We're currently hunting for a car and debating taking a loan or paying cash. We have a punch list of pros/cons of both options, but my dense brain is having issues comprehending interest on a loan (and investing the cash) vs. paying cash. What are we missing?
Car Cost: $88k
Car Loan: 5% APR on $88k loan, $0 down, 60 months, $11,640 paid in interest. Total over 60 months: $99,640
Cash Investment: 5% APY, $88k initial investment, no additional contributions, 60 months, compounded annually. Two different simple online calculators show total balance at $112,312. We would pay taxes on the $24,312 gain.
We know there are many other factors specific to the loan terms, potential savings on base cost/MSRP with cash vs. financing, benefits of not worrying about debt and payments vs. cash in hand, carrying debt on a depreciating asset, investment return risk, etc. Assuming we take all of that into consideration, is that basic math right? While investment APY technically takes compounding into account, why is the interest paid (on the loan) so different from the interest earned (from the investment) with the same rate? Is it simply because the loan's 5% APR is paid against a declining balance, i.e., simply the way the amortization works?
Car Cost: $88k
Car Loan: 5% APR on $88k loan, $0 down, 60 months, $11,640 paid in interest. Total over 60 months: $99,640
Cash Investment: 5% APY, $88k initial investment, no additional contributions, 60 months, compounded annually. Two different simple online calculators show total balance at $112,312. We would pay taxes on the $24,312 gain.
We know there are many other factors specific to the loan terms, potential savings on base cost/MSRP with cash vs. financing, benefits of not worrying about debt and payments vs. cash in hand, carrying debt on a depreciating asset, investment return risk, etc. Assuming we take all of that into consideration, is that basic math right? While investment APY technically takes compounding into account, why is the interest paid (on the loan) so different from the interest earned (from the investment) with the same rate? Is it simply because the loan's 5% APR is paid against a declining balance, i.e., simply the way the amortization works?
Statistics: Posted by jasonrecite25 — Tue May 28, 2024 2:45 pm — Replies 3 — Views 212