Hello folks,
I'm not very knowledgeable when it comes to how car loans work... Therefore, I would like to ask for your help. I'm about to finance a vehicle and I have a huge dilemma. To go for short-term or long-term financing.
I am going to try to pay off the car in 2 years of time and if that were not possible, 3 years maximum.
While keeping that in mind, which of the following two options would be an economically wise decision:(For the simulation purposes, after downpayment, the total amount financed would be $20,000)
- Long-term financing (60 months or longer) with 6% apr with no penalty for prepayment.
- Short-term financing (36 to 48 months) with 4% apr with no penalty for prepayment.
If I successfully pay off my loan in 2 years of time, I would only be paying:
- 6% interest ($400) on $6666.67 for the 72 month financing ($20,000/72x24)
- 4% interest ($533) on $13,333.34 for the 36 month financing ($20,000/36x24)(For this simulation, I did not include the interest that would be charged when making the 24 payments. In reality, this math is not an accurate depiction of how it would actually play out, but I am unaware of how much interest I will be paying and how much would be going to the principle. Maybe this form of calculation works with and without the interest. If not, please help this poor lost soul...)
According to this math, it is smarter to go for the longer-term financing option with the higher apr. However, I'm not sure if I'm even doing the calculations right... For all I know, I completely butchered this and will soon be a laughing stock.
Is my math right?
Which do you guys prefer when it comes to the length of financing?
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Update:
So the friendly fellow MinerDon redirected me to the loan amortization calculator. Apparently, everything I did above was the exact definition of stupidity 🤔
3 year plan for $20,000 with 5% apr:
If my 1st payment starts on January of 2019, I would pay $856 in interest the first 12 months, $532 in interest the second 12 months, and $191 in interest the last 12 months. So, if the last year's total interest is only $191, I might as well just take 3 years to pay off the car. Total interest paid for the 3 year term would be $1,579.
6 year plan for $20,000 with 7% apr:
If my 1st payment starts on January of 2019, I would pay $1,312 in interest the first 12 months and $1,111 in interest the second 12 months. It's not even worth looking any further because I almost pay as much in interest in just the first year with this plan as I would in three years with the 36 month plan.
Submitted November 16, 2018 at 05:03AM by Fantality4 https://ift.tt/2Bbek2s
