If I get a $13000 car loan and have 3% interest and a 60 month term but pay double each month is that the same as getting a 30 month term?
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No.
It's perhaps a bit obvious, but with the shorter term loan you would be contractually obligated to pay the higher monthly payment. By paying double on the longer loan, you retain the flexibility to pay less.
And you would pay less interest if you truly doubled your payment on the longer loan. This is because you'd be paying off more of the principal more quickly. (But you'd also be making a slightly higher payment than on the shorter term loan.) You can play with the amortization calculator at Bankrate to understand this.
Todd
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Good point about retaining the flexibility to pay less; even if the math comes out to roughly the same, that flexibility is very valuable, and worth keeping in mind. – dimo414 Apr 01 '14 at 06:26
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Yes, by paying double the amount each month you would have in effect paid the loan off in less than half the time.
For $13000 at 3% over 60 months your monthly repayments would be $233.59.
If you double your monthly repayments to $467.18 you would end up paying the loan off by the end of the 29th months, more than halving your loan term, as long as there are no penalties for paying the loan off early.
Victor
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As usual it depends, but fundamentally, an interest rate is just a function of a party's creditworthiness and the length of time the money is being lent out for.
- When a bank loans you money, they forego other opportunities to loan that money to someone else.
- When you reduce the terms of that loan, they don't forgo as many opportunities as they receive the principal back sooner.
- Additionally, their risk profile on the loan is reduced as they have a better understanding of the overall financial market over the next 30 months versus the next 60 months.
- So they can afford to offer you a better rate to compete with other lenders.
So, no, if your credit entitles you to a 3% APR on a 60 month term, then it should entitle you to a better interest rate over a 30 month term. Perhaps not double, but better.
Kyle Hale
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1@Victor given that your answer says "in effect [yes]", Dheer's says "Approximately Yes", and Todd says "No" it would seem, taking nothing else into account, that "it depends" is a very reasonable answer. Even if not, this answer is a reasonable exploration of the issues, I don't believe it deserves to be discarded offhand or downvoted. – dimo414 Apr 01 '14 at 06:24
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@dimo414 - I did not down-vote you, however your answer does not even answer the question, it does not ask about risk or changes of interest rates for reduced terms. Do you realise that some lenders may place a penalty if some loans are paid off early (especially if you have taken the loan at a higher fixed rate and interest rates have since come down). Also, the answer is not NO, it is reduced by just under half as both myself and Dheer have stated. The loan will be paid off in 29 months instead of 60 months if repayments are doubled. – Victor Apr 01 '14 at 06:45
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@Victor It's not dimo's answer, but my own. My answer was not about the specific loan, but about the advantages of identifying the lowest term duration you feel comfortable meeting and then negotiating a rate based on that term. You answered about the specific loan, so you gave a different answer. – Kyle Hale Apr 01 '14 at 15:38
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Also, in any case, this is the wonderful thing about SE sites: post your answers, let the votes sort them out, get some discussion going, help answer the questions being asked. – Kyle Hale Apr 01 '14 at 15:39
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@KyleHale - yes I realised it wasn't dimo's answer after posting the comment. Again, your answer does not answer the actual question at all, and most times you cannot negotiate a rate, especially if borrowing only $13000. So your answer is irrelevant to the OP's question. – Victor Apr 01 '14 at 20:35
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1You don't negotiate the rate, you negotiate terms. If you want to borrow $13,000, you can ask for a different rate for different terms. Which is what my answer suggests the user does. But you seem pretty insistent on defining what is "relevant" here, so I'll leave you to it. – Kyle Hale Apr 01 '14 at 22:03
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Approximately Yes. However as you are paying more, the interest accrused would be less.
- So for $13000 at 3% over 60 months monthly repayments would be $233.59
- At Double payments, $233.59*2 = $467.18 the tenor would be Aprox 28.5 months, less than half
- For $13000 at 3% over 30 months monthly repayments would be $450.32
Dheer
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In any case, the outcome will never be exactly the same, but the exact difference will depend more on the two contracts than on the theoretical mathematic difference. Moreover, you fail to indicate what you mean by "the same", but let's not get into that rabbit hole :-)
– Dirk Apr 01 '14 at 11:17