Which loan to choose?

[PizzaDispenser]

Hello,

Never had a car loan before. I plan on putting enough down to get a $600 monthly payment. I do see 2 options:

One is DCU @ 2.74% for 65 months: The down payment would be $14,800

Another one is doing Tesla @ 3.74 for 72 months: The down payment would be $12,350

Obviously the rates are better with DCU, but Tesla would allow for a longer loan. Total loan interest with Tesla would be $4,557.35, while with DCU it would be $2,793.23. Tesla would require $2,400 less down payment. DCU would save $1,700 in interest rate fees.

Also, if I do DCU, how fast can they get everything ready for delivery day? My current delivery day is set for June 10th 2022.

 

[afadeev]

Never had a car loan before. I plan on putting enough down to get a $600 monthly payment.

Are you cash flow constrained?
Why are you optimizing for a fix monthly payment amount?

One is DCU @ 2.74% for 65 months: The down payment would be $14,800
Another one is doing Tesla @ 3.74 for 72 months: The down payment would be $12,350
Obviously the rates are better with DCU, but Tesla would allow for a longer loan.

Lower interest wins every time, unless you can't afford the monthly payment and need to spread things out to lower the monthly payment.
Why a down payment > 0?

Also, if I do DCU, how fast can they get everything ready for delivery day? My current delivery day is set for June 10th 2022.

I used DCU in the past (for another car), but financed my Model 3 via another credit union that had better rates at the time of Tesla purchase.
I told my Tesla sales person that I will be brining my own financing, and waited to finalize the funding until the day before pickup (to avoid paying interest on an asset I did not yet own). It took ~10 minutes to process everything, and they sent me a PDF with funding instructions that I forwarded to the Tesla sales person the morning of vehicle pickup.

Instead of keeping the pickup appointment for that evening, Tesla SC turned around and delivered the car to me mid-morning, which was weird and needlessly rushed. Documenting and working through options on repairing the damaged bumper was a hassle. They must have processed the financing in minutes, and decided to move the damaged inventory in a hurry. It wasn't great, but that's how they roll.

HTH,
a

 

[PizzaDispenser]

Shoot, I realized that $0 down would have been much smarter. I paid the down payment and accepted the loan they gave me. Is it too late to change it?

 

[vertico]

To each his own, I generally think $0 down payment is a bad idea because in a normal market you are immediately upside down in your loan. Additionally you typically get a better interest rate with down payment. The auto market (and others) are on a downtrend now and likely for the next year. I would leave that down payment unless you plan to keep that car through the mid point of the loan.

 

[JetDriver05]

Question for all the financial gurus. If I plan to keep the car for a long time (historically, I’ve kept vehicles for 8-12 years), would it make sense to make the largest down payment possible and then quickly pay of the loan?

It’s hard writing a check for $45k, for example, especially when stocks are so cheap and we can put our money to work elsewhere. We just don’t like having any debt.

Thanks for the advice.

 

[afadeev]

To each his own, I generally think $0 down payment is a bad idea because in a normal market you are immediately upside down in your loan.

"upside down" is an emotional term that has no objective merit.
If it matters to you to have X% equity in a vehicle (or house) loan, and for X to be > 0, then do quantify that target and optimize for it.
Otherwise, it's irrelevant.

Additionally you typically get a better interest rate with down payment.

Usually, that is NOT the case with new vehicle loans.
If that applies in your case, then take that into account.

The auto market (and others) are on a downtrend now and likely for the next year. I would leave that down payment unless you plan to keep that car through the mid point of the loan.

There is no evidence that Tesla values are depreciating faster than one might be paying off a car loan.
There is nothing magical about "mid point of the loan", and nothing in particular should be targeted for that random date.

Question for all the financial gurus. If I plan to keep the car for a long time (historically, I’ve kept vehicles for 8-12 years), would it make sense to make the largest down payment possible and then quickly pay of the loan?

Down payment - not at all.
It's money down the drain, unless it is required to secure an interest rate discount (rare, but not impossible).
Pay off the loan quickly - sure, unless you have a risk-free way to earn a higher return than the interest rate on the car loan (rare, but not impossible).

It’s hard writing a check for $45k, for example, especially when stocks are so cheap and we can put our money to work elsewhere. We just don’t like having any debt.

Equity investments are not risk free, and there are better and cheaper sources of funding than car loans if you want to make leveraged equity bets.

Most folks don't have large chunks of cash lying around that have not already been invested. So car financing facilitates the purpose of making large-ish one time cash outlays, and then paying those off as cash flow comes in.
There is also the matter of facilitating the transaction with a car dealership altogether. Most dealers will refuse to accept large-ish (e.g.: $45K) cash transactions to comply with money laundering laws. Personal checks will not get accepted either. Cashiers checks may or may not, but vehicle financing authorization always will clear.

HTH,
a

 

[PizzaDispenser]

"upside down" is an emotional term that has no objective merit.
If it matters to you to have X% equity in a vehicle (or house) loan, and for X to be > 0, then do quantify that target and optimize for it.
Otherwise, it's irrelevant.



