# Car payments at 2.99% interest



## ML91 (Dec 5, 2015)

Bought a car in Sept 2015 for about 20k. I put down 6000 including my trade in. If I do all my payments over 60 months (5 years) ill pay about 1200$ in interest. Should I pay it off quicker or keep my money in the market and work to get a 3% return on my investments and ride it out?


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## AltaRed (Jun 8, 2009)

You are making payments with after tax dollars. If your investments are not in a TFSA and guaranteeing you 3%, you will have lost money on an after tax basis. Worse, if your investments tank, you are even worse off. My mantra was never to carry consumer debt in which interest payments have to be made.


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## ML91 (Dec 5, 2015)

AltaRed said:


> You are making payments with after tax dollars. If your investments are not in a TFSA and guaranteeing you 3%, you will have lost money on an after tax basis. Worse, if your investments tank, you are even worse off. My mantra was never to carry consumer debt in which interest payments have to be made.



My investments are in a TFSA. Thus far my gain is 2%. I should have been more specific in my original post.


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## camerono (Mar 5, 2016)

I would pay down the loan since you aren't generating better returns in your TFSA.


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## Mortgage u/w (Feb 6, 2014)

By that comparison, I would pay off the loan....make your payments towards your TFSA instead and benefit from compounding returns.


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## lonewolf (Jun 12, 2012)

Just read the other day that in US they are offering 7 year car loans. Trade in every few years & the car is worth less the loan. The debt in the system just keeps piling up. Transactional banking where these loans are bundled up & sold makes for a fragile system as the banks don't care if loans get paid off when they have no skin in the game.


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## yyz (Aug 11, 2013)

lonewolf said:


> Just read the other day that in US they are offering 7 year car loans. Trade in every few years & the car is worth less the loan. The debt in the system just keeps piling up. Transactional banking where these loans are bundled up & sold makes for a fragile system as the banks don't care if loans get paid off when they have no skin in the game.


What do you mean in the US? They do that here as well.Hyundai regularly likes to offer a 0% 84 month loan.My father in law has one and is thinking of getting a different vehicle.I've told him to pay out the loan he's under water on it.


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## djkelly (Feb 18, 2016)

Always pay off your debt before doing anything else.


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## carverman (Nov 8, 2010)

djkelly said:


> *Always pay off your debt before doing anything else.*


Good advice!


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## sags (May 15, 2010)

There are differing opinions on longer amortizations for cars, but under the right circumstances it can be a good way to pay for the vehicle.

http://www.theglobeandmail.com/glob...ms-make-good-financial-sense/article25321975/


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## coptzr (Jan 18, 2013)

pm sent


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## coptzr (Jan 18, 2013)

sags said:


> There are differing opinions on longer amortizations for cars, but under the right circumstances it can be a good way to pay for the vehicle.
> 
> http://www.theglobeandmail.com/glob...ms-make-good-financial-sense/article25321975/


This is extremely poor advice, don't do this. You don't want to be stuck in a 5-8 year loan with a vehicle out of warranty in 3-5 years, having a $1000-$4000 repair bill while making payments and with changing inspection and emission standards you could be stuck with a 5+ year old car you owe $12,000 that you can not sell.

Kijiji search for Ontario
(12) 2011 Mazda Cx-7 average $14k/92,000km cash sale
(5) 2016 Mazda Cx-5 $34k+taxes+pdi+extras+loan interest (if applicable) = $40k

Another personal point, life can change a lot in 5-8 years, you don't want to drag this debt around with you.

Would this extended car loan term not be similar argument to the 40year mortgage that was offered?


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## Mortgage u/w (Feb 6, 2014)

Agree with the above post. If you need to stretch a car loan to make affordable payments, it means you can't afford that car. You don't want to carry a debt for that long especially not for a depreciating item such as a car. I've never had a car loan, but I also never had a brand new car. Yet, I still got around hassle-free with mid-range quality cars.

One could argue two sides in regards to the extended car loans, including the extended mortgage loans. True, it simply en-debts people for much longer and creates a debt-load higher than one should be able to afford. On the flip side, we could credit the extended loans to keeping the economy stimulated throughout the recession. Make it affordable and they will spend. The theory works since most people are not money literate. The ones who are should be smart about it and take precaution.


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## sags (May 15, 2010)

How is it different to finance a vehicle over 7 years at 0% than paying cash for the vehicle ? It would be better to keep the $30,000 invested for 7 years and earn a return on it, which is equivalent to a price discount on the car. 

If a person is going to pay cash, a purchase of a 2-3 year old vehicle would be the best option. I don't think it is as wise to pay cash for a new vehicle when 0% financing is available, or paying 8% or higher interest on a used vehicle because it cost less.

The vehicle depreciates at the same rate regardless of financing. The vehicle's worth will be the same after 7 years, regardless of financing.

_"You don't want to be stuck with a 5-8 year old loan out of warranty in 3-5 years"._.......extended warranty coverage is available for the length of the loan. Any car repairs after warranty expires would be the same, regardless of financing. It may be cheaper to buy the new car with a full warranty.

I agree there are some traps to avoid. People are enticed to purchase a more expensive car than they need, some want to trade vehicles more frequently than every 7 years, and some may have trouble servicing the debt.

Other problems are people who pile up high mileage on their vehicles or don't maintain them well...........which will reduce the used price value of their vehicle.

As to the difference between extended auto loans and 40 year mortgages, the difference is the interest rate. If mortgages were available for 0% financing...........why wouldn't people take a 100 year mortgage ?

