- December 9, 2023
- Posted by: legaleseblogger
- Category: Related News
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Title: Seeking Advice on Financing and Compound Interest
Introduction
I have little knowledge about financing and compound interest, as my husband is American and is more familiar with financial matters. I have always preferred to pay for purchases in cash. However, I have a question about the implications of taking out a loan with compound interest.
Financial Situation
My husband has taken out a loan of $110,000 with a 9% compound interest rate. We are uncertain about the exact calculation and the amount of interest that will be accumulated over time. The monthly payments are $2500, but we are unsure about the total interest to be paid at the end of the loan term.
Confusion and Concern
I am puzzled as to why it would be advantageous to finance a purchase with compound interest, when we have the means to pay for it outright. My understanding is that financing with interest incurs additional fees and expenses, which seems counterintuitive.
AI Legalese Decoder Assistance
Using the AI Legalese Decoder can provide clarity by simplifying the legal jargon and complex financial terms related to loans, compound interest, and financing. It can break down the calculations and provide a clearer understanding of the financial implications of taking out a loan with compound interest. Additionally, the AI Legalese Decoder can provide insights on the potential benefits and drawbacks of financing versus paying outright, aiding in making an informed decision.
Conclusion
Seeking advice and utilizing resources such as the AI Legalese Decoder can alleviate confusion and apprehension regarding financing decisions. By gaining a deeper understanding of the financial implications and options available, we can make informed choices that align with our financial goals and preferences.
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>the monthly payments are $2500 in the end how much interest will he have paid on the loan total?
How many months is the term?
>IÔÇÖm confused as to why you would take a loan with interest when you can just spend the money and not pay any loan fees or interest etc.
Because some people are bad at math. Your instincts are correct: It does NOT make sense to do that, not at 9% interest at least.
It’s possible he didn’t want to deplete his savings, but he could have just paid cash for most of the expense and financed only a small part of it.
Im a mechanic not a financial advisor but afaik taking out a loan when you have the money only makes sense when your interest rate is lower than your index fund returns.
9% compound sounds like your husband just threw money out of the window for no reason
Ok – additional information. The loan is actually 135k with all the taxes and whatever else.
ItÔÇÖs a car, I assumed the loan was 120k because that was the list price and he put 10k down.
The reason I donÔÇÖt really know much about this is because I told him IÔÇÖm not interested in being involved. HeÔÇÖs from money and can easily afford this so in my mind he can do whatever he wants, I think itÔÇÖs a silly amount to spend on a car but thatÔÇÖs his business. What I have trouble with is having a loan when you donÔÇÖt need to – so essentially throwing $42k (I looked at the paperwork, thatÔÇÖs what heÔÇÖll pay all up) in interest down the drain. He is arguing that he can use the 100k to invest and make more than he would pay in interest. My argument is that he can easily invest an additional 100k if he wanted from his savings (while STILL having a robust savings balance AND a healthy retirement fund) and pay cash for the car. I canÔÇÖt see a single benefit to paying 42k interest.
Can anyone else?
It is not smarter to finance at 9% unless you can get a guaranteed 9% return AFTER taxes on an investment which I very much doubt you can.
As for how much interest you would owe you left out an important detail which is the loan term, ie how long to pay it off. I can calculate that though from the other three pieces which is the principle (110k) and the monthly payment (2500) and interest rate (9%) and it looks like its about a 4.5 year loan term which is really weird so can you please confirm your numbers?
But if that is correct, 110k, 4.5 years for payoff, 2500 a month, 9% interest then it would be a total of 53 payments and you would end up paying $23,000 in interest.
Must be nice to be super rich and make bad decisions and not feel the effects of them haha.
Would really need to know all of the loan terms to give you an exact answer. But if this were a 5 year loan for $110k at 9% interest, you’d end up paying about $27k in interest over the span of the loan. But that’s a guess. A 5 year terms gives payments of about $2283. A 4 year term gives payments of about $2737 (and $21k in interest paid). So if you have a 9% rate and $2500 payments…..I’m not sure what your term is. Or if there are other fees baked into that payment.
So….if you can afford to pay cash for this item, you’d save over $20k in interest. Your husband’s argument about it being smart to take the loan is if he has some other investments that are bringing in more than 9% in returns, where he can argue that he’s earning more on the investments than he’s spending on the loan interest. And he’s not likely doing that, without incurring a good level of risk.
