Help with Basic Finance Question

[jsaccio]

Hoping someone can answer basic finance question to help me decide between financing and paying cash. If I use a basic car loan calculator for $100k loan at 5%/5yrs it shows total interest I would pay around $13k. If I use savings calculator for leaving $100k in money market for 5yrs@ 4% it shows total interest paid to me around $21k. I don't understand why the interest amount is so much higher based on the same $/term for lower rate. TY

(FYI. The $100k money market idea is because I'm retired so it's a safety net incase the market tanks.)

Sponsored

 

[Awaz]

5%/5yrs loan you are paying off not only the interest but capital sum as well on monthly basis. Whereas, the whole of $100k you are investing for full 5 year term and not withdrawing any capital sum monthly. Hence, the reason.

Also, keep in mind, on $21k interest earned, you would be paying tax as well on your marginal tax bracket.

 

[Gordon87]

Also, when you borrow to purchase the car and invest your own funds, if you use any of the invested funds to pay any of the loan payments, you won’t earn the full interest in the invested funds over the full 5 years.

Also, if you borrow funds for the purchase, but decide to pay off the loan early, it is likely that the auto loan will front load the interest (using the Rule of 78s), whereas the interest you will have earned on your invested funds before the payoff earns simple interest.

 

[jsaccio]

Great feedback! Thank you very much.

 

[ColdCase]

Always look for auto loans with simple interest. You could also borrow against an asset (Home) instead of the car. Interest rates can be lower, and they may be tax deductible depending where you are with the std deduction. Continue to keep the money market as a safety net.

Sponsored