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Frequent Contributor
Mailak
Posts: 422
Registered: ‎04-26-2012
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Loan or no loan?

Does it make sense for me to get an auto loan if I can buy a car in cash?

 

Argument for loan: a) I wonder if it's prudent to spend all that cash in one go, b) I think it would beef up my credit history, which doesn't have any installment loans at all - I have never had an auto loan. 

 

Argument for no loan: It would dip into my savings account, but I can pay for it in all cash and that would save me money overall.

 

Hybrid approach? Try to do a small portion in a loan? Do banks do that? Hypothetical 16k car - 8k down, 8k loan? I could pay it off easily in 12 months.


I love would any input! Thanks!

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Revelate
Posts: 8,892
Registered: ‎12-30-2011
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Re: Loan or no loan?

[ Edited ]

Never pay cash for a car at the dealership.  Always negotiate with letting them finance it... pay with cash the next day to the lender who picked up the loan if that's really what you want to do.  You won't win any points with the dealership like this, but if you're looking at spending the least for the car...

 

Personally from what you described, there's no chance I'd pay cash... one of the things I profoundly regret in my credit profile is paying cash for two cars: it would've done my current reports a world of good to have a nice, solid auto tradeline on them, and incidently would've made my current auto financing a lot less painful.

 

Third strategy: pick a lender who will push your payment dates out when you make more than the minimum payments.  That way you get the best of, well, everything: you don't pay much in interest as virtually all auto loans are simple interest if you knock your principal down substantially quickly, and you get the FICO benefits of a nice 5ish year auto loan tradeline for hardly having to do anything extra by simply leaving some trivial amount on it.  Wells Fargo Dealer Services is one such lender, there's more out there if you research a bit.

 

PS: it may not count for FICO scoring, but having the larger installment tradeline number will often help in various underwriting departments than if you only finance 8K of the car.

 

 

 

Starting Score: EQ 561, TU 567, EX 599* (12/30/11, EX lender pull 12/29/11)
Current Score: EQ 04 679, EQ 8 708, TU 711, EX 702* (07/14/14, EX older)
Goal Score: 700 on EQ '04 (01/01/15)


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Mailak
Posts: 422
Registered: ‎04-26-2012
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Re: Loan or no loan?


Revelate wrote:

Never pay cash for a car at the dealership.  Always negotiate with letting them finance it... pay with cash the next day to the lender who picked up the loan if that's really what you want to do.  You won't win any points with the dealership like this, but if you're looking at spending the least for the car...

 

Personally from what you described, there's no chance I'd pay cash... one of the things I profoundly regret in my credit profile is paying cash for two cars: it would've done my current reports a world of good to have a nice, solid auto tradeline on them, and incidently would've made my current auto financing a lot less painful.

 

Third strategy: pick a lender who will push your payment dates out when you make more than the minimum payments.  That way you get the best of, well, everything: you don't pay much in interest as virtually all auto loans are simple interest if you knock your principal down substantially quickly, and you get the FICO benefits of a nice 5ish year auto loan tradeline for hardly having to do anything extra by simply leaving some trivial amount on it.  Wells Fargo Dealer Services is one such lender, there's more out there if you research a bit.

 

PS: it may not count for FICO scoring, but having the larger installment tradeline number will often help in various underwriting departments than if you only finance 8K of the car.

 

 

 


That's what I was thinking - build some history for when I really need it. Otherwise, I might regret it down the road if and when I want to buy a home. (I had somebody push me today to buy a home and I thought that I haven't even had an auto loan).

 

Revelate, could you please explain what you meant by pushing payment dates in your "Third Strategy." I don't completely get what that means. Also, 5 years? Wouldn't that just about kill me for 5 years?

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Revelate
Posts: 8,892
Registered: ‎12-30-2011
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Re: Loan or no loan?


Mailak wrote:

Revelate wrote:

 

<snip>

 

Third strategy: pick a lender who will push your payment dates out when you make more than the minimum payments.  That way you get the best of, well, everything: you don't pay much in interest as virtually all auto loans are simple interest if you knock your principal down substantially quickly, and you get the FICO benefits of a nice 5ish year auto loan tradeline for hardly having to do anything extra by simply leaving some trivial amount on it.  Wells Fargo Dealer Services is one such lender, there's more out there if you research a bit.

