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HungryGuy's avatar

Which is a better car deal: a lower price and a higher interest rate, or a higher price and a lower interest rate?

Asked by HungryGuy (15956 points ) March 3rd, 2012

Given the same monthly payment and number of payments:

Is it a better deal to get the lowest price on the car but have a moderate interest rate?

Or get a low interest rate and but not the lowest possible price on the car?

Or does it not make any difference at all?

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8 Answers

YARNLADY's avatar

The taxes you pay are figured on the purchase price of the car, therefore it makes sense to have a lower price up front. In California, the sales tax is a substantial amount.

Edit, there are several different ways to calculate interest, as well. With the so called Rule of 78, you have to pay the entire interest even if you want to pay the loan off early, so it is best to get a simple interest on the unpaid balance type of loan, that way you can pay more on the principle and owe less in interest.

Adirondackwannabe's avatar

Multiply the amount of the payments by the number of months and add the sales tax. The rule of 78 was canned years ago.

jerv's avatar

I would go for the lower price and higher interest partly because sales tax is often based off of purchase price and partly because you can wind up paying less overall if you come into a little extra money to put towards the principle.

@YARNLADY Did you mean;
”...a simple ‘interest on the unpaid balance’ type”, or
”...a ‘simple interest on the unpaid balance’ type”?

The only “simple interest” loans I have seen front-load the interest to make that impossible. In other words, borrowing will cost you the same if you pay off in six months or sixty. Punctuation matters ;)

wundayatta's avatar

I’d have to run the numbers. It’s all in the specifics, I’m afraid.

YARNLADY's avatar

@jerv Sorry Just leave out the word simple. An interest on the unpaid balance loan.

@Adirondackwannabe The rule of 78 type loan still exists, but they have changed the name so it is easy to disguise. I don’t know the new name.

john65pennington's avatar

Imagine a yardstick, when purchasing an automobile. Lower the price on the one inch line and make up the difference somewhere between one and 36 inches. This is what car dealers do. The bottomline is they are going to make their money off the deal, no matter where they raise and lower the figures.

The best bet, of course, is to pay cash for the car, like I did at CarMax and forget it.

I realize you probably cannot do this, so either of the offers are not good.

You would have to crunch the numbers, on the interest rate, compared to the number of months involved and compare it to the price of the vehicle.

For some reason, I had rather pay a little more for the vehicle and get a lower interest rate, if these were my only two choices.

Mariah's avatar

It very much depends on the exact numbers. There will be an optimal choice somewhere in the middle.

tedd's avatar

Well you could do the math and calculate how much you will pay in interest on both vehicles (I think they have to tell you how much you’ll spend total in interest now adays). My assumption is the interest money paid would be less on the new car that has lower interest. My brand new car for example costs me something like 12–15 dollars a month in interest, whereas the interest on a used car would’ve been like 50 a month.

The reverse of that is that the total purchase price of the used car will likely be lower, since the purchase price (not counting interest) was likely significantly lower than the purchase price of the new car. For example, though I pay lower interest on my brand new car… the used cars I was looking at were anywhere from 7 to 10 thousand dollars cheaper. So an additional $1500 in interest would still come in well below the total cost of the new car.

As far as either of them being a deal, that depends very much on the car and the condition its in. But keep in mind interest rates when buying. If a car is like $1000 less than the market value, that’s great… but if the interest tacks an additional $5000 to the price, suddenly the low sticker makes sense.

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