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Should I finance a car to rebuild my credit or buy one with cash?

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kiwi1970
New Member

Should I finance a car to rebuild my credit or buy one with cash?

I just found out my current car that has 200k miles on it now needs $3-4k worth of work done to it. I can't decide whether to fix it, finance a car or to buy one with cash. I have $13k in savings due to an inheritance. My credit score averages around 560. I've been on the job for 1.5 years with an annual income of $15K. Residence 1.5 years. I wanted to get everyones wise advise. I need to make a decision soon since my car is gradually getting worse. Thanks!

Message 1 of 14
13 REPLIES 13
TRC_WA
Senior Contributor

Re: Should I finance a car to rebuild my credit or buy one with cash?

I'd buy one with cash.

 

Financing a car is going to be an installment loan... which isn't very useful when it comes to rebuilding a credit score.  (Revolving credit cards are much better)  With your score you are going to get a horrible interest rate loan if you get one at all.

 

Pay cash for the car... work on the issues with your credit that have you at a 560 score... and profit.

 

 

FICO8 current as of : ----- EQ: --- TU: --- EX: ---
Hard INQs last 12 months: EQ: 5 | TU: 7 | EX: 9
Verizon Visa $6500 Amex Delta Platinum $10,000 Care Credit $12,000
NFCU CashRewards $6000 Apple Card $2000 Best Buy $3500 Amazon $5000
NFCU auto loan (2022 Ford Bronco Sport Badlands - Cactus Gray) $44k new - balance $31k/6.94%
Total CL: $45,000 --- Total CC UTI: --% --- AAoA: 5.5 years --- Income: $200k
Last app: 11-30-23
Message 2 of 14
Anonymous
Not applicable

Re: Should I finance a car to rebuild my credit or buy one with cash?


@TRC_WA wrote:

I'd buy one with cash.

 

Financing a car is going to be an installment loan... which isn't very useful when it comes to rebuilding a credit score.  (Revolving credit cards are much better)  With your score you are going to get a horrible interest rate loan if you get one at all.

 

Pay cash for the car... work on the issues with your credit that have you at a 560 score... and profit.

 

 


I have to slightly disagree with this. I financed a car last year. I put 50% (wouldn't qualify without doing so by myself) down and financed $15K. I paid it off in 12 months, and wound up picking up some points. I also am credited with an additional tradeline other than revolving. I had "fair" credit mix prior. Now I have "very good" credit mix. 

Message 3 of 14
Anonymous
Not applicable

Re: Should I finance a car to rebuild my credit or buy one with cash?

 

My position would depend on your exact scenario:

To give better advice but

 

1) Yes, I'd recommend financing a 'well bought' car (with 50% down)

a) It'll add credit mix to your profile

b) rates are relatively low right now, si it won't 'cost' you that much to "buy" your way a better profile*

 

The devil is in the details of HOW to do it comes down to specific facts dependent on person scenarios

 

Ex; If your score is that low AND due to high CC debt, then after you get your auto loan you have several thousand dollars to

"buy down" your debt...in the process your credit score will shoot up b/c of the new credit mix + the much beter debt ratio due to

the buy down...so a 560 file w/ horrible debt ratios becomes a 620-640 file with great ratios in 2-4 months it's REFI time!

 

Now b/c you bought 'well' (meaning below market value not top dollar) and you put down half ( you may be able to pull cash out

w/ places like PenFed but either way) the rate will be better going forward and your credit score should be easier to maintain as the note is lower and your debt

would be down

 

2nd

If you don't have CC debt and/or don't HAVE CC then you use some of the 50% to open two nice sized secured CC and use the new card to

ONLY pay your car ( keeping your debt ratio low) thus adding usage on the card while paying the car note (again no % on the card b/c you'll pay prior to due date)

From there the above plan works the same within say 3-6 payments the same scoring bump should allow for a auto refi to a better rate just the same b/c

again by adding the 2-3 cards + the car loan your credit mix will be great and by keeping the debt ratio low combined with the... of course on time payments

 

Either way within 3-6 months you'll be out of the 'crap' loan that you may have to eat to begin with ( which might not be 'that' bad to begin with, b/c of the 50% down and

NOT overpaying to begin with......

