Is a $20,000 down payment too much?
12-12-14, 09:30 AM
#31
Pole Position
Im a 24 year old, who's had 3 new cars in the last 4 years, I cant beat my habit of wanting a different car to drive every year, its like a drug. lol not smart financially but since I dont have any other bad money spending habits, its okay. Its nice to get a brand new car and having that feeling thats associated with it, but I dont see myself buying new in the future. I would actually recommend a used RX350. It would kill me to buy a soon to be last generation model for anywhere near 50K. Get a used CPO 2013 RX350 and use the money you save elsewhere. I know when you buy used you get a slightly higher interest rate then buying new, but i still feel its worth it. Ultimately its up to you, and its your money, so you have decide whats best for you. Im just sharing my opinion.
12-12-14, 10:26 AM
#32
Lexus Champion
I think we are talking about different situations. What I am saying is that the rule does not apply if you already have an existing loan that you are paying.
Example:
Loan A is a 60 month $10k loan at 5%. 50 payments in, 96% of your money is going into paying down the principal.
Loan B is a 60 month $10k loan at 3%. On your first payment, only 86% is going towards your principal.
In this case the "pay down your highest interest loan" does not apply. The extra payment would be better to go towards the lower interest loan B. OP didn't indicate if they had an existing loan, therefore I was looking at his/her potential situation. Not to mention that this rule doesn't consider whether or not interest expenses are tax deductions.
I could be wrong, but that's how I've always seen it. Yes, if you want to minimize how much the bank takes, you need to do this analysis. Best to speak to a financial adviser who majored in finance.
-Eric
Example:
Loan A is a 60 month $10k loan at 5%. 50 payments in, 96% of your money is going into paying down the principal.
Loan B is a 60 month $10k loan at 3%. On your first payment, only 86% is going towards your principal.
In this case the "pay down your highest interest loan" does not apply. The extra payment would be better to go towards the lower interest loan B. OP didn't indicate if they had an existing loan, therefore I was looking at his/her potential situation. Not to mention that this rule doesn't consider whether or not interest expenses are tax deductions.
I could be wrong, but that's how I've always seen it. Yes, if you want to minimize how much the bank takes, you need to do this analysis. Best to speak to a financial adviser who majored in finance.
-Eric
A really interesting thing to think about is if you were to buy a $50,000 Lexus out-right and had a mortgage. At first, it sounds like you are not paying any interest to the bank, but in reality, as long as you owe any money, you do. So, same $50,000 will cost $7,963 over a period of 5 years if the mortgage is only 3%.
That number goes up to $15,238 in 10 years.
Don't look at the percentage of principal you are paying on either loan. It's not a good representation of the real cost because as your principal amount decreases, so does the interest (compound), but your payments remain the same. The amount you pay the bank is still the interest rate * principal amount for each period.
Last edited by vlad_a; 12-12-14 at 10:36 AM.
12-12-14, 03:06 PM
#33
Eric, don't think of it in terms of payments. Imagine that in both Case A and Case B you make no payments whatsoever for a period of 5 years. In case A, you will pay $2,762 in compound interest. In case B, you are looking at $1,592. If in either case your principal never falls below $10,000, that is exactly what $10,000 will cost you regardless of the total loan amount, be either of these loans $1,000,000 or $100,000.
A really interesting thing to think about is if you were to buy a $50,000 Lexus out-right and had a mortgage. At first, it sounds like you are not paying any interest to the bank, but in reality, as long as you owe any money, you do. So, same $50,000 will cost $7,963 over a period of 5 years if the mortgage is only 3%.
That number goes up to $15,238 in 10 years.
Don't look at the percentage of principal you are paying on either loan. It's not a good representation of the real cost because as your principal amount decreases, so does the interest (compound), but your payments remain the same. The amount you pay the bank is still the interest rate * principal amount for each period.
A really interesting thing to think about is if you were to buy a $50,000 Lexus out-right and had a mortgage. At first, it sounds like you are not paying any interest to the bank, but in reality, as long as you owe any money, you do. So, same $50,000 will cost $7,963 over a period of 5 years if the mortgage is only 3%.
That number goes up to $15,238 in 10 years.
