If you are purchasing a truck be aware of financing

Your going to flip out if you ever buy a house with a 30 year mortgage. The amount of payment that goes to the principal of the loan the first 10 years is very small. It's not because your being screwed, It's because almost all loans are structured by the (rule of 78s)

It works like this, lets say you borrow money for 1 year, take the 12 months, add them together like this. 1+2+3+4+5+6+7+8+9+10+11+12=78 (thus the name 78)

This is how you figure interest paid each month
Lets say your total interest for the loan is $600.00
1st mo. inst 12(length of loan) divided by 78 X $600=$92.30
2nd mo 11 / 78 X $600 = $84.62
3rd mo 10 / 78 X $600 = $76.92
last months interest 1/ 78 X $600 = $7.69

Doesn't matter if the loan is 12 mo, 60 mo, or a 360 mo home loan. Add all the months together, your loan document says what your total interest will be. The longer the loan term, the more interest you pay in the early months.

This is what can get guys in trouble buying a truck when they don't understand interest and depreciation. In the first couple years you have lots of interest and depreciation to deduct. Then the last few years, very little interest and depreciation to deduct, but still, big truck truck payments to make and now tires and repairs are becoming an issue.

 

More paid towards interest than principal at the beginning of the loan? Yes, that's how loans work. That's EXACTLY how loans work. You must be new to loans.

 

Depreciation is the same each year. On the tax filing.
Some loans you can reduce the total interest paid, making extra principal payments.
Some loans don't allow the reduction of total interest paid. As calculated from the loan origination.

 

"Depreciation is the same each year"
Not for everyone, only if they are using straight line depreciation. Not if they are using a double declining balance method or MACRS. I would say most first time buyers and many owners have no idea what their "tax man" is using or why. Accelerated depreciation is very common and useful just like a section 179.

A loan with a "pre payment" clause is a very poorly written loan. That should be one of the first questions "does this loan have a pre payment penalty?" Even poor credit should be able avoid that pit fall.

 

All good points.
Some buyers are so happy to get a loan, with the adrenaline rush, they don't even hear the terms.

A few years back, looked at a lease purchase for a trailer. Asked what the interest rate was. Salesman says around 8.5%. He says they can't quote in terms of a loan because it's not a loan. It's a lease purchase.
Quoted payment schedule. Payments were about what I wanted.
Took numbers down. Used the pencil and paper, interest calculated to 18.5%.
Never talked to them again.

Bought a trailer financed by my local bank. 6.5%.

 

If the loan does not have “simple interest” written at the top, you are getting screwed.