 

Remember, the 1st car doesn't have to be the NEXT car...if it takes a few months in car A just to build your profile to get into car B 12-18 months from now...time flies faster than we think.

 

Best of Luck.

Message 4 of 14
JayTee1
Frequent Contributor

Re: Should I finance a car to rebuild my credit or buy one with cash?

In response to:  "so a 560 file w/ horrible debt ratios becomes a 620-640 file with great ratios in 2-4 months it's REFI time!"

 

I would not count on refinancing a car with a low credit score until a year of payments have been reported to the credit bureaus.

March 2014: Abysmal, low 500s


April 2015: TU 607 | EQ 599 | EX 608
March 2019: TU 717 | EQ 727 | EX 727
Message 5 of 14
Anonymous
Not applicable

Re: Should I finance a car to rebuild my credit or buy one with cash?


@JayTee1 wrote:

In response to:  "so a 560 file w/ horrible debt ratios becomes a 620-640 file with great ratios in 2-4 months it's REFI time!"

 

I would not count on refinancing a car with a low credit score until a year of payments have been reported to the credit bureaus.


This is a common misunderstanding on how credit SCORING works.....'humans'...."think" well one must SHOW this or that score for a period of time

before X or Y

but that's NOT true the scoring algorithm/computer-program has no such MEMORY it does not CARE if it's been a year, a day or an hour.

 

If your score TODAY is 640 based upon the data crunched TODAY, you WILL be approved for a car loan THAT day......

Granted my example for the OP was simplified to included no issues except debt ratios and/or lack of a mix of credit but indeed if one's profile has improved in 3 months it's improved, period.

 

The scoring model doesn't 'make him PROVE his score X amount of month before he can get off the couch' it is a SNAPSHOT of what it is AT THAT MOMENT!

 

And if at that moment, the NEW lender is NOT vetting a 560 file....it is vetting a 640 file with great ratios and 'the score needed' to qualify within their guidelines.

 

This especialy true with auto loans and refi's in particuliar ....when I UW loans while working in banks/cu's there were periods where we HUNTED auto loans to snipe from other lenders and trust me if the file met a) 'the score' and whatever basic guidelines it was approved, period!

 

Now, I'd agree that IF we were speaking unsecured accounts as a UW, depending on what's being asked and how conservative of an organization, some place would like to see X amount of payments over time (not a score) prior to say approving a CC at a certain level....again unsecured revolving debt vs an auto loan is very different.

 

The OP is talking about a MODEST car (if he/she were talking about buying a car with 13k) and I stand by my post that YES, heck yes that car could be refi'd within MONTHS b/c the profile would be different....and paying down debt and adding to credit mix can absolutely change a profile by 50-60 points in very short order.

 

In addition different lenders LOVE refi's and aggresively price them (DCU, PenFed, etc) I just went from 5% to either 2.49 (48) or 1.99 (36) with only 2 payments to NFCU now PenFed is happy to snipe that business and they do it on profile including SCOREbased upon what they are reviewing at the time of app, period!

 

 

Again if your score was

550 in Jan

600 in Feb

625 in Mar and

640 in Apr

and you apped in Apr guess what you are a 640 file w/ whatever ratios and mix you have AT THAT MOMENT and your file will be judge based upon THAT the computer doesn't REMEMBER your score from last time (like your g/f recalling you came in late the 'last time' you went out drinking) it's ONLY seeing you for today, about today...

Think '50 first dates' 'Groundhog Day'......all the system sees and reports is who you are TODAY and a refi of a modet car loan isn't gonna be a problem, either they cn beat it or not......it ain't that big a deal!

 

Refi's are loan-jacks not new purchases, the client isn't buying anything new there aren't taxes and tags and extras just straight up secured debt either the new lender wants to lend X amount to a 640 file or not, simple ...again made easy by also showing low debt ratios, sorry that enough to get the date .....whether or not things work out in the long run is a different story but if 640's get approved a 'new' 640 is the same as an old '640'.

Message 6 of 14
JayTee1
Frequent Contributor

Re: Should I finance a car to rebuild my credit or buy one with cash?