A 100 year fixed rate mortgage at 0% would be golden, especially if it was transferable. Today's payment of $1500 a month would be next to nothing in 100 years due to inflation and the time value of money.


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## Mortgage u/w (Feb 6, 2014)

sags said:


> How is it different to finance a vehicle over 7 years at 0% than paying cash for the vehicle ? It would be better to keep the $30,000 invested for 7 years and earn a return on it, which is equivalent to a price discount on the car.
> 
> If a person is going to pay cash, a purchase of a 2-3 year old vehicle would be the best option. I don't think it is as wise to pay cash for a new vehicle when 0% financing is available, or paying 8% or higher interest on a used vehicle because it cost less.


You said it yourself <there are traps to avoid> and this is clearly one of them. Why would any commerce offer 0% financing over 7 years? 0% financing is clearly a marketing tool - or a trap! Ask to pay the car cash and you instantly benefit in a $3000-$5000 rebate. So although it may be enticing to finance at 0%, you pay more regardless. The premium is added to the car price.


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## coptzr (Jan 18, 2013)

sags said:


> How is it different to finance a vehicle over 7 years at 0% than paying cash for the vehicle ? It would be better to keep the $30,000 invested for 7 years and earn a return on it, which is equivalent to a price discount on the car.
> 
> If a person is going to pay cash, a purchase of a 2-3 year old vehicle would be the best option. I don't think it is as wise to pay cash for a new vehicle when 0% financing is available, or paying 8% or higher interest on a used vehicle because it cost less.
> 
> ...


Sounds almost like someone who has not dealt with new car purchases and financing. Important point #1, 0% isn't 0.0000, its normally 0.9%. Extended warranties are NOT free, and normally cost $1500-$2500 extra, so that takes care of making money on your cash. Factory warranties don't cover maintenance, wearable items, and have been constructed to beat the average owner. They normally barely cover average km per year and most items are not 100% covered, in my experience, a large issue is more likely 75% covered. Also, anytime you would need to apply for credit, you would have that cash payable loan perhaps working against you. The high mileage argument is not valid as I work based on average. Anyone wanting a folder full of exteneded loans is free to do so, you likely won't sleep easier at night.


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## MrMatt (Dec 21, 2011)

lonewolf said:


> Just read the other day that in US they are offering 7 year car loans. Trade in every few years & the car is worth less the loan. The debt in the system just keeps piling up. Transactional banking where these loans are bundled up & sold makes for a fragile system as the banks don't care if loans get paid off when they have no skin in the game.


Unless you have a good downpayment, the car is worth less than the loan the minute the title is registered in your name.


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## Video_Frank (Aug 2, 2013)

sags said:


> How is it different to finance a vehicle over 7 years at 0% than paying cash for the vehicle ? It would be better to keep the $30,000 invested for 7 years and earn a return on it, which is equivalent to a price discount on the car


This is exactly what I did, except over five years, not seven. I took the cash I was going to use to pay for the car and put it into a People's Trust account. It paid 1.9% at the time but is 1.45% today. The price was fixed from Car Cost Canada and paying cash, versus taking the loan, would not have reduced the cost of the car.



coptzr said:


> Important point #1, 0% isn't 0.0000, its normally 0.9%.


The loan I got from Toyota was 0%. I asked what the catch was and was told that if you miss a payment, even the last one, interest over the lifetime of the loan becomes due at a punitive rate (I think it was around 6% or so).


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## MrMatt (Dec 21, 2011)

Mortgage u/w said:


> You said it yourself <there are traps to avoid> and this is clearly one of them. Why would any commerce offer 0% financing over 7 years? 0% financing is clearly a marketing tool - or a trap! Ask to pay the car cash and you instantly benefit in a $3000-$5000 rebate. So although it may be enticing to finance at 0%, you pay more regardless. The premium is added to the car price.


Often the cash promo isn't as good as the 0%, or 0.9% promo. My last car was "0%", but in actuality BMO held the loan at something higher.

There was no "cash discount", but once I got the car, I walked across the street and paid it off, saving the difference in interest rates.


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## ML91 (Dec 5, 2015)

Im going to ask my bank for a line of credit, see if its cheaper than 2.99 and go from there. If I keep paying off my loan monthly from my car dealer on my 60 month (5 year) term it will cost me about 1100$ in interest.


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## sags (May 15, 2010)

It doesn't have to be all or nothing.

You can lower the total interest cost by increasing the monthly payment or making some extra periodic payments to the lender to pay down the principal.

The optimum time for extra payments is early in the financing, when the bulk of the interest accrues and so you aren't paying interest on the same money every year.


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## Spudd (Oct 11, 2011)

ML91 said:


> Im going to ask my bank for a line of credit, see if its cheaper than 2.99 and go from there. If I keep paying off my loan monthly from my car dealer on my 60 month (5 year) term it will cost me about 1100$ in interest.


I doubt you will be able to get a LOC for less than 2.99%. Even HELOCs are likely more than that.


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## coptzr (Jan 18, 2013)

MrMatt said:


> Often the cash promo isn't as good as the 0%, or 0.9% promo. My last car was "0%", but in actuality BMO held the loan at something higher.
> 
> There was no "cash discount", but once I got the car, I walked across the street and paid it off, saving the difference in interest rates.


I've only found one cash discount and was for new 2013 Nissan Rogue SL AWD, worked out to $3000off or 0% finance, if I remember correctly.


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