Don't look at the percentage of principal you are paying on either loan. It's not a good representation of the real cost because as your principal amount decreases, so does the interest (compound), but your payments remain the same. The amount you pay the bank is still the interest rate * principal amount for each period.
In my example if you make an extra $1000 payment into your 5% Loan A at 50 months in, you will stand to lose more money to interest than if you put your extra $1000 payment into 3% Loan B at month 1. For that single payment alone, the difference in total interest paid is $109.71. Big difference.
I put together a spreadsheet with the calculations to demonstrate how this works and am happy to share my findings.
-Eric
12-12-14, 05:21 PM
#34
Lexus Champion
Hi Vlad, you MUST look at the principal to EMI percentage you are paying on each loan. In order to reduce compound interest, the rule of "pay the highest interest rate loan" does NOT apply. Each situation is different and if you have two loans with different timings, this rule is incorrect and misleading.
In my example if you make an extra $1000 payment into your 5% Loan A at 50 months in, you will stand to lose more money to interest than if you put your extra $1000 payment into 3% Loan B at month 1. For that single payment alone, the difference in total interest paid is $109.71. Big difference.
I put together a spreadsheet with the calculations to demonstrate how this works and am happy to share my findings.
-Eric
In my example if you make an extra $1000 payment into your 5% Loan A at 50 months in, you will stand to lose more money to interest than if you put your extra $1000 payment into 3% Loan B at month 1. For that single payment alone, the difference in total interest paid is $109.71. Big difference.
I put together a spreadsheet with the calculations to demonstrate how this works and am happy to share my findings.
-Eric
The math is very simple. Whatever money you currently own (principal) * interest rate is what bank gets each period. The more money the bank gets, the less goes into your pocket.
Let's say I have 2 loans with 2 different principal amounts and two different rates. Who cares what their term is because at the end of the day, it is what you pay into it that counts. It could be an equity line with no defined term.
I have $10,000 that I got as a bonus that I would like to pay into any one of these. Can you create a case of when I would save money by paying this $10,000 into a lower interest loan instead of higher interest? The key component (if we are going to play by monthly payments, which is a wrong approach) is that the monthly (or yearly for simplicity sake) payments absolutely must be the same in both cases.
12-13-14, 08:55 AM
#35
For anyone who complained about the depreciation:
1. Why go on vacations? Once the vacation is over it's 100% depreciation on the money spend, isn't it?
2. Why go for a dinner to a restaurant -- once you walk out your money are 100% depreciated as well.
...I can go on...
Cars can be a source of enjoyment as well and how much enjoyment one gets out of particular car is totally subjective and it's up to the individual to decide how much money they're willing to spend.
1. Why go on vacations? Once the vacation is over it's 100% depreciation on the money spend, isn't it?
2. Why go for a dinner to a restaurant -- once you walk out your money are 100% depreciated as well.
...I can go on...
Cars can be a source of enjoyment as well and how much enjoyment one gets out of particular car is totally subjective and it's up to the individual to decide how much money they're willing to spend.
12-14-14, 09:31 AM
#36
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I put $17,500 down on mine ($10,000 trade in + $7,500 cash)…I wanted to keep my payment under $700…I say buy what makes you happy…I love my car and don't regret the decision at all…I will say this - keep in mind not only are you paying for the car, but you are paying for maintenance, gas and insurance…I also had a Mercedes ML and that is a far more expensive car to maintain than a Lexus RX …this is my second Lexus - I think it is a great car, "reasonable" to maintain and holds its value well…Also, if you are comparing apples to apples in terms of options on a Mercedes vs a Lexus - you are WELL into the 60s on a Mercedes...
If I were you, I would also think about leasing instead of buying depending on how many miles you put on the car and how long you want to keep it for…leasing isn't great for me (I have done both)…if you lease, don't put ANY money down to lower your payment…
Good luck…let us know what you decide!
If I were you, I would also think about leasing instead of buying depending on how many miles you put on the car and how long you want to keep it for…leasing isn't great for me (I have done both)…if you lease, don't put ANY money down to lower your payment…
Good luck…let us know what you decide!