My comment is based on my own experience.  When I had a high interest car loan and two credit cards reporting, and I had less than a solid year loan payments, no bank would touch me.  I was specifically told by one lender that they wanted to see 14 months of car payments on the CRA reports (not just paid, but reported) before they'd refinance.  My scores were in the very low 600s at the time.

 

So I'm not arguing with you about theoretical scoring.  I'm just saying that my real-world experience was this, and I don't think it's unusual.

 

Lenders look at scores, but they look at your entire profile, not just the score.  

 

Finally, I think it's just good advice NOT to count on refinancing anything.  If you get a car loan at 19% interest, you'd better count on paying that loan off, period.  If you can't do that or aren't prepared to, don't get the loan.

March 2014: Abysmal, low 500s


April 2015: TU 607 | EQ 599 | EX 608
March 2019: TU 717 | EQ 727 | EX 727
Message 7 of 14
Anonymous
Not applicable

Re: Should I finance a car to rebuild my credit or buy one with cash?


@Anonymous wrote:

@TRC_WA wrote:

I'd buy one with cash.

 

Financing a car is going to be an installment loan... which isn't very useful when it comes to rebuilding a credit score.  (Revolving credit cards are much better)  With your score you are going to get a horrible interest rate loan if you get one at all.

 

Pay cash for the car... work on the issues with your credit that have you at a 560 score... and profit.

 

 


I have to slightly disagree with this. I financed a car last year. I put 50% (wouldn't qualify without doing so by myself) down and financed $15K. I paid it off in 12 months, and wound up picking up some points. I also am credited with an additional tradeline other than revolving. I had "fair" credit mix prior. Now I have "very good" credit mix. 


Yes, but did you do so on $15K income? IMHO, OP does not really have the income to support an auto loan, but they do have cash resources to purchase a decent used car. OP can "pick up points" by doing a small secured personal loan, which will cost far less.

Message 8 of 14
StartingOver10
Moderator Emerita

Re: Should I finance a car to rebuild my credit or buy one with cash?

I agree with the posters that are taking into account the OP's income.  $15k per year is not enough to finance any vehicle.  The inheritance is a good thing - but don't throw it away on a costly vehicle. Either put the money to work in investments or savings  or both, but putting it on a vehicle is a losing proposition with a guaranteed loss (loss of value through depreciation at a minimum). 

 

If I were in OP's shoes I would get the other vehicle fixed and use that one until it dies. By then the OP could have more income and more financial stability. Or buy an inexpensive cash vehicle if he is concerned about the 200k miles. 

 

FICO doesn't look at the size of the loan.  The small $500 share secured loan from Alliant will give him all the same points of an auto loan.  Why risk default on a car payment when he can get those same points for $500?  Here is the thread that details what I am talking about:  http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

Message 9 of 14
grillandwinemaster
Valued Contributor

Re: Should I finance a car to rebuild my credit or buy one with cash?


@Anonymous wrote:

@Anonymous wrote:

@TRC_WA wrote:

I'd buy one with cash.

 

Financing a car is going to be an installment loan... which isn't very useful when it comes to rebuilding a credit score.  (Revolving credit cards are much better)  With your score you are going to get a horrible interest rate loan if you get one at all.

 

Pay cash for the car... work on the issues with your credit that have you at a 560 score... and profit.

 

 


I have to slightly disagree with this. I financed a car last year. I put 50% (wouldn't qualify without doing so by myself) down and financed $15K. I paid it off in 12 months, and wound up picking up some points. I also am credited with an additional tradeline other than revolving. I had "fair" credit mix prior. Now I have "very good" credit mix. 


Yes, but did you do so on $15K income? IMHO, OP does not really have the income to support an auto loan, but they do have cash resources to purchase a decent used car. OP can "pick up points" by doing a small secured personal loan, which will cost far less.


I agree with Norman. Getting into debt is a bad idea to improve your score. Especially when OP is willing to repair his current car. I have 385,000 miles on my vehicle and I'm just now looking into buying something. That's ONLY because my scores are just now rebounding. There's no way I would have even sniffed the new car smell when I had 500's scores. 


Current Scores 3/2016 Equifax 676 Transunion 697 Experian 648 Goal Scores: 720's accross the board. Gardening Goal: 3/2017
Message 10 of 14
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