Refinance or buy new?

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gmazz
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Refinance or buy new?

Postby gmazz » Tue Mar 31, 2015 11:24 am

Hello all,

New to this forum and seeking some advice. I have been working on rebuilding my credit for 2 years now. I have gone from a high 400 to currently a 638. I paid off all old debt, opened a secured card (now unsecured), and 1 month ago opened a second secured card to continue to build credit. 1 year ago I purchased a car knowing the interest rate would be high (12.8%). I have now paid perfectly for 13 months and am trying to decide on what is best to do. Should I refinance or trade it in possibly to get a better interest rate on my next purchase. My only concern on refinance is the car is a 2010 and am already upside down on it. The value of the car will start to drop rapidly at this point.

Any help on this would be greatly appreciated.


jcarte29
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Postby jcarte29 » Wed Apr 01, 2015 8:37 am

gmazz wrote:Hello all,

New to this forum and seeking some advice. I have been working on rebuilding my credit for 2 years now. I have gone from a high 400 to currently a 638. I paid off all old debt, opened a secured card (now unsecured), and 1 month ago opened a second secured card to continue to build credit. 1 year ago I purchased a car knowing the interest rate would be high (12.8%). I have now paid perfectly for 13 months and am trying to decide on what is best to do. Should I refinance or trade it in possibly to get a better interest rate on my next purchase. My only concern on refinance is the car is a 2010 and am already upside down on it. The value of the car will start to drop rapidly at this point.

Any help on this would be greatly appreciated.


Trade it in for a newer one. Its easier for the bank to justify a lower rate on a newer vehicle than a 2010, and while the value will continue to drop (not at any particular rapid or steady pace), the biggest reason for being underwater is most likely the current interest rate anyways. So trade and save paying the future interest.

For credibility purposes- I work for a car dealership, and I would be happy to help you trade out of it if you are in Eastern NC! (And in some cases coastal SC wouldn't be too far of a drive either).
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GM MC $9,000 [9-14]
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CarefulBuilder14
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Postby CarefulBuilder14 » Wed Apr 01, 2015 10:34 am

I am not an auto expert, and I've never financed a car. I drove an old hand-me-down until I purchased a lightly used one outright that I still drive. A lot of this seems odd to me...

1. Do you have the cash to pay off your current vehicle at an accelerated rate? Would there be penalties for doing so, or would you be saving a lot in interest?

Edit: If there are penalties, would you avoid them by doing a trade-in?

2. If you traded in your current vehicle, would you want a newer, more expensive vehicle? Or a comparable or less expensive one? How would the trade-in value compare to the price of the replacement? Don't most dealerships try to offer as little as possible for trade-ins?

3. I understand that being underwater in any loan is bad, but why is a 2010 vehicle so vulnerable to a further price drop? I know a brand new car loses a lot of value right after it's sold, but wouldn't a 2010 model car (presumably made in 2009?) have lost a lot more of its value between 2009 and 2015 than it would lose between, say, 2015 and 2017? Or is it just very difficult to get a loan on a car that's more than give years old?

4. Is there anything seriously wrong mechanically with your car? Or you just want something newer and flashier?
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jcarte29
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Postby jcarte29 » Wed Apr 01, 2015 10:53 am

CarefulBuilder14 wrote:I am not an auto expert, and I've never financed a car. I drove an old hand-me-down until I purchased a lightly used one outright that I still drive. A lot of this seems odd to me...

1. Do you have the cash to pay off your current vehicle at an accelerated rate? Would there be penalties for doing so, or would you be saving a lot in interest?

Edit: If there are penalties, would you avoid them by doing a trade-in?

2. If you traded in your current vehicle, would you want a newer, more expensive vehicle? Or a comparable or less expensive one? How would the trade-in value compare to the price of the replacement? Don't most dealerships try to offer as little as possible for trade-ins?

3. I understand that being underwater in any loan is bad, but why is a 2010 vehicle so vulnerable to a further price drop? I know a brand new car loses a lot of value right after it's sold, but wouldn't a 2010 model car (presumably made in 2009?) have lost a lot more of its value between 2009 and 2015 than it would lose between, say, 2015 and 2017? Or is it just very difficult to get a loan on a car that's more than give years old?

4. Is there anything seriously wrong mechanically with your car? Or you just want something newer and flashier?



I'll be glad to assist with this, except for questions directed to the OP.

1) the second question posed about penalties. There are no pre-payment penalties on simple interest loans through most (if not all) banks I'm familiar with. It's just like a house with a fixed rate, if you pay it off early, AWESOME. That's that much interest you saved (hundreds on a double digit interest rate)

The edit to number 1 is irrelevant, but yes you avoid the future interest by trading it in and paying off the loan (which the dealership would send the check for on your behalf).

2) Up to the OP. There's a couple directions this could go and all of it depends on how much downpayment the OP would want to put towards his newer vehicle. If he is upside down he can either use the downpayment to get him closer to even or tack the extra onto the new loan (you'd be surprised at how often people decide to do this, which I find silly).

