@Chris679 wrote:
@Anonymous wrote:
@Chris679 wrote:
If gap insurance was worth the investment they wouldn't make so much money on it. He's "out" the $2500 in the above example only because he paid for the insurance. If you rely on gap and don't pay down the loan to match the depreciation your paying out the ass. Better to finance the full amount and pay ahead on the loan, the best of both worlds,
this makes zero sense
OK, ask yourself why banks or insurance companies offer gap insurance. Are they just looking out for your best interests? No, it is because it is profitable for them not you. Most people who purchase gap insurance never use it and just throw away that money. The argument for paying for gap insurance is that you don't want to be upside down on the loan. Well if you don't want to be upside down on the loan you can simply pay it off faster to make sure you are never upside down. This gives you the added benefit of saving on interest. So not only do you save any money that you would have spent on gap insurance but you are also saving money on interest. If you choose to purchase gap insurance and also choose not to pay the loan off fast enough to match depreciation on the vehicle you are paying out the ass.
Many would use those reasons as an argument for a down payment and that would not be the worst idea in the world. However, I argue that you can gain all of the benefits stated above and then some by simply financing the full purchase price and then paying down the loan quicker afterwards. By doing that you gain all of the benefits I mentioned above but you also are now ahead on the payment schedule of the loan. That means that if you were say 6 months ahead on the loan, you could stop making payments for 6 months. This could come in handy if an unforeseen financial crisis came up and you needed to divert cash somewhere else. I treat this as another layer of my emergency fund.
Your credit score also benefits from the accelerated loan payoff because the % of remaining loan balance is a factor in your FICO score.
How quickly you want to pay off the loan depends on the interest rate of the loan and whether or not that money could be put to better use elsewhere. At the very least though you should be paying it off fast enough to match the depriciation of the vehicle.
@Anonymous's about risk management. I could have paid cash for my last few cars, but chose to finance w/ zero down @ 0.9% APR (so the extra interest is neglible) and got GAP thru my insurance for a few bucks every month. This way I am guarateneed to never lose anything more beyond my monthly payments made up until a total loss (wreck or stolen)
If you pay for the car up front (or get a loan and then make a sizeable principal payment) you run the risk of losing additional cash beyond what you would lose in a zero down scenario. There are already examples in this thread.
