Auto loan balance keeps rising...

[OCGuy]

Hey you know a lot about credit right? (underwriter or something?)

If one has perfect credit (no late payments, not carrying big balances on CCs, not overstretched on debt), that actually uses it (car loans/etc), how many years of that good history would you think it takes to be really *set*, as in like 775+ score, easily able to get below prime rates on loans that are properly within their salary?

Most lenders stop giving you any credit for having over 740 middle score. Meaning you would be in the same bracket if you had a 741 or the mythical creature known as the 850.

If you have a good mix of tradeline types (installment, revolving) with balances under ~40% on the revolving, you can easily be in the mid-700s in your mid-20's, assuming you started your credit history in your late teens.

Yes I do underwrite and process mortgage loans in California.

 

[the DRIZZLE]

Well in post #13 he wrote that 1^(infinity) = 2.71828182845904

The limit of (1 + 1/n)^n is actually 2.718. Thats the definition of e.

 

[yh125d]

Cool. Once I get this collection off my record (not my fault I promise!), I will have perfect history, with a couple paid as agreed ~$9k car loans and a low revolving CC balance (currently 0), and I'll be 21 in may. I tentatively plan on buying a house around 25, so I should be set.

 

[ShawnD1]

This might be the most wrong thing I ever seen posted here.

Maybe to americans. Do you guys have usery laws down there?

 

[OCGuy]

Cool. Once I get this collection off my record (not my fault I promise!), I will have perfect history, with a couple paid as agreed ~$9k car loans and a low revolving CC balance (currently 0), and I'll be 21 in may. I tentatively plan on buying a house around 25, so I should be set.

Yea keep it up you will have no problems on the credit side. You can put down 3.5% on an FHA loan with a 640 middle FICO and get a better rate than someone with a 700 putting 20% down. Of course, you have mortgage insurance with anything less than 20%, but it is still a bit odd how the pricing is working right now.

 

[the DRIZZLE]

Maybe to americans. Do you guys have usery laws down there?

Your payment first goes toward interest, whats left goes toward the principle. If your payment is less than the interest for that month the balance goes up by the difference. In the next compounding period you would pay interest on your new higher balance. If you are paying less than the interest amount you will never pay off the loan. People in credit card debt who make only minimum payments run into this all the time. No auto loan would ever be structured that way.

 

[Sukhoi]

The limit of (1 + 1/n)^n is actually 2.718. Thats the definition of e.

Ugh, it's been too long since college. I actually did notice that 2.718 seemed similar to what I remembered e being, but I didn't bother to look any farther.

 

[BoomerD]

Unless you got your car loan from this guy, this should not be happening. The loan cannot go up unless you are missing payments or your interest rate is > 100%

As long as youse pays yer vig on time, dere's no problems...

 

[JS80]

<3 penfed. I have two loans 60 month at 2.99&#37;.

 

[dave_the_nerd]

Holy shit that's high. You sure this isn't a mafia loan? Most car loans are more like 2.9&#37;

New cars. Used car loans tend to be more like >4%, and since OP is 21 and has a credit history shorter than his dick, it doesn't really matter how good his score is. 6% minimum until you're 25 unless somebody's cosigning.

(Unless you're putting ridiculous money down and qualifying for every possible interest rate incentive.)

Lending person at my bank says structured long term debt like cars and mortgages is best for building a reliable-looking credit history though.

 

[ShawnD1]

New cars. Used car loans tend to be more like >4&#37;

Interesting. Seems like there's a huge split where it's either financing a new $20,000 car or paying $2,000 in cash for a used car. That middle ground where it's used but costs more than $2,000 is unexplored territory 😀

What's the lending company? Different companies have different ways of calculating interest. For example, pawn shops get around usery laws by charging "storage" fees. Instead of 100% yearly annualized interest, it's 100% storage fee with no interest. Credit card companies pull similar bullshit.

 

[DrPizza]

math tip of the day: if they compounded it every second, the effective interest rate would be 172&#37; yearly 😉

(1 + 1/n)^n where n is infinite compounding periods = 2.71828182845904

It probably says something like 3% interest rate then in brackets (compounded every trillionth of a second)

Awwwww, isn't that cute! BUT IT'S WRONG! Not even close.
Let's assume a $1000 loan, at 6% annual interest, compounded daily. (for simplicity's sake, we won't make any payments.) That works out to $1061.83 after a year, or an effective interest rate of 6.183% (The $1000 really doesn't matter; it cancels out in the end.)

Compounded monthly, the effective interest rate works out to 6.168%

6% annual interest, compounded every billionth of a billionth of a billionth of a second (compounded continuously) works out to 6.184% - virtually no difference from compounded daily. Increasing the compounded from daily to "every trillionth of a second" has a nearly negligible effect on the realized amount of interest.

Of course, the limit as n approaches infinity of (1+ 1/n)^n is Euler's number. But that has little to do with this problem.

The limit as n approaches infinity of (1+r/n)^n = e^r
2.71828182845904523536^.06 = 1.0618365465453596

 

[Oakenfold]

Here you go OP. It's just simple interest calculated daily. Your financial institution does it so you know what the loan payoff is daily.
http://www.ehow.com/how_6673595_calculate-daily-interest-rates.html

 

[bhanson]

Tip: Financing new vehicles right now can be just as cheap as paying with cash if you are Tier 1/2 credit

Isn't it better to just buy a used car?

