Originally my intention was to save for the full cost of the car because I have bad credit. But I'm starting to think I can put a lot of what would otherwise be idle savings toward improving my credit, and then finance some (or all) of the car to further improve my credit while still ending up with the car.

In any event I'm going to need to seek professional advice, lol, I think I've gone beyond the scope of the thread.

 

I am a loan expert and there's almost nothing in America that isn't compound interest. But that doesn't matter- your only factors that matter:
How much you borrow
How long you take to pay it back
What the interest rate (APR) is
plus if they stick on any fees- which are common with mortgages but not with car loans. But they may stick you with insurance requirements.


BUT- it is not reasonable to compare it to what you're (currently) earning in a mutual fund because that fund can lose value. The only fair comparison is to what you can earn RISK-FREE (like a bank account) and that's less than 1%.

 

How does the amount of time to pay back the loan factor in? Say it's $10,000 with 10% interest; what's the difference if I pay in <1yr or >5yr?

 

The interest rate is per year. The longer the loan, the more total interest you'll pay.
And you pay interest on how much you still owe.
For example:
60 month loan
$10,000
10% interest rate
Monthly payment is $212.47
after you make the first month's payment you've paid $129.14 in principal and the rest ($83.33) is interest.
For the second month, since you now owe a bit less than $10,000, less of your payment is interest and so more goes to pay down the loan.
The last payment pays $210.71 in principal and only a small amount of interest since you don't owe much at that point.

 

The interest that you pay back on any loan is based on the loan balance each month and calculated against the rate of the loan.

For example:

You borrow $10,000 at 6% interest.
That interest rate is 1/2% per month. (6%/12months)
So the interest on the first month is $50 (1/2% of $10,000)
Let's say you are paying this loan back on a 5 year (60 month) payment schedule. The payment for this loan is $194/month.
The first $50 of your payment goes towards interest. The remainder goes towards reducing the principle, in this case $144.
The next month the interest is again 1/2% of the remaining balance. And since you paid off $144 in the first month the balance is now $9856 and 1/2% of that is $49.28. Each month the amount of your payment that goes towards interest I reduced.

Here is the amortization schedule for the first year of the above loan:
Date.......payment.....principle...interest...tota l interest... Balance
Aug. 2014 $ 193.33 $ 143.33 $ 50.00 $ 50.00 $ 9,856.67
Sept. 2014 $ 193.33 $ 144.04 $ 49.28 $ 99.28 $ 9,712.63
Oct. 2014 $ 193.33 $ 144.76 $ 48.56 $ 147.85 $ 9,567.86
Nov. 2014 $ 193.33 $ 145.49 $ 47.84 $ 195.69 $ 9,422.37
Dec. 2014 $ 193.33 $ 146.22 $ 47.11 $ 242.80 $ 9,276.16
Jan. 2015 $ 193.33 $ 146.95 $ 46.38 $ 289.18 $ 9,129.21
Feb. 2015 $ 193.33 $ 147.68 $ 45.65 $ 334.82 $ 8,981.53
Mar. 2015 $ 193.33 $ 148.42 $ 44.91 $ 379.73 $ 8,833.11
April 2015 $ 193.33 $ 149.16 $ 44.17 $ 423.90 $ 8,683.95
May 2015 $ 193.33 $ 149.91 $ 43.42 $ 467.32 $ 8,534.04
June 2015 $ 193.33 $ 150.66 $ 42.67 $ 509.99 $ 8,383.38
July 2015 $ 193.33 $ 151.41 $ 41.92 $ 551.90 $ 8,231.97

 

That's super helpful. So then how do I extrapolate the total cost of interest over the life of the loan? And what changes if I make bigger payments, say $1,000 instead of the minimum?

Granted, this is just helping me understand the financing, because I can afford $1,000/mo in discretionary income and I would only finance like $3,000 in a worst case scenario (if for some reason it was necessary to jump at a certain offer immediately instead of just waiting 3 months, and of course like I said I have pretty poor credit so I would expect a very high interest rate).

 

If you have bad credit and want to begin repairing it, taking out a car loan and paying it off on schedule or even fast is a very good way to help you repair your credit. So borrow a small amount, at a high rate if necessary, and then pay it off faster, just be aware that there are some lenders that may have an early payment penalty. This comes from the fact that they will pay the dealer or lender a fee upfront for delivering this higher than market rate loan and then they expect to make their money that they gave the dealer upfront, thru the high interest charges. So always confirm that there is no prepayment penalty.

You can calculate any loan amount and interest rate payment by using any online loan calculator. Just google loan calculator. You plug in the loan amount term of the loan and interest rate and it will tell you the payment amount. And always double check the numbers that you are quoted using your own loan calculator. Dealers will tell you that you are paying one rate and then charge you another, and double talk you when it comes time for you to sign the paperwork.

 

Haha I immediately realized that after posting.

 

i never carry a balance on my credit card, so pay as much as the dealer will let me to maximize rewards.

for the balance you should take advantage of near-free float if there's a crazy low rate; you can always write a payoff check anytime you've had enough.

 

I could have paid cash, but wisely opted to keep the cash liquid and not tie it up in an asset that depreciates rapidly in value. I had substantial equity in my trade and was able to command my asking price given my beacon score, equity etc. So the low monthly payment and the option to pay the note off at anytime of my choosing was made good fiscal sense to me. Not suggesting one size fits all go with what your comfortable with! Good luck with your purchase.
Cheers!

 

I managed to get my '13 sport new for 15.5k out the door with cash but I had to play a few mind games with the dealers in the area first.

#1 Find all of your local dealers and email the online sales guys asking for a quote, I sent it to all of the dealers in one email to make them fight for my business and got an offer of 16.2 from a high volume dealer.

#2 look at their inventory and see who hasn't moved a car in awhile and head over there with a qoute from the lowest bidder.

#3 start the buying process and don't mention how you are going to pay until they have agreed upon the price you managed to beat them down to since they think they will make it back off of you with financing through them. Drop the bomb on them and break out the check book.

I was in the dealer for all of 45 minutes before I walked out with my car and even had the sales guy shake my hand and compliment me for beating the dealer at their own game haha.