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Saturday, February 19, 2011

How saving for a car matters when buying one

Savings is important.  Not just having savings but also having the skills necessary to be a disciplined saver. It is something that literally pays off in the long run.  And one of the most dramatic ways a person can benefit from saving money is through the process of buying an automobile.  

For this example, we have 3 individuals- Alan, Beth and Carl.  Each of them are purchasing a new automobile that will cost $25,000 including all taxes and tags.  Alan will be putting down a payment of $2500 and financing the rest.   Beth will be putting a down payment of $7500 for her car.   Lastly, Carl will be putting down $10,000 and financing the remainder.

For this example, all 3 will be financing 48 months at 4.99% APR

Alan:    $25,000  vehicle
          - $ 2,500 down payment
            $22,500 to be financed

            $22,500 = 48 pymts of $518.06/mo  

Alan paid $2,367 in interest.  

The Real cost of the 
car to Alan is $27,367

Beth:   $25,000  vehicle
          - $ 7,500 down payment
            $17,500 to be financed

            $17,500 = 48 pymts of $402.93/mo *

* That's about $116/mo less than Alan per month

Beth paid $1,841 in interest. **  

** Alan paid $526 More in total interest than Beth

The Real cost of the 
car to Beth is $26,841

Carl:   $25,000  vehicle
         - $10,000 down payment
           $15,000 to be financed

            $15,000 = 48 pymts of $345.37/mo *
*  That's about $173 less than Alan per month;  $55/mo less than Beth

Carl paid $1,578 in interest. **

 ** Alan paid $789 More in interest than Carl; Beth paid $263 More

The Real cost of the $25,000 car to Carl is $26,578

~  The Lesson-- the more you can save money ahead of time for something that will require you to borrow money to complete the purchase (car, home,etc) the lower your monthly payments and the more money you will ultimately save when the balance (interest & principle) is paid in full.

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