Usually, that is NOT the case with new vehicle loans.
If that applies in your case, then take that into account.



There is no evidence that Tesla values are depreciating faster than one might be paying off a car loan.
There is nothing magical about "mid point of the loan", and nothing in particular should be targeted for that random date.



Down payment - not at all.
It's money down the drain, unless it is required to secure an interest rate discount (rare, but not impossible).
Pay off the loan quickly - sure, unless you have a risk-free way to earn a higher return than the interest rate on the car loan (rare, but not impossible).



Equity investments are not risk free, and there are better and cheaper sources of funding than car loans if you want to make leveraged equity bets.

Most folks don't have large chunks of cash lying around that have not already been invested. So car financing facilitates the purpose of making large-ish one time cash outlays, and then paying those off as cash flow comes in.
There is also the matter of facilitating the transaction with a car dealership altogether. Most dealers will refuse to accept large-ish (e.g.: $45K) cash transactions to comply with money laundering laws. Personal checks will not get accepted either. Cashiers checks may or may not, but vehicle financing authorization always will clear.

HTH,
a

Gotcha. I was told I can change the loan. So $0 down and 65 month is best then?

Also do you usually roll taxes and fees into the loan? I was thinking of doing $0 down but paying taxes and fees

 

[CreoUCLA]

Most dealers will refuse to accept large-ish (e.g.: $45K) cash transactions to comply with money laundering laws. Personal checks will not get accepted either.

I purchased my 2021 Toyota Tacoma last year from a dealership using a personal check for the entire amount. Their only qualification to do so was that I had "excellent" credit.

Federal anti-money laundering laws don't prohibit them from accepting large cash payments, but they are required to report/document them with the IRS (I believe the threshold is $10,000).

 

[Hiline]

Gotcha. I was told I can change the loan. So $0 down and 65 month is best then?

Also do you usually roll taxes and fees into the loan? I was thinking of doing $0 down but paying taxes and fees

Yes.

If it possible to roll, do the roll. Try to take out the maximum loan amount possible.

 

[DayTrippin]

If you are fiscally responsible, finance the entire amount. The rate of inflation is far greater than the interest on the loan. I financed every dime I could on the S and 3.

If something were to happen in the first few months of repayment, I could possibly be in a negative equity situation and I have cash on hand to cover that if I had to sell. On the plus side, the current price of the base prices of both cars is more than I financed rolling in taxes and tags. I know this is unique situation but it factored into my logic.

When I did the loan on both cars earlier this year I think it was at 1.24% or something crazy like that so it was even more of a no brainer. I also throw an extra hundred toward the principal on each car to make sure I am in positive equity more quickly. Once I am certain I am there, I am going back to the required minimum payment.

Obviously don't buy the car if you can't afford it. In both instances I didn't want to take money out of investments that are earning far more than the cost of the interest. Based on inflation rates, they are paying me to take their money. I glad accepted and glad I bought in when I did.

In high inflation, or when it is at least higher than my borrowing costs, I put down the minimum I need to, to get the best rate (assuming there is enough different to really matter).

 

[ECMYLR]

I have an EDD that's in a little over a month from now, so reading through some threads to get a better understanding of financing my car and locking in a rate (should have done it before 8/1, but EDD was still potentially 4-5 months out). Found some really interesting points in this thread, but was hoping to get some clarification/insight:

Shoot, I realized that $0 down would have been much smarter. I paid the down payment and accepted the loan they gave me. Is it too late to change it?

Why is a $0 down payment smarter in this case? At the end of the loan, won't the interest payment be higher? Or is this only in the case where you're planning on owning the car beyond the terms of the loan (i.e. greater than 60 months)?

Down payment - not at all.
It's money down the drain, unless it is required to secure an interest rate discount (rare, but not impossible).
Pay off the loan quickly - sure, unless you have a risk-free way to earn a higher return than the interest rate on the car loan (rare, but not impossible).

Can you explain why a down payment would be considered money down the drain? I was planning on putting down a downpayment for about 40% of the car, but now reconsidering that move.

In high inflation, or when it is at least higher than my borrowing costs, I put down the minimum I need to, to get the best rate (assuming there is enough different to really matter).

I think I'm confused here. If inflation is at 9%+, then in general my cash would be worth less in a few years. Why would it make sense then to have liquidity over paying down debt at a 3.49%? What am I missing here?

 

[RayK]

Most dealers will refuse to accept large-ish (e.g.: $45K) cash transactions to comply with money laundering laws. Personal checks will not get accepted either. Cashiers checks may or may not, but vehicle financing authorization always will clear

My experience with Tesla in Fremont when I picked up my car in July 2018 was exactly that; they would not accept cash. Not that I was going to bring a suitcase full of 20's. When I got there I was told what the full cost of the car was (~53K) and then I initiated an electronic (ACH) debit from my bank account. You're also right that they didn't accept a personal check (or credit cards) but they would have taken a cashier's check.

 

[DayTrippin]

I think I'm confused here. If inflation is at 9%+, then in general my cash would be worth less in a few years. Why would it make sense then to have liquidity over paying down debt at a 3.49%? What am I missing here?

