I put this here because I believe that it has an answer. I’m not looking for an opinion, just trying to see if I understand how loans are structured.
If I took out a 72 month auto loan, yet paid the 48 month payment, would it be paid off in 48 months? (assuming no pre-payment penalty)
If so, then it seems to me that it would be wise to take out the loan for 72 months, make the 48 month payment, and then if Something Bad happens, I could make the smaller payment to remain current.
And, again, if this is still correct, why doesn’t everyone do this instead of taking a shorter term loan?
I pay 0% because I don’t borrow money. As a matter of fact, I make a car payment to myself by putting it in a money market account, so I end up making a couple percent on it.
Generally shorter term loans have lower interest rates, so if you made the 48 month payment you would probably still owe some money after 48 months. E.g., the interest rate on a 48 month loan through Chase is 4.48% and the interest rate on a 72 month loan is 5.5%
Are you planning on keeping the vehicle for the full lease term? Unless you have a vehicle that will have a great trade-in value, I would suggest, all concerns for interest rates aside, that you don’tdo a 6-year lease. I did, with a 2003 Trailblazer that I’m sure won’t have a very good trade in value, as it’s had numerous problems. Plus, your taste and life situation may change, and you’ll still be on the hook for the monthly payment.
OP is plainly not talking about leasing. And because you’re mentioning trade-in value, you’re not really talking about leasing, either, but yet you mention it several times.
Go with the longer loan but make a payment that is higher – automatically, if possible. I got no break unless I went to a 3 year loan on my car, but at the time I was concerned about making the payments and still being able to save or plan for emergencies, so I went with the highest they offered (5) and just paid it off after about 3.5 years.
Kind of the same deal with my mortgage. I couldn’t take a shorter term – the next option had too high of a payment, and my debt to income at the time was hard enough to get approved – but I set my automatic payment to add additional principal payment each month. I don’t even notice it since I always get charged the same amount.
Then yes, it certainly makes sense to hedge your bets and take the longer term loan while making the shorter-term payment. We’re sort of doing this right now… rates had dropped since we bought our car, so we refinanced a year ago, but are continuing to make our old payment and should be done 6 months earlier than if we hadn’t refinanced.
However as others have noted, the longer the loan, the greater the risk that you’ll be upside down on it due to depreciation.
IMO, the biggest mistake that people make when doing finances, is not taking personal behavior in account. You can promise yourself that you will pay a 72 like a 36, or a 30 year mortgage like a 15, etc., but very few will actually follow on that. It’s quite comparable to promising yourself you’ll eat only salad at a buffet.
I took stock of my older peers and saw they weren’t really going anywhere in wealth building despite a “smart” mortgage, a “smart” HELOC, “smart” student loans, all of which they are deliberately not repaying because these loans are theoretically lower in interest than what you’d make off the stock market. I have decided to do away with “financial math” altogether and just pay off all my debts, including the mortgage. That includes a “smart” 2.12% interest student loan. That’s my personal motivation and reasoning – “smart” financial math does not translate into human behavior. Hope this is the kind of reasoning you’re looking for.
Agreeing with this. Unlike mortgages, auto loans are (were?) often structured so that there is no benefit for early payment. You had to pay the principle plus interest as calculated for the full term regardless. Read the fine print.
No. I didn’t have that kind of cash in a lump sum.
ETA: Upon further reflection, though, I may have been able to pay it off faster than I did, but I elected not to. Not sure I could have paid it off in 3 years though.