  

 


That's what I was thinking - build some history for when I really need it. Otherwise, I might regret it down the road if and when I want to buy a home. (I had somebody push me today to buy a home and I thought that I haven't even had an auto loan).

 

Revelate, could you please explain what you meant by pushing payment dates in your "Third Strategy." I don't completely get what that means. Also, 5 years? Wouldn't that just about kill me for 5 years?



Different lenders handle any extra payment made in a given month in different ways:

- Some apply to principal / accrued interest and not against the next payment

- Some apply to principal / accrued interest, but also against the next payment.

 

An illustrated personal example:

 

My monthly auto loan is 548/mo (don't ask, way subprime) with Wells Fargo: In january I made my 548 payment for Feb which put my next payment in March; however, a week later still in January I threw what was left of that week's paycheck ($1000) at the loan, and much to my surprise my next due date was pushed into April, with a much smaller than expected remaining payment.  

 

My not having a cashflow problem (at that point) and thinking this was interesting I decided to toss another four thousand over the course of the next two weeks at the auto loan... and it pushed my next payment due date all the way out to December while still knocking down my 21K loan to ~15K in the process, just in the first two months.

 

Dependant when I get my invoicing straightened out (and all things are harder with refinancing being self-employed again), I'm debating not refing my car at all, and just throwing another 14K or so at the loan during the rest of the year... pushing my next payment date out by something like 25 months in the process.  At that point I'll just let the installment line pretty much idle (might make $1 payments just to show activiy on the loan), but 20% on 1K is pretty trivial to me for a long term tradeline which I consider as anything over 3 years in length.

 

If I pursue that strategy, I get an auto tradeline with around 4 years history on it having only paid a small fraction of the interest that would've normally accrued had I just paid the minimum each time.

 

Starting Score: EQ 561, TU 567, EX 599* (12/30/11, EX lender pull 12/29/11)
Current Score: EQ 04 679, EQ 8 708, TU 711, EX 702* (07/14/14, EX older)
Goal Score: 700 on EQ '04 (01/01/15)


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Mailak
Posts: 422
Registered: ‎04-26-2012
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Re: Loan or no loan?

Very interesting. So, basically, it just counted your payment towards the next monthly payment. Rather than reduce the length of the loan at the end, it creates space in the middle. I read on WF site that they don't penalize for early payment. But you say, they also don't charge interest on that amount you pay extra. Very interesting.

 

As a matter of fact, I was planning to go to WF myself. But I wasn't planning on an extended loan - max 24m. But then again, I wasn't planning on a whole lot of loan amount or spending too much. Will they tell me how about I would qualify for, or do I have to apply and ask for a specific amount? I hate this whole 'apply and then we'll tell you' business.

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Revelate
Posts: 8,892
Registered: ‎12-30-2011
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Re: Loan or no loan?

[ Edited ]

Mailak wrote:

Very interesting. So, basically, it just counted your payment towards the next monthly payment. Rather than reduce the length of the loan at the end, it creates space in the middle. I read on WF site that they don't penalize for early payment. But you say, they also don't charge interest on that amount you pay extra. Very interesting.

 

As a matter of fact, I was planning to go to WF myself. But I wasn't planning on an extended loan - max 24m. But then again, I wasn't planning on a whole lot of loan amount or spending too much. Will they tell me how about I would qualify for, or do I have to apply and ask for a specific amount? I hate this whole 'apply and then we'll tell you' business.


Can go either way, but usually I think they mostly ask what the size of your loan you're looking for is as that tends to affect underwriting it.

 

If you go with the above strategy, get the longest loan possible: you don't care about the length and you don't care about the APR, because you're going to be airstriking the principal quickly (creating space in the middle as you put it, I like that phrase).  It does actually shorten the length of the loan as the amortization schedule is calculated based on minimum payments and therefore maximum interest earned by the loan.  As a result, you won't reach the term length regardless because you're changing the amortization schedule radically and the anticipated interest just got vaporized.  The lower the monthly payments, generally the longer you can stretch things out as far as the tradeline goes, and as such take the normally ridiculous 84 month loan if they offer it.  

