Comment by kop316 | Hacker News Reader

Comment by kop316 | Hacker News Reader

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So let's assume the person can pay off the loan (A lot of these loans have clauses where if you miss a payment or are late for a payment they can charge a collection fee or repo the car).

From my understanding, what is used is called an "opportunity cost". Meaning, if I took this loan rather than pay off the car, I now have $36,000 in my possession that I would not have otherwise. I have to be able to make more than %1.9 off the money I spent over seven years for that loan to have been worth it.

So let's say I just store $36,000 in a savings account that had a yield of less than %1.9 and used that to pay off the loan. I am still losing money on the deal. If I put it into some sort of investment that made more than %1.9, then I make more money than if I spent it entirely on the car.

This is at least my understanding of how it works out. I welcome other's thoughts if I am wrong.

Even very safe investments will get you an expected rate of return higher than 1.9%. Hell, my bank's current rate on a 5 year CD is (barely) above 1.9%.

In short, the loan is a great deal if the terms of the loan did not affect they buyer's willingness to pay more for the car.

That's what I was thinking too....but this assumes a few things:

a) You have that sort of cash on hand. b) You do NOT miss payments.

If you miss payments, they typically have late/collection fees against you (I don't know how bad they are) or repossess your car depending on the situation. I assume both are structured to be advantageous to the dealer (I don't know specifics).

Also, it is in the dealer's interest to make the loan as long as possible, as this makes the advertised monthly payment as low as possible.

In addition, making the loan payments as low as possible helps decouple the true cost of the car from the buyer. This encourages more spending that otherwise would not happen.

That assumes that you can skip buying the car. It’s usually not the case and a lot of buyers have not built up savings to be able to refuse a loan.

It does.

I am trying to answer the question posed, which was "is this a really good loan?" I took that to mean "If I have the money to buy the car, is this advantageous enough to take a loan anyways?"

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