SAN FRANCISCO (9/23/15)--Credit unions offer the most consumer-friendly interest rates on auto loans, according to a NerdWallet blog addressing whether it is better to pay cash for a new car or to make a small down payment, take out a loan, and put the balance in an investment (NerdWallet.com Sept. 17).
“When looking for a loan, be sure to shop around for the best annual percentage rate (APR)—credit unions,” said NerdWallet blogger Victoria Simons, who also provided a link to a previous blog about interest rates.
The article took a scenario of a hypothetical consumer who saved $25,000 to spend on a F-150 XL pickup truck. The buyer decides to spend only $5,000 of the savings on a down payment for the truck, and takes out a $20,000, five-year loan at 2% APR to cover the rest of the truck’s cost. At that point in the hypothetical, Simons suggests checking credit unions for the best APR.
The scenario continues, with the consumer investing the $20,000 left over from the savings account in an index fund with a 10-year annualized rate of return of 7.7% as of July. The buyer takes money out of the index fund each month to make the auto loan payments. After the loan is paid off and capital gains taxes are figured, the buyer would have about $2,723 remaining in the fund, or an 11% savings on the pickup price.
Simons’ blog also offers caveats about investing and funds’ performance and shows how different APRs on the loan could affect savings. She noted that if the $2,723 were left in the fund another five years, earning a 10-year annualized rate of return at 7.7%, the amount saved would stretch to nearly $4,000.