Refinance or buy new?

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Postby flan » Thu Apr 02, 2015 8:03 am

gmazz wrote:By no means am I short on cash and there is no way on earth I am defaulting on this loan. I could pay the remainder the loan in less than 6 months if need be (as a reminder I have been paying 1 year on a 5 year loan). I bought this car to establish a loan and build my credit. Paying it off quickly from what I understand does me no good.

Well it'll save you a bunch of money. (at 12.8% for 60 months, you pay about 360 in interest for every $1000 you borrowed. At 2% (which is what my bank is offering me for a used car loan), you pay $60.) Saving money is a heck of a lot more money than playing games trying to maximize your credit score, and paying the loan off early won't hurt you. Installment loans are a small fraction of the total score, and lack of one won't hurt much, assuming you have good revolving (and mortgage, if you have one) history.

Refi the loan; you'll probably have to put up some cash, to reduce the loan amount to match the current value.

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Postby gmazz » Thu Apr 02, 2015 11:51 am

CarefulBuilder14 wrote:Well, since the only reason you have the loan is to improve your credit, then you should know that the long-term value (from April 2019 onwards) to your credit profile of having a 5-year installment loan (like a car loan) may be limited. Your credit profile will need time for the derogatory marks to weigh less heavily, even though you've since paid those accounts off. An auto loan may have given you a quick boost to your FICOs 13 months ago, because any new healthy account would have been an improvement to your overall report.

The problem is that the derogatory marks from 10-ish defaulted accounts will probably still hurt you for a few more years. Most of the FICO boost from an installment loan is also generally limited to the last few years that an account is open. Early on in an installment loan's history, creditors may not like the high remaining balance. Once the installment account is closed, FICO scores give very little credit to it. It's counterintuitive, but FICO tends to treat a paid-off installment loan not as a mark of victory, but simply as 'old news'.

Edit: It seems to me like a high-interest car loan is just an expensive way to get a short-term benefit. You could probably get a share secured loan that would do the same thing and cost you a lot less. Maybe that would allow you to get cards with good rewards and credit terms a little more quickly.

What do others think?

Thank you, your reply was very helpful. This is all very new to me and am trying my best to take the right path. I wish when I was young, besides my parents telling me to get good grades, they would have included to KEEP GOOD CREDIT!

You are correct that even though I have paid off all old defaulted debt it still is hurting my score. It has been explained to me that even though it's paid that it is the most recent on my report. I since have opened a secured card to build something new.

Besides a car purchase I strongly believe in the thinking of "If I can't pay cash for it, I don't buy it". I traveled to fiji, hawaii, and mexico last year and paid cash for all. So using credit for indulgences is not my goal. I simply would like to be able to buy a home someday and not pay out of my $#% for it.

I have never heard of a shared secure loan but I will look into it and see if it's a good option.

Really appreciate the informative response.

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Postby rhipsher » Fri Apr 03, 2015 1:43 pm

Refinance it at a lower interest rate. Going from 12% to 4-5% will make a pretty good dent in the monthly note. If your upside down already and you trade it in on a new car then they are going to tack on the amount your upside down on to the new car loan. So now your paying more than the new car is worth. That's the way it works.

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Postby JamesMS » Tue Apr 14, 2015 6:39 pm

If you are going to choose one or the other, trade it in. Refinancing a car that you are upside down on might not be all that easy, but then again depending on how much you are upside down, you might have a hard time with a new car as well. I would say that if you are not too much upside down (up to $1500), you might be able to do so. If you are more than that, you should just pay the loan down first. Trading in a car that you are upside down on could cause you more problems down the road.
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