Which auto loan option is better?
2023 Mazda CX 30 select
About $27,000
$5,400 (20%) downpayment
2.9% 36mo loan vs 4.9% 60mo loan (manufacturer promo rates)
So it would be about $620 vs $400 monthly payment
I’d be paying nearly 3 times the amount in interest at the end of the day with the 60mo loan. But if I invested what I’d be saving with the lower monthly payment, would that outweigh the additional total interest paid over the life of the loan?
I know it’s possible that the market could go down while paying the car loan instead is a “guaranteed return” but I feel like a 5 year time span is likely to get a positive return?
Okay, let’s break this down:
- Car price: $27,000
- Downpayment: $5,400 (20% of $27,000)
- Remaining amount to be financed: $21,600
- 36 month loan at 2.9% interest
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- Monthly payment: $620
- Total interest paid over 36 months: $800
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- 60 month loan at 4.9% interest
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- Monthly payment: $400
- Total interest paid over 60 months: $2,940
The difference in monthly payments is $220 ($620 – $400).
If you invest the $220 monthly savings from the 60 month loan, at an average 7% annual return over 5 years, you would earn approximately $3,200.
So in this scenario, the total interest paid on the 60 month loan is $2,940, but the investment earnings are $3,200.
The difference is minimal, with the additional interest being slightly lower than the potential profit from the investment.
However, it’s essential to note that the stock market’s returns are not guaranteed, and there’s a risk associated with investing. On the other hand, paying off the loan is a “guaranteed return.”