12-14-14, 12:50 PM
#38
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If you can swing it, finance at 0.9%, no money down, put 20k in interest bearing account and let it build money for you while you pay, and if you get short on one month, pull from that 20k in savings. I screwed up when i got out of college, by putting 20k down on acura, and 11 months later I wrecked it badly, was not totaled but it was never the same. I traded it in, and lost a bit due to depreciation. When i was buying car, a Dr. approached me who was buying a convertible Mercedes at same location, after talking, he told me not to put that much down, because he totaled a Porsche 1 month after purchase, and he lost quite a bit also from depreciation. I ignored his advice and still put the 20k down, but 11 months later, i wish i would have listened. Just my .02
Whatever you decide, good luck.
Whatever you decide, good luck.
12-14-14, 03:46 PM
#39
I bought my f sport new in 2013 because it was new that year. But I wouldn't think twice about a CPO lexus given the reliability trends of the RX. I had a trade worth $18k. But I put it into a higher yield savings account and financed the entire amount of the car because my interest rate was around 1% as well. I used that 18k to pay for the monthly payments for almost two years. I paid minimal interest and basically the car didn't cost me any money until I ran out of the 18k. The only problem now is that the 18k is gone, even though a lot the car is paid off, my monthly payment is $800 a month. A large down payment now would get a much lower monthly payment for the life of the loan and less interest. Yes it's only 0.9% but it's still money you are giving away. And I am sure there are some Mercedes that won't break on you, but if you look at the trends over the past many years, they are much riskier than a lexus and repairs will cost more.
I recently test drove a Porsche Cayenne with a buddy of mine. The thought of owning a porsche was enticing, especially considering they have the highest reliability ratings of any German car brand. The car was only a year old with 10k miles. But after the test drive I was shocked at all the creaks rattles and groans I heard after just ten minutes in the car. My f sport has 20k miles and is twice as old, and the thing drives like it did when I drove it off the lot. This was only one brief experience but it reminded me why the rx is rated so highly.
I recently test drove a Porsche Cayenne with a buddy of mine. The thought of owning a porsche was enticing, especially considering they have the highest reliability ratings of any German car brand. The car was only a year old with 10k miles. But after the test drive I was shocked at all the creaks rattles and groans I heard after just ten minutes in the car. My f sport has 20k miles and is twice as old, and the thing drives like it did when I drove it off the lot. This was only one brief experience but it reminded me why the rx is rated so highly.
12-14-14, 08:15 PM
#40
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On a car loan, you should only put down the minimum amount needed to get the lowest interest rate - especially if its 0.9%. Save the rest for a house or something that won't depreciate so easily.
I'm also going to agree with whoever mentioned getting a used car. If you saved that $20k by purchasing a cheaper car, you basically just expanded your max upfront budget on a house by $100k. This is why my wife and I always bought used cars - well until this year when we pulled the trigger on a new BMW 435.
I'm also going to agree with whoever mentioned getting a used car. If you saved that $20k by purchasing a cheaper car, you basically just expanded your max upfront budget on a house by $100k. This is why my wife and I always bought used cars - well until this year when we pulled the trigger on a new BMW 435.
12-15-14, 02:12 AM
#41
On a car loan, you should only put down the minimum amount needed to get the lowest interest rate - especially if its 0.9%. Save the rest for a house or something that won't depreciate so easily.
I'm also going to agree with whoever mentioned getting a used car. If you saved that $20k by purchasing a cheaper car, you basically just expanded your max upfront budget on a house by $100k. This is why my wife and I always bought used cars - well until this year when we pulled the trigger on a new BMW 435.
I'm also going to agree with whoever mentioned getting a used car. If you saved that $20k by purchasing a cheaper car, you basically just expanded your max upfront budget on a house by $100k. This is why my wife and I always bought used cars - well until this year when we pulled the trigger on a new BMW 435.
12-15-14, 06:34 AM
#42
On the other end of the spectrum and I've never done this but I have a friend that always pays cash for his cars. He then pays himself back. You have to be very disciplined and have a steady income to do this. When he saves up enough he goes out and buys another car, cash on the barrel head! No financing for him.
