Financing a car - some questions

[GrimJack]

I am not planning on buying a car anytime soon, but I always thought that financing a car was when you went to a dealer who put you into an agreement where you paid the interest first (like financing a house) and once the interest was paid, then you were paying for the car; but a loan was where you borrow money and pay it back in a fixed period of time but the payments were such that you were paying towards principle and the current interest owed.

I hope I am making my question clear - I have always told my friends not to finance the car but to get a loan from a bank, am I just having a language issue or am I missing something?

[disneysteve]

I've never heard of the deal that you're describing as financing where you pay all the interest first and I've financed a few cars over the years.

[bjl584]

I've never heard of that either.

Sometimes it is favorable to obtain financing from your bank or credit union. It depends on interest rates. The last car I bought I financed through the dealer. The rates were better than my bank.

[disneysteve]

Sometimes it is favorable to obtain financing from your bank or credit union. It depends on interest rates. The last car I bought I financed through the dealer. The rates were better than my bank.

I have always financed with the dealer but only after checking rates elsewhere. The first time, the dealer quoted me a much higher rate. When I told him the rate the bank was offering, he immediately matched it.

[Like2Plan]

I am not planning on buying a car anytime soon, but I always thought that financing a car was when you went to a dealer who put you into an agreement where you paid the interest first (like financing a house) and once the interest was paid, then you were paying for the car; but a loan was where you borrow money and pay it back in a fixed period of time but the payments were such that you were paying towards principle and the current interest owed.

I hope I am making my question clear - I have always told my friends not to finance the car but to get a loan from a bank, am I just having a language issue or am I missing something?

I've never heard of that, either. Unless It is some sort of pre-payment penalty, which is something I wouldn't recommend.

Obviously, you pay more interest at the beginning of the loan because you owe more on the principal. But, in the past few years I have even seen 0% interest offered by dealers. You always have to weigh that against a possible alternate offer: a cash back incentive and bringing your own financing. If you plan to pay the car off early (and/or you find a better interest rate), the cash back might be better deal.

But, your advice to pay cash is also very solid. Not only would the cash paying person be able to take advantage of cash back incentives, they wouldn't buy a car they might not be able to afford and/or possibly find themselves upside down on the loan. On the other hand, maybe the 0% loan is so inexpensive--why not let your investments continue to work for you (instead of liquidating assets to pay for the car). Lots to consider--not a one size fits all answer.

[disneysteve]

Obviously, you pay more interest at the beginning of the loan because you owe more on the principal.

Actually, I think car loans are usually non-amortized, simple interest loans. Each payment is identical as far as how much goes to interest and how much goes to principal. You don't get a benefit by prepaying unless you verify with the lender that they will apply the extra payments to principal as opposed to just recording them as early payments.

[GrimJack]

I think this might be a credit issue; the person I was discussing this with was a WoC* with a low income. She was saying that the financing she got for her car left her with little or no principle after a year of paying for her car. This might be how those 'Pierre Money Mart' car lots make sure that they get theirs. From the responses I get the impression this does not happen when you have good credit or at least average credit.

* Woman of Color - I want to keep politics out of this but I am not sure if her financing was due to her race or her credit.

[Like2Plan]

Actually, I think car loans are usually non-amortized, simple interest loans. Each payment is identical as far as how much goes to interest and how much goes to principal. You don't get a benefit by prepaying unless you verify with the lender that they will apply the extra payments to principal as opposed to just recording them as early payments.

I'd never heard of this type of repayment method (equal interest payments), either. I was curious as to how the interest amount could be the same each month, so I did a search and found this link:http://online.morainevalley.edu/webs...t_car_loan.htm which refers to this as the "future value simple interest" formula which calculates the interest every month using the original amount of the loan as the principle (and the reason why the interest is the same every month.). I don't know if this what you were referring to.

On the car loans I've had in the past, I've always paid less interest each month as the loan balance was being paid off (and no early payoff penalty).

[JackieWard]

Why Finance

What you are describing sounds like the rule of 78 which guarantees the lenders interest earnings. My question is why do you want to even consider putting yourself in debt. Why not finish paying off your current vehicle and then take the $400+ that you are paying each month in a car payment and continue to put that money into a savings account. Then take the $5k you save in a year, combine that with what you get out of your current vehicle and pay cash for a car. If you continue saving instead of paying the bank each month, you can continue to move up in your vehicle selection over time and never be concerned with wether you are paying interest or principle first again.

[GrimJack]

What you are describing sounds like the rule of 78 which guarantees the lenders interest earnings. My question is why do you want to even consider putting yourself in debt. Why not finish paying off your current vehicle and then take the $400+ that you are paying each month in a car payment and continue to put that money into a savings account. Then take the $5k you save in a year, combine that with what you get out of your current vehicle and pay cash for a car. If you continue saving instead of paying the bank each month, you can continue to move up in your vehicle selection over time and never be concerned with wether you are paying interest or principle first again.

Thanks, I had never heard of the rule of 78 so that was nice; but if your comment is for the OP (who happens to be me), you did not fully read my post - it started with I am not planning on buying a car anytime soon. I was asking for a clarification of word usage. What I learned is that what I thought was "financing" was actually how those late night car sales can make any money guaranteeing a loan to anyone.