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Started By
Message
re: Car Finance vs Pay Cash
Posted on 9/2/22 at 4:03 pm to Rick9Plus
Posted on 9/2/22 at 4:03 pm to Rick9Plus
quote:
quote:
I paid cash for my last few cars, new and used, and when I went to get a boat loan they wouldn't give it to me because I didn't have any installment loans.
This is the kind of thing that worries me. I’ve read that your credit takes a hit if you pay off a loan early, too. I’m wondering if anyone knows the various ins and outs of the sorcery they use to do your credit score. I’m wondering if I should pay cash for all but $5000 or something, and have it on autopay for the next 6 years just to keep my score up.
That is false. Paying off an installment loan greatly helps your credit. You could finance the vehicle, pay 3 months, and then pay it off and that does prove an ability to manage credit. 12 months may be better than 3. But 3 months is better than not taking the loan.
Old school credit models look at 24 months paid as agreed being a huge asset to the score (then you could pay it off).
Also, you could get the gas card and payoff monthly (my 18 year old does this).
2
Posted on 9/2/22 at 4:32 pm to meansonny
quote:
hat is false. Paying off an installment loan greatly helps your credit. You could finance the vehicle, pay 3 months, and then pay it off and that does prove an ability to manage credit. 12 months may be better than 3. But 3 months is better than not taking the loan. Old school credit models look at 24 months paid as agreed being a huge asset to the score (then you could pay it off).
Based on this premise, would paying cash for most of it but financing a small amount (say 5k) for 2 years help my credit? Would financing the whole thing, then paying off early be better than that?
This post was edited on 9/2/22 at 4:34 pm
Posted on 9/2/22 at 4:52 pm to Rick9Plus
quote:
Based on this premise, would paying cash for most of it but financing a small amount (say 5k) for 2 years help my credit? Would financing the whole thing, then paying off early be better than that?
From a score perspective, I think it would be about the same.
From an underwriting method, having at least $5k financed would be most impactful (managing a $5k balance is typically deemed large enough to qualify as managing a large purchase). Two years should be sufficient.
Since I'm discussing old school underwriting, you probably want 3 active accounts within the prior 24 months. So get that gas card and pay it off monthly. Get one more credit card, use it once at a restaurant or grocery store, pay it off immediately,, and put it away (don't use it unless you get a notification about closing it for non-use which you probably wont).
3 accounts with a 2 year history should get you qualified for anything you need. As your paid off car loan gets near 2 years paid off (reaching that 24 month window), you may want to get a higher balance credit card (as close to 5k as possible, use it once and put it away).
3 accounts within 24 months is generally the baseline.
I've seen some people get their utilities to report to credit bureaus to bump up a activity history for one of the three. But actually having the account makes sense to me for emergencies.
This post was edited on 9/2/22 at 4:53 pm
Posted on 9/2/22 at 6:16 pm to Niner
quote:
Genuinely confused as to why some of the folks here would tell you to even consider getting this loan. Pay cash and be done with it.
Well, he already has that 6.8% loan you referenced. That is the student loan rate.
I would get a loan and remain liquid in case one of your children’s cars “craps out”. Just make sure there is no prepayment penalty. Also, if you are disciplined consider getting a Marriott, Delta, Southwest or Hilton, etc. rewards credit card, put as much of the car as they will allow and pay it off the first month before internet accrues. You’ll probably have enough points from the initial spend to fund a mini trip.
Posted on 9/2/22 at 8:18 pm to Niner
quote:Because it’s lower than the rate of inflation. It’s free money he can invest somewhere else, but pay it off later if inflation drops.
quote:6.8%Genuinely confused as to why some of the folks here would tell you to even consider getting this loan. Pay cash and be done with it.
Posted on 9/2/22 at 8:45 pm to meansonny
quote:
quote:
quote:
I paid cash for my last few cars, new and used, and when I went to get a boat loan they wouldn't give it to me because I didn't have any installment loans.
