Car Repayments, Finance 101 vs Weird thinking

P

Pixelbender

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Hey guys,

I just wondered. I've got a 5 year lease on my car, about halfway now and have some extra cash to put towards the car at the end of the month.

Should I....
Put it directly towards the financing, ie: Pay financing more than I have to

- OR -

Put the money in an account and only put it toward the car as a lump sum at the end of the year, before the next financing term kicks in.

What kind of savings could I realize either way?

In the beginning Saving up/lump sum sounded like good idea but the more I think about it, it would basically just be the same? Isn't it?
 
Remember interest as an expense is generally higher than interest rates earned. So if your interest rate is 10% on the car and a savings account would only return 5% you would save money by actually paying off that debt faster i.e. paying less interest at the end of the term.
 
$m@Rt@$$ said:
Remember interest as an expense is generally higher than interest rates earned. So if your interest rate is 10% on the car and a savings account would only return 5% you would save money by actually paying off that debt faster i.e. paying less interest at the end of the term.
Click to expand...

Yup unless you can earn more money than you'd lose on the interest payments then you should rather just pay off the debt now.
 
I understand, but the thinking is.

• 2 years left
• Save R X,X amount a month and get interest on it
• And pay the savings as lump sum to the car before the end of the year, before the next interest % kicks in.

- OR -
• Just pay the R X,X amount towards the financing instead.

$m@Rt@$$ said:
Remember interest as an expenses are generally higher than interest rates earned. So if your interest rate is 10% on the car and a savings account would only return 5% you would save money by actually paying off that debt faster i.e. paying less interest at the end of the term.
Click to expand...
 
But a lease isn't an interest-bearing contract is it? Isn't it a fixed-use-per-month charge?
 
In my small mind, the saving route will get me an extra 10% or does the interest rates decrease with time?

Probably depends on the amortisation schedule?
 
Pixelbender said:
I'm a private individual who bought the car through a dealership, standard. I'm not sure if it's a lease or hp.
Click to expand...
So you sign and start paying for the car without knowing what the T&C according to what you want it to be?

What does it say on your statement every month?
 
Pixelbender said:
I understand, but the thinking is.

• 2 years left
• Save R X,X amount a month and get interest on it
• And pay the savings as lump sum to the car before the end of the year, before the next interest % kicks in.

- OR -
• Just pay the R X,X amount towards the financing instead.
Click to expand...

The interest doesn't "kick in" at the end of the year. They calculate it every day based on the outstanding amount at that point in time. So you basically get charged 1/365 th of your annual interest every day.

For example, assume your interest rate is 7.3% per annum. Then every day you will be charged 0.02% (7.3% / 365) of the outstanding balance as interest.

Your approach only works if the interest rate that you earn when you save the cash is higher than the rate you are paying on your car.
 
Pixelbender said:
Instalment sale.
Click to expand...

right

In that case, compare interest rates. If you can get higher interest in an investment than you pay on the car loan, then invest it- otherwise, put it in the car loan.
 
Not looking to invest, I want to invest towards paying off car.

The question is; should I do it by saving the money to the side and pay in lump sum at end of year or should I just pay it towards car.

The question is not about investing vs debt.

Sinbad said:
right

In that case, compare interest rates. If you can get higher interest in an investment than you pay on the car loan, then invest it- otherwise, put it in the car loan.
Click to expand...
 
Pixelbender said:
Now I know thanks
Click to expand...

Depending on the interest rate you got when you signed. If you can get more interest from an interest barring account than you would by saving on interest by dropping a lump sum on the HP. Then I would say invest it.

I however am more of the quicker off debt kind of person so personally I would just pay that car off as soon as possible. Not really fussed about the 1 or 2% either way I might save by doing other things. I would much rather have that vehicle instalment off my shoulders quicker so I can use that money for investing.
 
Let me clear this up - I am an F&I at a vehicle dealership and some of these comments are pretty silly.

If you have money pay it into your vehicle finance account immediately. There is no other way to save money. There is no stable investment that would yield more than your annual vehicle finance interest rate. You will not pay less or get more by keeping your lump sum any longer.

Now that that is out the way, lets talk about a vehicle lease. In South African finance law, a vehicle lease and and instalment sale agreement are pretty much the same in the eyes of a layman. A vehicle lease is not the same as a property lease. An instalment sale agreement and a vehicle lease agreement both have the vehicle registered with you as the owner and the bank as the title holder. When the contract is paid up, titleholder is transferred to the owner.

In the USA, a vehicle lease agreement is equivalent to a rental agreement. We also have rental agreements in South Africa but it is called a RENTAL not a lease.

Hope that clears some things up?
 
Thank you for clearing this up. Just thought 2 years left, saving it to one side will earn me an extra 5% per annum, hence I still score 5% or something. Okay, but I'll put it towards finance account. Thanks.

SigmaZ said:
Let me clear this up - I am an F&I at a vehicle dealership and some of these comments are pretty silly.

If you have money pay it into your vehicle finance account immediately. There is no other way to save money. There is no stable investment that would yield more than your annual vehicle finance interest rate. You will not pay less or get more by keeping your lump sum any longer.

Now that that is out the way, lets talk about a vehicle lease. In South African finance law, a vehicle lease and and instalment sale agreement are pretty much the same in the eyes of a layman. A vehicle lease is not the same as a property lease. An instalment sale agreement and a vehicle lease agreement both have the vehicle registered with you as the owner and the bank as the title holder. When the contract is paid up, titleholder is transferred to the owner.

In the USA, a vehicle lease agreement is equivalent to a rental agreement. We also have rental agreements in South Africa but it is called a RENTAL not a lease.

Hope that clears some things up?
Click to expand...
 
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