or so between a 3 yr loan and a 6 yr loan is the price you pay to have an extra 3 years to pay it. If you understand that, then what's the problem? I know people who think they'll take 10 years to pay something and they're payments are so low and they're excited, when in actuality, they end up paying double the cost due to the interest. That makes no sense. I think $5K in interest on a $30K good vehicle that you will use is not that bad.

There's nothing wrong with it so long as you understand the terms and what deferring those payments is costing you. In your case I don't think there's any issue, you're on a personal finance forum after all. The problem is that so many people out there with no financial literacy see $300 per month payments instead of $400 and so they take the $300 without understanding how it costs them more in the long run. Multiply that over a lifetime by a few cars, credit cards, student loans, a house, braces for the kids etc. and that's a huge part of why so many people struggle with money rather than being able to have something in the bank and the peace of mind that goes with it.

[katestar]

Originally Posted by FL2MT

There's nothing wrong with it so long as you understand the terms and what deferring those payments is costing you. In your case I don't think there's any issue, you're on a personal finance forum after all. The problem is that so many people out there with no financial literacy see $300 per month payments instead of $400 and so they take the $300 without understanding how it costs them more in the long run. Multiply that over a lifetime by a few cars, credit cards, student loans, a house, braces for the kids etc. and that's a huge part of why so many people struggle with money rather than being able to have something in the bank and the peace of mind that goes with it.

Definitely agree with this! I personally know a few people that are like this. As long as the payment is low, they don't care if it is a 50 yr loan at 30% interest.

[oneasterisk]

A coworker got a 7 year loan on a car! Yikes!!!! I thought 5yr was plenty long on my last vehicle and I wasn't aware they even made 7 year loans till he told me. I think that is way too long for something that depreciates as quickly as a car.

[manderly6]

Originally Posted by oneasterisk

A coworker got a 7 year loan on a car! Yikes!!!! I thought 5yr was plenty long on my last vehicle and I wasn't aware they even made 7 year loans till he told me. I think that is way too long for something that depreciates as quickly as a car.

If the rate was low enough I would take the longest time period I could.

[katestar]

7 years, wow. I'm planning to get rid of my loan in 4 and I do have a good rate. I agree with what people say regarding a car being a depreciating asset. I however don't like to look at my car that way. I look at it as a way to get to work, once it no longer does that, I get one that does. In this way it is not an asset, it is like paying for the bus. For example, if you don't have a car, you need to either pay for the bus, train or someone to take you to work. It might be cheaper, but a car is more convenient. You pay for the convenience.

On the other hand, we bought our second car, 5 years old with 41K miles from a trusted friend that was gonig to give it to his daughter. The car is great and cost 1/3 of the new one...probably will last the same time :-/ I just think that cars like this are very rare and we just got lucky. A friend of mine bought a car for $3K, which then required $2K worth of work and died in 2 years.

I guess I value piece of mind and when I bought the car, I didn't want to have to do anything to it for like 5 years.