I find myself in a position of needing to finance a large purchase. Fortunately, I saved a significant amount in expectation of this expense so I have about 50% of the total cost on hand and allocated. My choice then comes down to one of two options:
- Pay 50% down and then finance the remaining 50%.
- Finance 100% and then immediately pay 50% of the value in a lump sum payment.
I am leaning toward option #2 as it seems like this would avoid the expensive part of the loan at the beginning where most of the cost of a single payment goes to interest.
It seems like this should be directly calculable for both cases but I am a little unsure. Case #1 is trivial and just uses the standard formula for interest over the duration of a loan. What I don't understand how to factor in, however, is the 50% lump sum payment for case #2. I cannot simply reduce the principal amount as that is just case #1 and doesn't account for the 'skipped' interest payments.
- Either option doesn't significantly alter the interest rate, which can be kept as constant.
- Loan term would be identical in either case.
- I have planned these costs such that I can continue to over-pay each month with the goal of getting the entire thing paid off in ~2 years.
- None of this involves touching any kind of investment account or retirement.
So, as stated in the title, which is cheaper: 50% down with 50% loan or 100% loan with 50% immediately paid after signing? How can I calculate this?