Sounds like you’re saying everyone’s situation is different. Interesting indeed.
What’s the value if you car in 24 months? Then compare that to the principle balance on your loan. It could be thousands different. Your Insurance will only pay Actual market value which could be way less than what you owe. The car could be totaled and you are still responsible for the loan. That’s what Clark is talking about, not the rate. The depreciation is faster than you are paying the loan down. And, heaven forbid if you got a Rule of 78’s loan.
Thank you Joe! I figured there was a valid point that I was missing. Of course, if I had already paid for the car, I would also be out nearly the same amount, with the interest paid being the extra loss for having had the loan. I can live with that, since the interest rate I have is rather low, 1.9%.
The overlap between people who take rule-of-78 loans and those considering whether it makes more sense to get a car loan or take money from their investments is probably pretty close to zero.
I wasn’t aware that they were still writing Rule Of 78 auto loans anymore……are those for low credit buyers ?
That’s true only if you don’t total it in the early years or you don’t try to pay it off early, but yes, you are absolutely correct otherwise.
Bryon, the first couple of years of a loan that long will be mostly be interest and little principal. But, the car is depreciating rapidly. You’ll owe way more on the loan than your insurance will pay, so you’ll owe the difference. You need to run the amortization schedule and see how the principal owed compares with market value. Now, your insurance company may sell you a rider to pay off the loan, but that just eats up more of that perceived savings from the low rate. And, if you did pay cash for it and you drive it a couple of months and want to sell it, you won’t get your money back. Now, think about what the principal on the loan looks like. As long as you don’t have a total loss all of that is moot.
I don’t really know. I’ve never seen or heard of them other than when I took statistics in high school and then on the Clark Howard Show. But to be fair, most of the people who I would expect to have such a loan would probably not know it’s not in their best interest.
It appears some lenders still use Rule of 78 for some short-term, fixed rate loans under 61 months, but not very common because of Federal laws and some states have bans.