12-15-14, 07:58 AM
#43
Lexus Champion
If you can swing it, finance at 0.9%, no money down, put 20k in interest bearing account and let it build money for you while you pay, and if you get short on one month, pull from that 20k in savings. I screwed up when i got out of college, by putting 20k down on acura, and 11 months later I wrecked it badly, was not totaled but it was never the same. I traded it in, and lost a bit due to depreciation. When i was buying car, a Dr. approached me who was buying a convertible Mercedes at same location, after talking, he told me not to put that much down, because he totaled a Porsche 1 month after purchase, and he lost quite a bit also from depreciation. I ignored his advice and still put the 20k down, but 11 months later, i wish i would have listened. Just my .02
Whatever you decide, good luck.
Whatever you decide, good luck.
The only thing that could be done for you, the upside-down balance on your Acura could have been rolled into the new car loan. You'd still be-upside down, now on 2 cars, but you would have your monthly payments masking your real financial situation.
If you do end up in the latter situation, then GAP insurance might be a good idea.
12-15-14, 01:06 PM
#44
Eric, you are not calculating it correctly. Apples and oranges.
The math is very simple. Whatever money you currently own (principal) * interest rate is what bank gets each period. The more money the bank gets, the less goes into your pocket.
Let's say I have 2 loans with 2 different principal amounts and two different rates. Who cares what their term is because at the end of the day, it is what you pay into it that counts. It could be an equity line with no defined term.
I have $10,000 that I got as a bonus that I would like to pay into any one of these. Can you create a case of when I would save money by paying this $10,000 into a lower interest loan instead of higher interest? The key component (if we are going to play by monthly payments, which is a wrong approach) is that the monthly (or yearly for simplicity sake) payments absolutely must be the same in both cases.
The math is very simple. Whatever money you currently own (principal) * interest rate is what bank gets each period. The more money the bank gets, the less goes into your pocket.
Let's say I have 2 loans with 2 different principal amounts and two different rates. Who cares what their term is because at the end of the day, it is what you pay into it that counts. It could be an equity line with no defined term.
I have $10,000 that I got as a bonus that I would like to pay into any one of these. Can you create a case of when I would save money by paying this $10,000 into a lower interest loan instead of higher interest? The key component (if we are going to play by monthly payments, which is a wrong approach) is that the monthly (or yearly for simplicity sake) payments absolutely must be the same in both cases.
Yes, I can create a case where you would save money paying into a lower interest loan and I already have above. I did not say that we are playing by monthly payments, I said you need to consider the amortization schedule to know which loan is best to pay. I highly recommend that you build your own scenario so that you understand the situation before writing it off.
While you can generally say it's smarter to pay the higher interest loan first, which is what the banks want you to think, then it's your money to waste. However it is not always the case and it is not good advice to give to others without understanding the schedule.
-Eric
12-15-14, 01:25 PM
#45
Lexus Champion
Yes my calculation was incorrect. In fact the $1000 extra payment into the 3% loan saves you $118 (I had written $110 before) than if you put the $1000 into the 5% loan at 50 months. The same applies if you consider "what you pay into it".
Yes, I can create a case where you would save money paying into a lower interest loan and I already have above. I did not say that we are playing by monthly payments, I said you need to consider the amortization schedule to know which loan is best to pay. I highly recommend that you build your own scenario so that you understand the situation before writing it off.
While you can generally say it's smarter to pay the higher interest loan first, which is what the banks want you to think, then it's your money to waste. However it is not always the case and it is not good advice to give to others without understanding the schedule.
-Eric
Yes, I can create a case where you would save money paying into a lower interest loan and I already have above. I did not say that we are playing by monthly payments, I said you need to consider the amortization schedule to know which loan is best to pay. I highly recommend that you build your own scenario so that you understand the situation before writing it off.
While you can generally say it's smarter to pay the higher interest loan first, which is what the banks want you to think, then it's your money to waste. However it is not always the case and it is not good advice to give to others without understanding the schedule.
-Eric
I will respectfully disagree. Paying higher interest loans first is a very valid advice. Amortization schedule makes no difference whatsoever, other than having psychological factors as well as affecting minimal payments, which is what most people live by.
