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.
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.
I think you missed my point that I’m getting substantially more interest on the money I diverted to my retirement accounts instead of using it to pay off the loan. The net is that my wealth will increase slightly by taking the longer, lower-interest loan than it would have had I taken the shorter, higher-interest loan. My whole point here is that sometimes paying off a debt slowly is actually a good thing.
It would be a completely different story if my financial situation were less flexible.
The interest payments started at about 11% of the monthly bill, due to the rate being 1.9%. It was never even close to “mostly interest”.
The interest isn’t the issue of Clark’s rule. It’s the depreciation vs the principal of the loan. Since you are paying the loan off over a long period of time you will be upside down in the loan very soon. The value of the car went down when you drive it off of the lot. You actually can purchase insurance to help cover that. Since your loan preloads the interest, look at a mortgage payment. If you total the car you’ll see what I’m talking about. The insurance company will pay ACV. You may owe more principal on the loan and you’ll be responsible to the lender for that. It’s the way the payments work, not the interest rate. The longer payments will always look good, but it’s the value of the car that will be the problem. If you don’t have a total loss then you win with the lower rate. If you total the car you’ll lose. That’s what Clark is talking about. He likes lower interest rates and payments as well, but he’s worried about the value of the car. Drive carefully.