Interest-Related Question

[BWSUQ]

This is my first post as I usually lurk, but I'm trying to see if I'm missing something with my thought process and number crunching. I plan to purchase a new car in May(ish) to replace my 21 year old Honda Accord. Originally, I was going to put about 40% down cash and try to get the lowest financing available through either my credit union or the dealer. I wanted to pay it off in about 3 years or so. After spending many hours researching what car I want and how to go about making a purchase this is the plan that I formulated.

Now...the numbers
I owe $104,000 in student load debt (veterinarian) - started at $131,000 2.5 years ago. Most are at 6.8% fixed, with one at 2.36% variable which is being paid off the slowest. Except for the variable loan, all others are paid up until May 2013 at this time.

I have no other debt and pay off my credit card in full every month. I live very frugally even though I make a good income with the goal of becoming free of my student loan debt in the next 4-5 years, and continuing to max out my roth (no 401K available through employer) and invest in taxable accounts. Also, I began to travel internationally just last December/January, and will be taking my 2nd trip in the last 3 months (goal of 1 per year) in one week. I budget every penny and can so that my money can go towards student loans, investments, and travel.

Now...the question
I was just looking at the numbers of the car I want and was wondering if it made sense to actually put less down and pay it off slower, *IF* the interest rate is lower than my student loans. Example...instead of putting $10,000 down in cash, I would put $5,000 down in cash (with $2,500 on my credit card to get cash back), and put the other $5,000 towards my student loans. Also, I would pay it off slower and put the extra money towards my student loans instead since they will have a higher interest rate. I will be paying more in interest for the car long term, but I will putting that extra calculated money towards student loans. This is assuming I will be able to get the same interest rate with less money down (a big assumption?)
*Does this make sense or am I missing something?*
*Would this be a bad idea with my situation?*

Career: stable
Income: expected increase of at least 10-15% due to working at least 24 more days this contract year (base + production)
Monetary Discipline: very good (very little waste, love budgeting and numbers)
Budget: thorough (budgeted all of 2011 as a base, tracked all of expected 2012 w/ wiggle room, started 2013)

Thanks for your help!

[dczech09]

I would not do that. If I were you, I would try to buy the car with cash (no loan).

The thing with car loans is that the bank has collateral. With your student loans, they do not. Also, your car will go down in value quickly, so it makes sense to pay it off quicker so ou do not become "underwater." The problem with being underwater is that your options become pretty limited.

So no I would pay off the car loan as quickly as possible.

If you are investing so much in taxable accounts, and as frugal as you say, you should be able to just buy a car with your income.

[BWSUQ]

If I was going to buy the car with cash only, I would have to save for another 4-6 months and not pay off any more student loans. In the meantime, I would be accruing 6.8% interest on them when I could instead pay them off as I go with a lower interest car loan. Also, I plan on driving this new car into the ground so I don't mind what the car value is. Can you explain how being "underwater" with my car would affect me if I will be driving the car for 15 years?

Thanks

[disneysteve]

If I was going to buy the car with cash only, I would have to save for another 4-6 months

Or buy a cheaper car.

[BWSUQ]

Thanks for that, haha! I guess my basic question regarding different interest rate will go unanswered?

Having my car break down on me twice in the past 4 months, including how many repairs were needed when I bought my car over a decade ago, makes me want a reliable vehicle in which I know exactly how it was driven before I got it. And in the case of a new car, not much at all. I don't think $20,000 for a new honda civic or ford focus is out of line, but to each his own I guess.

Well, I guess I'll have to figure this out on my own and lurk some more on various forums. Thanks for your input

[disneysteve]

This is my first post as I usually lurk

I plan to purchase a new car in May

I owe $104,000 in student load debt (veterinarian) - started at $131,000 2.5 years ago. Most are at 6.8% fixed

Thanks for that, haha! I guess my basic question regarding different interest rate will go unanswered?

I don't know how long you've been lurking but if you've hung around for a while, you probably know that answers given here often go beyond the question asked. You are asking specifically about the interest rate on a new car loan. Okay, yes, it makes sense to put more money toward a higher interest student loan than toward a lower interest car loan. That said, however, most of us wouldn't advise that you do that.

You have over 100K in student loan debt at a pretty high rate. If you want to retire that debt as quick as possible, taking on additional debt in the form of a car loan isn't the way to go about it. My advice, and I suspect that of many others here, is to buy a more modest car that you can pay for in cash and stay on track paying off your loans.

Keep in mind that doesn't mean you have to keep the car forever. If you get your loans repaid in 4-5 years as planned, you can then sell the car and upgrade to something nicer. A little delayed gratification can go a long way.

So yes, a 2% car loan is better than a 6.8% student loan, but no car loan is even beter.

[BWSUQ]

Thanks Steve. That answered my question. I've been lurking on this forum for about 2 weeks, and on some others off and on for over a year.

[jpg7n16]

You have over 100K in student loan debt at a pretty high rate. If you want to retire that debt as quick as possible, taking on additional debt in the form of a car loan isn't the way to go about it. My advice, and I suspect that of many others here, is to buy a more modest car that you can pay for in cash and stay on track paying off your loans.

Well kinda agree, kinda don't.

If you can get 2% financing, and have the cash available to buy the car, I'd personally rather take the 2% loan, and use the cash on hand to pay down the SLs. Increases my 2% debt, buy equally lowers my 6.8% debt.

Having said that, borrowing to buy a car makes it very easy to overspend. I'd rather you pay cash for a $8k car, than take a 2% loan for a $20k one.

So yes, a 2% car loan is better than a 6.8% student loan, but no car loan is even beter.

Especially since you don't get the tax benefit on all your interest. SL interest is deductible, but only on the 1st $2500 subject to income limits. On $100k @ 6.8%, you pay much more than that, and don't receive any tax incentives on that excess.

All the more reason to pay off the SL debt.

[Like2Plan]

This is assuming I will be able to get the same interest rate with less money down (a big assumption?)

I don't think you have making a big assmuption on the interest rate. I don't have much to add to the analysis, but I noticed the other day that Penfed is offering a 1.99* loan (looks like new and used cars)

(*Internet only special rate. Higher rate will be assessed if you do not apply online. )

Also noticed they had a slightly lower rate (1.49% APR online only rate) if you use their car buying service.

link to PENFED