This is the kind of thing that worries me. I’ve read that your credit takes a hit if you pay off a loan early, too. I’m wondering if anyone knows the various ins and outs of the sorcery they use to do your credit score. I’m wondering if I should pay cash for all but $5000 or something, and have it on autopay for the next 6 years just to keep my score up.
That is false.
My score wasn't the problem. It was lake of recent installment loans. The last car I financed was in 2015 and it was paid off in 2017. The lenders weren't not willing to give me money, they were willing to give me lots of money, just not using a boat or any other "toy" as collateral.
Having an installment loan and mortgage in your mix in good standing will improve your credit score, but it is a minor bump.
Posted on 9/2/22 at 9:09 pm to Rick9Plus
I'll tell you want my accounting professor told me. Never take on debt for a depreciating asset
Posted on 9/2/22 at 9:42 pm to armsdealer
quote:
My score wasn't the problem. It was lake of recent installment loans. The last car I financed was in 2015 and it was paid off in 2017. The lenders weren't not willing to give me money, they were willing to give me lots of money, just not using a boat or any other "toy" as collateral.
Having an installment loan and mortgage in your mix in good standing will improve your credit score, but it is a minor bump.
I think that is exactly what I was getting at. They want that activity within the past 24 months.
I have seen a $5,000 revolving account work in lieu of the installment loan. But you are correct. Every underwriter can have their own preference.
Posted on 9/2/22 at 10:23 pm to Rick9Plus
There are more consumer protection laws for car sales that are financed, even if you pay the note off the next day. I learned this the hard way.
Posted on 9/3/22 at 4:58 am to alpinetiger
quote:This is terrible advice.
Because it’s lower than the rate of inflation. It’s free money he can invest somewhere else, but pay it off later if inflation drops.
Inflation is a useless metric here. All you're telling him is that he has to invest $31k and make better than 6.8% for the life of the loan. Do you know the loan term? Do you know how many rolling 3/5/7-year periods of time in the history of the stock market returned less than 6.8%? What if he doesn't get there?
People try to do this with their mortgage all the time. It's a more compelling argument when rates are at 3%. At 6.8%, it's - I repeat - a terrible idea.
Three thoughts for the OP:
1. Have you been paying extra on the student loans and mortgage? If you have and you have also been able to build at least $31k of cash, then pay cash for the car and start building cash for your next major expense. Don't try and get a 6.8% auto loan for the sole reason of building credit.
2. If you qualify, consider refinancing your mortgage through an actual lender. You will likely get a higher rate than what your paying now, but if your purpose is to build credit, it's the lesser evil vs a 6.8% auto loan.
3. Just want to say it again - don't get a 6.8% auto loan for the sole purpose of building credit.
Posted on 9/3/22 at 8:32 am to Rick9Plus
I think it makes most sense to not finance with very few exceptions. Maybe for tax purposes, it could be beneficial to finance it but it depends on how much you earn and other tax angles.
If you pay cash but invest the amount that you’d have paid for the note then I think it makes a ton of sense.
If you pay cash but invest the amount that you’d have paid for the note then I think it makes a ton of sense.
Posted on 9/3/22 at 9:21 am to Rick9Plus
In hurry but wanted to share thoughts on prioritization for cash...
Positive Spread:
earning return/interest > cost of interest
Can you earn more on $ than cost of either auto loan (6%) or student loan debt (?%)?
If yes, invest it and pay the interest on auto/student loan over same period.
If no, prioritize payoff of the debt from highest interest to lowest interest.
Consider financial discipline of carving out the equivalent car note and investing it on a monthly basis. Builds cash for next vehicle, provides optionality, power to consider more range of cars in next purchase, or perhaps use the money altogether different reasons.
Good luck.
Positive Spread:
earning return/interest > cost of interest
Can you earn more on $ than cost of either auto loan (6%) or student loan debt (?%)?
If yes, invest it and pay the interest on auto/student loan over same period.
If no, prioritize payoff of the debt from highest interest to lowest interest.
Consider financial discipline of carving out the equivalent car note and investing it on a monthly basis. Builds cash for next vehicle, provides optionality, power to consider more range of cars in next purchase, or perhaps use the money altogether different reasons.