The basic concept is you invest in an asset that generates a higher return than the cost of the interest:
so $135k loan over 6 years at 9% you would pay back $175k
If you invest $135k at 10%, it would be worth $239k after 6 years
As such you generated $104k in returns and paid $40k in interest, so in this scenario, youÔÇÖre $60k better off
The key question is, how likely is it that you will earn more than a 10% return over 6 years?
If we take the S&P500, I donÔÇÖt have the stats for 6 year rolling averages, but for 10 year rolling averages, the returns have been above 10% in 56% of the years going back for the past century. Based on this, I would say thereÔÇÖs a slightly better odds than a coin flip that youÔÇÖll be better off financing the car than paying outright.
For me personally, I would like better odds than that, but it depends on your personal risk preferences.
He will not get 9% on an equivalent investment after taxes (!). So it would have been better to buy outright. 2-3%, ok. But not 9.
Others have calculated the amount he’s paying in interest, depending on amount, term and interest rate. You can Google loan interest calculator and plug in numbers yourself.
Does he have crap credit? You can get car loans for 6.25% at a credit union, why the heck would he pay 9% on such an expensive car. I’d keep a close eye on your husbands financial activities because it doesn’t sound like he knows what he is doing.
Compound interest means that you donÔÇÖt just pay interest on the principal (the $110,000) but also on the interest.
According to the numbers youÔÇÖve provided, the loan is for 4 years and a half approximately, and heÔÇÖll pay approximately $25,000 on interest payments, thus paying $135,000 at the end of the loan.
You don’t need help with math, you need help with your husband. 9% is foolish loan on a vehicle. If it was a 2% financing special, that is a different matter. It is not.
If the six figure vehicle is a mistake or not is a different question.
If your loan was $100K, he’d be paying$7,000 more a year at 9%, than if it was 2%.
> He is saying itÔÇÖs smarter to finance but he can afford to pay it outright
This is an economics concept called *opportunity cost*. It can be smart to finance something at 9% if you have the opportunity to earn higher returns on your own money. So you invest your own money earning higher returns and take the loan to pay for what you need.
But on a 9% loan, I’m extremely skeptical your husband is doing this correctly. It sounds like he know just enough to be dangerous.
[https://www.calculator.net/debt-payoff-calculator.html](https://www.calculator.net/debt-payoff-calculator.html) is an excellent tool for these questions.
Some Americans finance everything. Other Americans live within their means, save up for big purchases, avoid paying interest.
If you can borrow at a lower rate than you can earn from a safe investment, it may make sense to borrow. Safe investments are things like savings accounts and US Treasury Bills, where you know what the interest rate is and when it will be paid. That kind of borrowing is called leverage and can be a good strategy if carefully planned.
If he comes from money, there’s a not-unreasonable chance he can beat 9%. I’ve got private equity/joint veture investments which return minimum 30% annually (medical field). Niche I know, but not unusual. Best to ask him why he thinks he can beat 9%.
Dang, that’s a lot of math to do. According to my calculations (which may or may not be accurate), your husband will end up paying around $33500 in interest by the time he pays off that loan. But hey, what do I know? I’m just some random person on the internet.
There are amortization calculators on the internet that will give you the info
Unless he can get a better than 9% return elsewhere, it doesnÔÇÖt make sense. WhatÔÇÖs the money for?
Not QUITE the right terminology, but close enough for understanding.
Yes, we do finance quite a bit here in the US, and most of the time, it’s not a good idea.
9% is on the high side for a loan, and he should try to make extra payments towards the principal on this, so you’ll pay less overall in interest. What was this loan for, anyway?
> He is saying itÔÇÖs smarter to finance but he can afford to pay it outright
It’s only smarter to finance if he can definitely make more from investing. So he’d have to make over 9% in the market in order for paying a 9% interest rate to make sense. That is by no means a guaranteed thing, so in this case, it is wiser to pay down the loan.
> in the end how much interest will he have paid on the loan total?
What is the term of the loan (how many months)? You just take $2,500 * (number of months), subtract $110,000 from that total, and you have how much he’ll have paid in interest/fees.