I am investing my money and doing more than keeping up with inflation. Not to mention a car is an illiquid asset. So the loan was a no brainer since the interest rate was so low. Even if the APR matched inflation, which it hasn't, it was better for me to keep my money in investments and keep working rather than pay for the car.

As it is now, every dollar I am paying back with is an inflated dollar and a dollar worth less than it was when I took out the loan. If I took out the money and paid cash for the car, instead of 80k over 5 years, I paid for the car with a dollar that was worth more. The purchasing power of the dollar declines with inflation. So I borrowed when the dollar was worth more and paid it back with dollars that are worth less.

It is even better for me as my original loan rate was 1.24%. If inflation is at 6.5% avg for the next 5 years (term of my loan), that 80k would have been worth about 110k in 2027. Inflation favors the borrower.

I had no plans to leave my money in cash so it would devalue over time.

 

[ECMYLR]

I am investing my money and doing more than keeping up with inflation. Not to mention a car is an illiquid asset. So the loan was a no brainer since the interest rate was so low. Even if the APR matched inflation, which it hasn't, it was better for me to keep my money in investments and keep working rather than pay for the car.

As it is now, every dollar I am paying back with is an inflated dollar and a dollar worth less than it was when I took out the loan. If I took out the money and paid cash for the car, instead of 80k over 5 years, I paid for the car with a dollar that was worth more. The purchasing power of the dollar declines with inflation. So I borrowed when the dollar was worth more and paid it back with dollars that are worth less.

It is even better for me as my original loan rate was 1.24%. If inflation is at 6.5% avg for the next 5 years (term of my loan), that 80k would have been worth about 110k in 2027. Inflation favors the borrower.

I had no plans to leave my money in cash so it would devalue over time.

This makes a ton of sense and appreciate your explanation! I was reading a bunch of articles this morning and this is spot on.

Will look to invest my cash and borrow the full cost of the car.

 

[phaheem]

Someone else mentioned in another thread that it’s better to take a longer term loan to have the lower monthly payment, despite the extra you’ll pay in interest.

This way, if an unexpected expense/purchase arises, you‘ll have more liquid cash on-hand because you have a lower monthly payment. I know it’s not sound financial advice (because you‘re paying more interest over the life of the loan on what is typically a depreciating asset) but it makes practical sense if you’re trying to have a lower monthly payment to have more liquid cash available.

Also, if you’re not keeping the car forever and/or will sell it before you payoff the car, that extra interest becomes moot and you got away with a lower monthly payment while you had the car. Just something to consider.

 

[ECMYLR]

Someone else mentioned in another thread that it’s better to take a longer term loan to have the lower monthly payment, despite the extra you’ll pay in interest.

This way, if an unexpected expense/purchase arises, you‘ll have more liquid cash on-hand because you have a lower monthly payment. I know it’s not sound financial advice (because you‘re paying more interest over the life of the loan on what is typically a depreciating asset) but it makes practical sense if you’re trying to have a lower monthly payment to have more liquid cash available.

Also, if you’re not keeping the car forever and/or will sell it before you payoff the car, that extra interest becomes moot and you got away with a lower monthly payment while you had the car. Just something to consider.

Tried to do some math last night to see what would make more sense. Putting down the 40% would save me about $2.5K in interest over the course of 60 months, or about $42 per month. I could probably find a better return than $42 per month by investing that cash in the market, but who knows, it's so volatile right now.

Last car I had was about 7.5 years, so I guess it really depends if I want to swap cars before my loan is up. Feel like car fees are so high though when you're constantly swapping out cars (i.e. titling, etc.).

 

[DayTrippin]

If you follow some of those money shows that talk about investing such as Clark Howard (not sure his reach) but many say if you can't pay the car off in 48 months, it is too expensive of a car for you to buy.

I have used a lender that is often quoted here (forbidden to mention them now it seems) and took advantage of the BEV discount and others. The typically have a 1% bump when over 65 months. So usually I just do the 65 months and take the savings. I normally finance as much as they will let me. The loan to value on my S was about 108%. I rolled everything into the loan, car price, tax, license, etc. Even at 65 months term I can easily cover the loan but at times when the interest rate isn't much different for 72 or 84 months, I use the flexibility there and go with the longer term and sometimes drop a bit more money on the loan in the first year to offset the extra interest impact but typically not worth the hassle.

It would have been crazy not too. The potential downside is to be in a negative equity situation, aka "upside down". So if something happened, I might be in a situation where my payoff on the car is more than it is worth. So potentially I may have to come up with cash to pay off the loan in that situation such as the car totaled or I had to sell it in a rush.

WIth my Teslas of late, they have increased in value so I wasn't in a negative equity situation for long as with the low interest rate (more goes to principal), and the Increase in value, it flipped pretty quickly. That may not always be the case though so I always have emergency money on hand anyway so if I need to come up with cash to cover any negative equity I could. YMMV of course.

I would seriously consider a longer term loan over leasing with Tesla's crappy lease terms and inability to buy out the car if you are considering leasing.