Finance Help

[furolan6]

Any finance majors in here willing to crunch some numbers for me?

I'm deciding between 0.9% APR for 36 months or 1.9% APR for 60 months on a $70,000 loan. Considering the money I don't use toward paying off the car can sit in a 3.5% interest bearing account, which would be the better option?

[quiksi]

just based on time value of money and opportunity cost alone, take the 60 months

[kscarrol]

Agreed, and please tell me where you're getting 3.5% interest in a savings account? 5 year CD rates are roughly 1.6% and high-yield money market accounts are paying 1.3% or less...

[furolan6]

ah that was purely speculation. I haven't looked at savings account rates since before the recession (I was getting 5% with etrade). 3.5% seemed like a fair average between CD's and mutual fund returns.

[TurboFan]

You'll pay about $3432 over 60 mos in interest or $980 over 36 mos. That's money down the drain. I appreciate that you'd invest the difference in theory, but will you really? And getting better than 2% will be tough.

If you can handle the extra $700-$800 mo for the 36 mos, I'd go that route.

[sameh]

Originally Posted by TurboFan

You'll pay about $3432 over 60 mos in interest or $980 over 36 mos. That's money down the drain. I appreciate that you'd invest the difference in theory, but will you really? And getting better than 2% will be tough.

If you can handle the extra $700-$800 mo for the 36 mos, I'd go that route.

Well said, agree 100%

[donovan]

Either way, less months will be more money in your pocket in the long run...

[rominl]

Originally Posted by TurboFan

You'll pay about $3432 over 60 mos in interest or $980 over 36 mos. That's money down the drain. I appreciate that you'd invest the difference in theory, but will you really? And getting better than 2% will be tough.

If you can handle the extra $700-$800 mo for the 36 mos, I'd go that route.

agreed ++

[quiksi]

Originally Posted by TurboFan

You'll pay about $3432 over 60 mos in interest or $980 over 36 mos. That's money down the drain. I appreciate that you'd invest the difference in theory, but will you really? And getting better than 2% will be tough.

If you can handle the extra $700-$800 mo for the 36 mos, I'd go that route.

Here's some quick calculations
60mo@1.9% 36mo@0.9%
Monthly PMT $1,223.88 $1,971.54
Difference $747.66

Total Payment $73,433.00 $70,975.50
Difference $2,457.50

By saving the difference in payments every month (the $747.66) into an account for 36 months, you get the following

Saved PMT diff @ 1% each month $27,312.01
Total difference in PMT for 36 months $26,915.76
Earnings $396.25

Invested PMT diff @ 5% each month $29,410.03
Total difference in PMT for 36 months $26,915.76
Earnings $2,494.27

So in theory, if you saved the payment difference every month for 36 months, and got a consistent 5% return, the difference would be negligible, though nowadays it does take some effort to earn 5%

[TurboFan]

Originally Posted by quiksi

Here's some quick calculations
60mo@1.9% 36mo@0.9%
Monthly PMT $1,223.88 $1,971.54
Difference $747.66

Total Payment $73,433.00 $70,975.50
Difference $2,457.50

Ok, that's what I said, in more words

By saving the difference in payments every month (the $747.66) into an account for 36 months, you get the following

Saved PMT diff @ 1% each month $27,312.01
Total difference in PMT for 36 months $26,915.76
Earnings $396.25

Invested PMT diff @ 5% each month $29,410.03
Total difference in PMT for 36 months $26,915.76
Earnings $2,494.27

So in theory, if you saved the payment difference every month for 36 months, and got a consistent 5% return, the difference would be negligible, though nowadays it does take some effort to earn 5%

Well, to run this you need it over 60 months. If he does the 36 month loan, he's not making any additional investments, in theory, with the payment difference.

So, investing $747.66/mo, every month, for 60 months, at an even 5% APY, would yield $50,845.43. But where is this 5% APY really going to come from? Sure, you could put it in some type of investment vehicle, but that's an optimistic RoR for the next 5 years. I'd use 3% right now for a typical, average Joe stock fund. Which still yields $48,333.76. THAT assumes no drops in the fund, no fees, taxes, etc.

However, the question I asked is will the OP really do this?

But lets look at another option - say the OP buys the car over 36 mos, making no additional investments beyond what he/she is doing today. Then, at the end of 36 months, the OP puts the entire $1971.54 monthly car payment into some investment earning 5% for 2 years. At the end of the two years, they'd have $49,655.05 and a car worth somewhere between $35-$40k. Now you pay cash for a new M3, drive it for 5 years, and keep that investment going. You'll have another $50k in five years, another car still worth $45k+. Using this method you'll pay cash for every car you buy, and have the flexability of no car payments.

Back to the current scenario: Figure in the 3 year period for the car payments, in which the OP would save $2,457 in interest, added to the $49,655.05, and the OP would have $52,112. That's $1266 more than if he/she did the 60 month loan and invested the difference.

Do the 36 months if you can afford the payment.

[michaelw9]

Originally Posted by furolan6

Any finance majors in here willing to crunch some numbers for me?

I'm deciding between 0.9% APR for 36 months or 1.9% APR for 60 months on a $70,000 loan. Considering the money I don't use toward paying off the car can sit in a 3.5% interest bearing account, which would be the better option?

I just financed about $72~k and I went with the 1.9% for 60 months on a BMW Select loan. To me, 1% difference is not that much, and time value of money plays a bigger factor.

I could have bought the car outright if I wanted to, but financing just makes the most sense. I'll be upside down in my car for likely 2-3 years+ (more so because I have a balloon payment). But combined with GAP insurance, that difference is insured should my car ever be totaled or stolen. Then the money doesn't come out of my pocket, which it would if you owned it outright.

I'm a savvy investor, so I have no problem making 5% a year on my money. Therefore I'd rather have the debt.
You can easily find bonds (not treasuries) that pay that.

There's of course some risk depending on the rating, and it's not the same security as a CD, but it's very doable. I've had for many years a tax-free municipal city bond that pays me approximately 7.75%.

Or you could chose lower-risk ETFs (which trade like stocks) that have higher dividends. I'd recommend PZA -- it has generally low volatility compared to the overall market and the current yield is 4.14%. There's some risk of course, but it works for my financial situation.