If your husband is in pay day loan business or something similar, his logic is sound. In that type of business, one would earn around 400% interest per annum.
I recently made a purchase of this size for a truck & trailer. The Trailer loan at 9%, the Truck loan under 2% from the manufacturer. Keep in mind that interest on a savings account is (around) 5%, and an extra 4% premium on stocks is a reasonable assumption based on historical performance. This may be his thought.
If you have the money, then taking the loan doesn’t hurt you. While the money is outstanding, the loan accumulates interest while your assets (hopefully) increase in value. You can pay it off if you choose to. If interest rates go down, you can refinance. If interest rates go up, then the loan’s rate hurts less.
I sold off assets to pay off the trailer. 9% is just too high for me to carry that much interest. Keep in mind that you need to have an amount of money liquid and accessible for emergencies, and to generally make good financial decisions (buying vs. financing things). If you have enough money to cover a loan, but that’s every last dollar you have, then you don’t have enough to cover that loan.
Also keep in mind a vehicle will depreciate. I looked up a travel trailer depreciation estimate and applied that to my purchase price. I also regularly check my Blue Book on the truck, and those are included in my worth. Just understand you are losing more money than just the interest. How is your insurance? Do you need GAP insurance
As an example, my CU has made lots of loans on Model S Tesla. They go for this price. Beyond straight MSRP, you have to add in Self-driving and your state sales tax.
People buying this class of car have a high income, but not always a high credit score. Monthly cash flow is sometimes more important than the interest rate if they are confident of future earnings.
He thinks he can get a return of greater than 9% after taxes. It’s possible, but unlikely, so this is the opposite of “smart”.
Your husband is wrong. The only way he can come out ahead of a 9% loan vs paying cash if he can earn more than 9% AFTER tax (which would be about 12% before tax).
Many Americans think financing cars is the norm, so most do get loans for cars.
(I disagree with that philosophy, and I think people should not finance cars in general.)
Google ÔÇ£amortization calculatorÔÇØ. Play around and enter different loan amounts, interest rates and months to pay off the loan. You will see the effects of compounded interest.
Here’s what I will tell you. I cannot answer your question because there’s variables missing but you can get a loan calculator online that will tell you all that you want to know. More importantly you say that you’re not financially Savvy and your husband handles most of the stuff. You are 100% as Savvy or more savvy than your husband because his explanation defies all reasonable logic because he’s not getting a return on that money big enough to offset a 9% interest rate. And even if he did today it is extremely doubtful he would do that for the life of the loan
Hi everyone (is this how I add extra info? By just leaving a comment?) new to Reddit.
Thank you for all your feedback!
Ok so additional info –
He is from money but I said that just to make the point that he doesnÔÇÖt think through these things as seriously as I would (definitely not being from money) all the income he has now is from his work. He doesnÔÇÖt draw money from a trust.
He definitely isnÔÇÖt keeping anything from me, he is completely open about all the money and spending and loans etc, I made this post because I sometimes feel a bit on the back foot when discussing financial stuff because IÔÇÖve never financed anything and always lived well within my means. I just wanted some other opinions and youÔÇÖve all been awesome! He even knows about this post and IÔÇÖve been telling him that it looks like IÔÇÖm right because Reddit is backing me up ƒÿè
WeÔÇÖre super open about money and he always tells me he values my input, I sometimes just tell him I donÔÇÖt care and do whatever because I actually donÔÇÖt care about his car and I get over discussing it so I say if you can afford it go ahead. But then I saw the loan and thought, that seems silly when you could have just bought it. (Hence the post to see if my instinct was on track)
We have a prenup – for those comments worried about me. IÔÇÖm all good.
HeÔÇÖs not in crypto ƒñ¬
He has excellent credit, that was just the % the dealership offered him on the day and he didnÔÇÖt argue or negotiate (again from money so has a meh attitude often which is where I come in)
THANK YOU for those that pointed out that heÔÇÖll be taxed on any investment returns.
In conclusion – I won this one ÔÿØ´©Å
We contacted the finance place to see what the penalties would be to just pay the loan in full and own the car. Zero penalties and when the paperwork and account etc is finalized in a few days he is going to just pay it off. Thank you for all the comments, Reddit is awesome.