Dealerships don't intentionally try and offer as little as possible, they simply offer a cash value for the vehicle. They will be glad to show you retail value, by asking retail value for the vehicle the OP wants to purchase. (apples to apples, you can't get retail for your used trade and buy the newer vehicle for wholesale, or vice versa)

3) It's not necessarily vulnerable to a further price drop. Brand new vehicles losing value right after it's sold is a myth in the context of how much (It loses some, not half, as is widely perceived) The last point is semi-correct, banks are hesitant to give low rates to older vehicles (it's more risk obviously than say one that has full warranty coverage on it)

4) Upto the OP. If there's something mechanically wrong with his vehicle, he needs to cut his loss and get something more reliable. But the way I read it is he wants to lower his interest rate, which could be very well possible if he truly has improved his credit. That's a great reason to trade, when you can lower that rate into the single digits!

Hope this helps :)
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CITI Diamond Preferred $7,000 [06-16]
AMEX Platinum (Charge) [11-16]
AMEX EDay $12,000 [11-14]
Lowes Store $15,000 [4-14]
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GM MC $9,000 [9-14]
AAdvantage Red MC $10,350 [10-14]
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CarefulBuilder14
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Postby CarefulBuilder14 » Wed Apr 01, 2015 12:10 pm

It's good to have that info, jcarte29, thanks. I know new vehicles don't lose anything close to half of their value right away - but even 10% right away and 20% in the first year would still be significant if someone is in a lot of debt.

Also, for the OP...what is the term of the first loan? If it's only 24 months, then refinancing might not be worth it since your remaining payments will be largely principal.

I suspect, though, that it's longer than 24 months. In that case, refinancing (if you can get it) could make some sense.

And if you're paying 12.8% interest, it sounds like you're short on cash. Do you really think it's sensible to be considering a nicer car?
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jcarte29
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Postby jcarte29 » Wed Apr 01, 2015 12:13 pm

CarefulBuilder14 wrote:It's good to have that info, jcarte29, thanks. I know new vehicles don't lose anything close to half of their value right away - but even 10% right away and 20% in the first year would still be significant if someone is in a lot of debt.

Also, for the OP...what is the term of the first loan? If it's only 24 months, then refinancing might not be worth it since your remaining payments will be largely principal.

I suspect, though, that it's longer than 24 months. In that case, refinancing (if you can get it) could make some sense.

And if you're paying 12.8% interest, it sounds like you're short on cash. Do you really think it's sensible to be considering a nicer car?



All great points CarefulBuilder!!! You're spot on or right close to it, and that is a good follow up for the OP about the term. (I suspect it's more than 24 months left as well).
Portfolio:
CITI Diamond Preferred $7,000 [06-16]
AMEX Platinum (Charge) [11-16]
AMEX EDay $12,000 [11-14]
Lowes Store $15,000 [4-14]
CSP VISA $6,000 [7-14]
GM MC $9,000 [9-14]
AAdvantage Red MC $10,350 [10-14]
Discover IT $4,500 [03-15]
Chase Marriott VISA $5,000 [04-15]
Cap One Quick $2,600[4-10]

gmazz
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Postby gmazz » Wed Apr 01, 2015 12:34 pm

jcarte29 wrote:4) Upto the OP. If there's something mechanically wrong with his vehicle, he needs to cut his loss and get something more reliable. But the way I read it is he wants to lower his interest rate, which could be very well possible if he truly has improved his credit. That's a great reason to trade, when you can lower that rate into the single digits!

Hope this helps :)


jcarte is correct...i simply would like to lower my rate. It would be a bit of a drive for me for you to help me out with a new car since I live in Los Angeles.

My current car is in amazing shape and has very low miles, just don't want to pay all that extra cash on it if I don't have to. If I paid the loan off today it exceeds the value of the car though. So in my thinking it would be best to get out sooner than later. Refinancing at a rate of maybe even 8% would only get me to it's current value.

-Lowering my rate is #1 priority.
-Improving my credit is also important
-Getting something a little newer doesn't sound all that horrible either ;)

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CarefulBuilder14
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Postby CarefulBuilder14 » Wed Apr 01, 2015 2:28 pm

gmazz wrote:My current car is in amazing shape and has very low miles, just don't want to pay all that extra cash on it if I don't have to. If I paid the loan off today it exceeds the value of the car though. So in my thinking it would be best to get out sooner than later. Refinancing at a rate of maybe even 8% would only get me to it's current value.

-Lowering my rate is #1 priority.
-Improving my credit is also important
-Getting something a little newer doesn't sound all that horrible either ;)


It sounds to me like getting a new car would be going from a bad financial place to a worse one. Even if you can get the rate down from 12.8% to 8%, you still would be paying a high rate of interest.

And why should the fact that the car is underwater have any significance? Unless you plan on defaulting, you'll have to pay the full debt off sooner or later. If you're worried about being unable to refinance when underwater, you can contribute more cash as part of the refinancing.

I'd keep the car and extinguish the debt by just paying in full.
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gmazz
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Postby gmazz » Wed Apr 01, 2015 3:21 pm

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.

I fought hard to pay off about 10 defaulted accounts from my past. Once I was debt free I made the purchase.

I make 5x the purchase price in salary per year. So being able to afford and having a "nicer car" should not be the issue.

With all due respect I came here for advice on my situation, not opinions on what my lifestyle can afford.

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CarefulBuilder14
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Postby CarefulBuilder14 » Wed Apr 01, 2015 8:52 pm

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.

I fought hard to pay off about 10 defaulted accounts from my past. Once I was debt free I made the purchase.

I make 5x the purchase price in salary per year. So being able to afford and having a "nicer car" should not be the issue.

With all due respect I came here for advice on my situation, not opinions on what my lifestyle can afford.


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?
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