Need a little guidance

[Anonymous]

So I recently graduated University and looking to either lease or finance a newer. The car that I am looking at is the 2014 Ford Fusion SE or Titanium. 

I bought my first car  (with a cosigner) about 3 years ago (exactly 3 years next month). Due to lack of adequate credit history I hopped into a 2004 honda civic at a whopping 12.79 APR on a 10K loan (I knew I overpaid for the car at the time, but I needed a car desperately and this was the only thing I could get). Needed it to commute to work and school.

Nothing major is wrong with the car but based on my $230 monthly payments, I could be driving a newer car for about $80 more a month(not a need, but rather a want). My civic has done its job, and I can see it finally falling apart (cosmetically not mechanically YET). I have also applied to grad school and I will be needing a car to get me to clinical rotations etc.

My Stats:

Age 23

Monthly income is ~2.2K/month before tax (~1.7K after tax). 

Length of oldest account 4 year 8 months.

AAoA 2 years

3 years auto loan (4.8K left) - never missed or deffered a payment. 26 payments left.

24K school loan - repayment begins in November/December (approx. $235/ month).

Fico8: 761 EX   761 TU   Unknown EQ

~12K in savings.

6 credit cards and never missed a payment. My credit file is free of any public records or derogs.

My questions are:

1. Should I pay off the car completely and see a significant decrease in both my credit score AND savings (but savings on interest in retrospect)?
2. Should I pay off enough to not be upside down, trade the car in, and obtain a newer car in the upcoming months?
3. Should I pay off the car completely, wait until I know where I am going for grad school, and then lease a car once I move?
4. Should I make peace with the civic, pay it off, and keep it until 2020 (when I graduate grad school).
   • I rather not do option 4 because although it makes the most sense...I am really not happy with the car (it was a desperate purchase).

Thank you in advance. I've truly enjoyed reading up on this site. I've learned a tremendous amount. 

[Anonymous]

You are in good shape for your "want" - even if the best advice on paper would be to keep the older car.

First thing to do is get a value on your old car - trade in and retail values (you can get trade in from blue book, retail you may wish to get it appraised at a CarMax or similar)

The only reason I'd look at retail, if it was me, is because you have the savings available to -at least temporarily - use to pay it off and then turn around and sell it outright immeditately, if the retail value is much better than the trade in value.  If the two are really close, though, there's no real reason to go through this hassle.

Next is get a payoff quote on your old one.  Since you have a couple of years left, you're still paying a fair amount of interest, so your payoff should be better than the residual $4800 left on the loan.  This tells you exactly how much you are upside down on the old car.

Borrowing to get a new car should not be an issue at all (except for possibly DTI) - your scores, payment histories, experience with an auto loan... all of that means your credit file from an auto lender's perspective is in great shape.  Manufacturers are all offering "recent grad" programs these days, but many of those are limited to new cars so you'd have to check with For'd program to see if they're also covering used ones.  If you can find a Certified Pre Owned 2014, you might also be able to use the promotions with that, again depending on the details of Ford's program.

DTI may be a factor, if you pay rent.  With 6 credit cards, that's a probaby monthly minimum of $25 apiece, of $150, which is only about 7% of $2200.  A vcar payment of about $300 on top of that would put you at 20%, which is still fine, but if you pay rent it might push you over some lenders' limits.  Once the student loan payments kick in, those have to be considered too, so by the end of the year this is going to be your biggest hurdle for financing.

[Anonymous]

Thank you for the reply!

I pay about $700/month in rent not including groceries and gas for the car. 

All of my credit card balances are 0 except one which is sitting at ~$125 (will be paid off next paycheck). As for student loans, if I get into grad school next year, I will only be paying ~6-7months worth of payments until it automatically goes back into deferment. 

Based on my budgeting this is what I am looking at: rent - $625/month, utilities - $75/month, food - $150/month*, car payment - $350/month*, insurance - $200/month*, gas - $70/month*, phone - $67/month. This leaves me with a pocket change of ~$60/month. My savings should offset this since I refrain from dipping into it. Should an unforseen emergency pop up, I have enough to soften the blow.

Also, payoff quote is $4,841 for the month of June. Car is worth approximately $2,300 per KBB. 

My biggest fair is damage to my credit score. I worked so hard to get it to where it's at and would regret damaging it because of stupidity and lack of bugeting/planning. 

*overestimated

[Anonymous]

Don't pay off current car loan. Take the car into Carmax and see what they will offer u. They will print u an offer. After that's done u go to a ford dealership and get the ford u want. After u got price for vehicle let them know u want to trade in ur vehicle and see what they offer u. If they offer less than Carmax show they the printed price and most likely they will match it. Just roll the negative into new car loan. Ur APR should be lowest with any lender. If u buy from ford they have 0% for their cars. Forgot to say too. If u do that buy gap program from ur insurance company

[Anonymous]

Thank you for the response and suggestions! 

Hopefully I do the right thing here and take the correct steps and not damage my credit.

[Anonymous]

DTI is only based on your "contracted" debt expenses, not your living expenses/budget.

Your DTI will be all REQUIRED payments on a monthly basis, as reported by your creditors.

In the case of most credit cards, they report $25-35, whatever your required minimum monthly payment is.

If a card is reporting a consistent 0 balance, this amount may be reported as 0, although some lenders fail to correct that box and report it the same every month regardless.

So, for you, rent + car payment + combined monthly minimums on your credit cards + required minimum loan payments on your student loans (once those hit), then take that and divide by your monthly income (2200).  You're looking for a number under 30% to pass most lenders' requirements, especially if you're dealing with prime lenders (the ones with good interest rates).

You can find calculator pages online (bankrate.com has a good one) that will let you put in the amount to finance on your new car (include your $2500 in negative equity on top of the selling price, and estimated tt&l), then put in the length of term and a guess of your interest rate, and see the payment amount for that combination. You can play with this a little to see if the payments come out at a point that keeps you on budget and in line with DTI, before you go to the trouble of actually applying for a loan. 

[Anonymous]

I went ahead a financed the car I wanted. Dealer didn't even require proof of income.

My monthly payments is only $57 more than my older car. Even more evidence that I overpaid for my first car smfh.

Thank you for all your guidance.