 

This wasn't a tactic I was really considering trying and it was just more an intellectual exercise after seeing how Wells handled my loan; however, it looks now that I'm going to be getting paid 1099 rather than W2 which is going to make refinancing tricky in my case.  May wind up putting this silly FICO trick into play on my own credit report as a result.

 

Starting Score: EQ 561, TU 567, EX 599* (12/30/11, EX lender pull 12/29/11)
Current Score: EQ 04 679, EQ 8 708, TU 711, EX 702* (07/14/14, EX older)
Goal Score: 700 on EQ '04 (01/01/15)


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New Contributor
Twizzle
Posts: 73
Registered: ‎09-12-2011
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Re: Loan or no loan?

[ Edited ]

Revelate wrote:

Never pay cash for a car at the dealership.  Always negotiate with letting them finance it... pay with cash the next day to the lender who picked up the loan if that's really what you want to do.  You won't win any points with the dealership like this, but if you're looking at spending the least for the car...

 

Personally from what you described, there's no chance I'd pay cash... one of the things I profoundly regret in my credit profile is paying cash for two cars: it would've done my current reports a world of good to have a nice, solid auto tradeline on them, and incidently would've made my current auto financing a lot less painful.

 

 



Gotta disagree. Sorry. :smileyhappy: You can do both. As the OP mentioned, we use the hybrid method.

 

We always negotiate the price first if we use a dealership. We don't discuss financing, ever, just tell them we don't know yet. Once we get the final price, we pay cash. Do I think we've gotten worse deals because of this? Heck, no. We've been very happy. And that's what's important to us. But then, admittedly, we buy more private party and the deals have been fantastic.

 

Anyway. We pay cash for the simple reason that we spend far less when we do and only what we need to spend when we feel the pain of handing all that money over. We also don't pay interest on a loan that's typically higher than the interest we lose from not having that money invested, and our ins costs less. We can carry the limits we want and are comfortable with. So we prefer cash.

 

That being said. We do carry a low auto loan once every nine yrs for one yr. We just did this in Jan. We actually wanted to switch banks and it was past time, so we found my SUV, joined a local CU we were interested in and got a small auto loan with them, all for one inq. We'll carry the loan for 1 yr, just for the aging and better FICO impact, and then pay it off. We're good then until it's close to falling off our reports.

 

I will add that we put a good chunk down and these loan amts are smaller. Of course they are,we're admittedly cheap and just don't believe in spending a lot of money on cars. And these small loans have never impacted the amt we've been preapproved for. Our preapprovals have always far exceeded what we ended up borrowing. And it wasn't an issue when buying a home (we'd actually let the last auto loan fall off the reports accidentally) that we didn't have an installment reporting. Lots of people buy homes without having car loans, and it can even be a detriment (DTI). So, we've always only borrowed what we've needed and never more, and paid it off as soon as best.

 

But, as always, OP, do what's best for you. There's a million different roads people take, and they can all get you to the same place. You just pick the one that's right for you and leaves you with the amt in your pocket that you're comfortable with. 

Frequent Contributor
Tmleverage
Posts: 452
Registered: ‎07-14-2007
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Re: Loan or no loan?

Put as much cash to the downpayment and carry a small loan, you wont lose out on a losing investment such is an auto loan but will establish good credit with the small loan amount..

 

New Member
tigger_435
Posts: 3
Registered: ‎04-30-2012
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Re: Loan or no loan?

Bob Hope said, "A bank is place that will lend you money if you can prove that you don't need it." The fact is, when you finance a car, you're paying a lot more than you "negotiated" for it. If you want to continue to bet on the future and pay more for an "assest" that loses value, well, it's not just good financing. ON the other hand, I don't have a whole lot of experience, and the guy who mentioned paying off the lender the next day, might have it right. The dealers know that much of their kickback comes from financing, so to get the best deal, you may have to finance. But there will be a minimum finance charge. I remember reading in the fine print of one of my deals, it said the minimum finance charge was $50.00 (Just to cover their costs...for people who do that.) I would personally just pay cash so I didn't pay more in the long run. Plus, you're not in debt!!

Regular Contributor
MissExcellentCredit
Posts: 248
Registered: ‎11-20-2010
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Re: Loan or no loan?

+1 to tmleverage. I think its better to establish a good credit history and track record. Just keep your monthly payment to something you can definitely afford.



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