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Unread 08-05-2016, 07:01 PM   #1
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Default Car Financials (APR, Down payment, etc.)

Hello CarForum!

I'm 15 years old and I got curious recently about buying a car. It has come to my attention that it is not as easy as just saving up the money for a nice car and paying for it then and there. There are taxes and loans and stuff but the problem is that I don't know anything about it. I asked my mom but she didn't offer many "understandable" comments so I was thinking maybe a car forum could help me out. My main dream is to get like a sports / supercar of some sort-the best deal I can find when I can afford a car. Now I know that there is a trick and that is to buy a car a few years older and that will save some money but there is something called a down payment and APR. Not sure what those mean. Also, my main thought right now is what if I want like a $100,000 car? Do I just save up $100,000 and take it to the dealership (or I guess if i am buying the car online i put it in a bank account and use my credit card to buy it online). There is also a option to lease a car and I would like to know more about that too.

Thanks to Car Forum and the people of it for helping me understand the financial stuff about buying a car!

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Unread 08-06-2016, 08:03 AM   #2
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You certainly can save up the money, walk into the dealer, pay cash (you'll have to pay taxes and registration fees on top of the vehicle price, as always), and leave with the car. Easy peasy. Most people can't do that. So we finance.

Financing is incredibly complicated, let me over simplify.

Down payment is a lump sum that you pay to get the loan started. It's usually suggested to be around 20% of the purchase price, but doesn't have to be. Basically, in order to qualify for a loan, you usually have to put SOMETHING up front to minimize risk for the lender giving you the money. Sometimes you hear about "zero down" offers. That's where you do NOT have to put anything down. You can walk in with no money and walk out with a car financed for 100% of the purchase price (+taxes and registration, as always), in theory. Usually you have to be well qualified, however. There's also the option of using your trade-in as a down payment, if you're trading in another car. They give you less money than you could sell the car for in trade in, but it's convenient so it's popular.

APR/interest: When you finance, this is the money you pay to be able to use the lender's money. If you're paying 5% APR, you pay 5% of the balance essentially each year to the bank. It's worked into your monthly payment so you pay a certain percentage to the interest and a certain percentage to the princpal balance. There are "zero percent APR" options sometimes for really well qualified buyers - these are way more complicated. In theory they have no interest. In reality they make money in other ways.

Leasing is where you pay $x00 a month and drive a new car but do not own it. You give it back after a set number of years but are fully responsible for it in that time frame. Think of it as a long term rental. Some people lease so they can drive brand new cars they wouldn't otherwise be able to afford to buy. From a financial standpoint it's almost always better to buy, because with leasing you're paying thousands of dollars over the course of your lease and getting absolutely nothing for your money once you give the car back.

Hope this helped.
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Unread 08-06-2016, 01:43 PM   #3
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Oh wow! Thanks for the reply!

This did clear up a lot of the confusion I had about car buying. But I have a follow-up scenario...

Say I have a $100k salary. let's just say I save $30k every year towards a new car and live off of a $70k salary. I think many people live off a $70k salary especially if it's just me and no wife, no kids, no house of my own (rent apartment). And then let's say I save up for like 4 years. That'd be $30k a year multiplied by 4 years = ~$120k in physical cash form. Would I just be able to use up all that money for a nice ~$100k car? Would that be a good decision and not waste my money? Also, would about car insurance?

Sorry if I seem to be too invasive but I am really curious and your previous answer sparked up some new questions in my mind. Thanks!!

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Unread 08-06-2016, 09:01 PM   #4
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Spending that much money on a car is absolutely a terrible financial decision and huge waste of money. It's overly excessive and unnecessary. But alas, this is a car forum, not a personal finance forum.

But, yes, if you saved up that cash you can do what you wish, including buy a $100k car. I'm assuming by "cash" you don't mean a buttload of hundred dollar bills..not sure anyone is prepared to deal with that to be honest. But bank transfer or whatever typically.

Insurance is outside of purchasing but obviously necessary. That will depend very heavily on the car being purchased and its worth, as well as your trustworthiness with said car. I've paid as low as $25 a month, but $1000 a month for a nice car is not unheard of. A $100k car for an under 25 year old male would be stratospheric insurance rates.
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