 

[JS80]

Isn't it better to just buy a used car?

Why not get a used car with a penfed auto loan at 2.99%?

 

[bhanson]

Why not get a used car with a penfed auto loan at 2.99%?

Why not pay cash? (I'm not being argumentative, but what's the upside of taking out an unnecessary loan?)

I guess it's good for your credit, but the only thing you really need credit for is buying a house. With the way FHA loans are structured I don't see a reason why most people would choose a traditional loan over an FHA.

 

[PlasmaBomb]

Why not pay cash? (I'm not being argumentative, but what's the upside of taking out an unnecessary loan?)

I guess it's good for your credit, but the only thing you really need credit for is buying a house. With the way FHA loans are structured I don't see a reason why most people would choose a traditional loan over an FHA.

Even if you had the cash and could afford to buy a new car, taking out the loan could be beneficial - if you could invest your money and earn interest at a rate higher than that of the loan.

For example if you could invest your money and it earned 5% interest (which isn't a great return), you would be better off taking the 2.99% loan and investing the money, rather than paying cash.

 

[JS80]

Why not pay cash? (I'm not being argumentative, but what's the upside of taking out an unnecessary loan?)

I guess it's good for your credit, but the only thing you really need credit for is buying a house. With the way FHA loans are structured I don't see a reason why most people would choose a traditional loan over an FHA.

Liquidity.

 

[ElFenix]

Ah yes, i see it now. $7143.21 is my *payoff for today only. In my transactions history I see the principal balance is $7081.84



Another curiosity, why does the portion of my payment that goes to interest vary so much every month? I'd get if it was a little every month, especially if it went down slightly every month (cause loans put more of the interest up front then pay more to principal as the term goes on right?), but it isn't. It can vary from 53, to 75, to 23, to 44, to 48, yadda yadda yadda.

depends on the day payment is applied and the number of days in a month.

if you make one payment early in the cycle and then the next month's payment late in the cycle, the next month's payment is going to be shown to have paid a larger amount of interest than the first's.

 

[bhanson]

Liquidity.

I guess I feel the amount of money you spend on a car shouldn't be significant enough to warrant liquidity being a factor, unless you're buying too much car.

Even if you had the cash and could afford to buy a new car, taking out the loan could be beneficial - if you could invest your money and earn interest at a rate higher than that of the loan.

For example if you could invest your money and it earned 5&#37; interest (which isn't a great return), you would be better off taking the 2.99% loan and investing the money, rather than paying cash.

Where can I get a fairly reasonably sure 5%? (serious question)

 

[Imdmn04]

Depressing to know that you have to pay $150 in interest every month. Seeing it applied to your balance at the end of every day just makes it worse.

Tip: Pay cash for your next vehicle.

Never pay cash for a car unless buying a car is like buying a loaf of bread to you.

An average new car cost $30k, invest the $30k in some relatively safe investment vehicles such as an index fund over the course of the loan, and profit.

Most new cars cost only 2-3&#37; APY to loan over 48 months in this weak economy, you will average at least a 5-8 percent return annually on your investment in an index fund. Even if the car loan APY is the same as your investment return yield rate (5 percent APR loan vs 5 percent annual investment yield), you will still come out ahead taking the loan. In a loan, the principal is constantly reduced. In an investment, as long as you don't take any money out, you make interest(or gains) on top of the interest/gains you earned in the previous cycle. In the end you will earn more interest/gains in an investment than the interest you have to pay over the course of the loan, even if the the yield rate is the same between the two.

Never pay cash (the most liquid form of asset you have) for a quickly depreciating asset, unless of course like I mentioned earlier, you are so rich that buying a car is like buying bread at the supermarket.

 

[MegaVovaN]

Never pay cash for a car unless buying a car is like buying a loaf of bread to you.

An average new car cost $30k, invest the $30k in some relatively safe investment vehicles such as an index fund over the course of the loan, and profit.

Most new cars cost only 2-3% APY to loan over 48 months in this weak economy, you will average at least a 5-8 percent return annually on your investment in an index fund. Even if the car loan APY is the same as your investment return yield rate (5 percent APR loan vs 5 percent annual investment yield), you will still come out ahead taking the loan. In a loan, the principal is constantly reduced. In an investment, as long as you don't take any money out, you make interest(or gains) on top of the interest/gains you earned in the previous cycle. In the end you will earn more interest/gains in an investment than the interest you have to pay over the course of the loan, even if the the yield rate is the same between the two.

Never pay cash (the most liquid form of asset you have) for a quickly depreciating asset, unless of course like I mentioned earlier, you are so rich that buying a car is like buying bread at the supermarket.

What about taxes on gains from stock? Are they small?

 

[the DRIZZLE]

What about taxes on gains from stock? Are they small?

He also completely ignores the risk component. The loan payments are certain but the stock return isn't. If you have a very long time horizon what hes suggesting might make sense but its not good advice for everyone.

 

[MegaVovaN]

Of course, a better idea is to not buy a car at all and put $20k in an index fund for profit... 😉

 

[JS80]

Penfed car loan rate now 2.49&#37;