Good luck.
Posted on 9/3/22 at 9:26 am to Niner
quote:
2. If you qualify, consider refinancing your mortgage through an actual lender. You will likely get a higher rate than what your paying now, but if your purpose is to build credit, it's the lesser evil vs a 6.8% auto loan.
3. Just want to say it again - don't get a 6.8% auto loan for the sole purpose of building credit.
Agree with 3
But why would one refinance a mortgage that may be 8-10X higher debt and 6X long term than an auto for same credit building point nixed in 3? If you point is cost for credit score, help me understand your logic in 2, pls.
Posted on 9/3/22 at 9:26 am to Niner
quote:You sound penny wise and pound foolish. There are many other investing strategies besides having a long position in equities and watching time go by. I haven't invested in equities in fifteen years.
This is terrible advice.
Inflation is a useless metric here. All you're telling him is that he has to invest $31k and make better than 6.8% for the life of the loan. Do you know the loan term? Do you know how many rolling 3/5/7-year periods of time in the history of the stock market returned less than 6.8%? What if he doesn't get there?
People try to do this with their mortgage all the time. It's a more compelling argument when rates are at 3%. At 6.8%, it's - I repeat - a terrible idea.
OP stated he could pay off the loan at any time, and also needs the credit line. He's +2% (inflation 9.1% vs. 6.8% term) if he borrows before he does anything with his money. When that flips he could choose to pay off the note. I'm just speaking about this specific situation. If someone showed up at my door with a car to drive, and gave me +2% annual value for the trouble, I'd consider it. I don't need a car or a credit line however.
This post was edited on 9/3/22 at 10:16 am
Posted on 9/3/22 at 11:31 am to tigerfive
quote:
There are more consumer protection laws for car sales that are financed, even if you pay the note off the next day. I learned this the hard way.
In what way?
Posted on 9/3/22 at 11:34 am to Niner
quote:
1. Have you been paying extra on the student loans and mortgage? If you have and you have also been able to build at least $31k of cash, then pay cash for the car and start building cash for your next major expense. Don't try and get a 6.8% auto loan for the sole reason of building credit.
Yes on the student loan. It is actually multiple loans and I’ve paid several completely off during times of extra money. No on the mortgage. Also, i haven’t saved the entire $31. About 20k was a payout for my old car which was totaled. I’m a saver but not that big of one.
Posted on 9/3/22 at 11:36 am to Niner
quote:
2. If you qualify, consider refinancing your mortgage through an actual lender. You will likely get a higher rate than what your paying now, but if your purpose is to build credit, it's the lesser evil vs a 6.8% auto loan
I looked up today’s average interest rate and it’s a full 2 percent higher than my current rate.
Posted on 9/3/22 at 3:26 pm to Rick9Plus
I feel bad for the hyper suspicious people on here who apparently hate their family.
Take the Fed student loan credit, payoff the credit card, and then pay cash for car with the rest and finance a smaller amount if you have to.
Take the Fed student loan credit, payoff the credit card, and then pay cash for car with the rest and finance a smaller amount if you have to.
This post was edited on 9/3/22 at 3:29 pm
Posted on 9/3/22 at 3:46 pm to Rick9Plus
Have you shopped the car loan to see if you can get a better rate? Dealer financing is almost always more expensive cause they getting a cut
Posted on 9/3/22 at 5:34 pm to LSUFanHouston
quote:
Have you shopped the car loan to see if you can get a better rate? Dealer financing is almost always more expensive cause they getting a cut
No, since I was previously just thinking “finance or not.” I’ll see what my bank has to offer. I’ve come so far, from huge debt-to-income ratio that prevented me from getting a traditional mortgage, to sort of seeing the light at the end of the debt tunnel. Then I realized that if I had no debt but also no savings, not being a “baller”, (income about 80k), i’m still vulnerable if I need a loan in the future if I’m classified as a person with questionable credit. My score now is good, but not perfect. I looked it up and it’s 745. I would like it to be higher.
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