Pay cash or get a loan?

Anonymous · ‎01-22-2009

A little over 3 years ago, we filed Chapter 13 to get out of a few personal guarantees associated with a business venture gone bad. We've saved up enough money to pay off our Chapter 13 plan early and we will be dischargred in a few months.

We had a 780 FICO before filing and now have a 660 (not bad for an open bankruptcy). Of course, we want to improve that FICO to get a decent mortgage.

In the mean time, we're going to buy a car -- a $14,000 used minivan. We have enough money to pay cash and were planning to do it. Then, I thought about getting a auto loan instead and paying it off early for the sole purpose of improving our FICO.

Will that work? How long do we have does the loan have to be open to have a positive effect on our FICO? Because of our bankruptcy, we're not comfortable having any outstanding loans whatsoever, but would if it could improve our score. Any insight would be helpful.

JShidell · ‎01-23-2009

From what i've gathered and based off my personal experience. Getting an installment loan can help if you don't already have an installment loan open. This will help with mixing your credit.

However, once that loan is paid off you can see your score drop because then you will know longer have mixed credit.

When i paid off my car loan last year I saw a drop in score of about 12 points and I still have not recoverd from those points.

A positive would be a good account on your reports for 10 years which will help your age.

But, im not that educated on Installments and how they actually work on helping FICO scores. Maybe someone more educated can help answer your question.

v/r

JShidell

Anonymous · ‎01-23-2009

Fact: if you are not using credit lines since the BK you will be viewed as not "reestablishing" a credit history.

Remember it is not just your FICO but your credit/payment history too.

This will negatively impact you on both the car loan and the mortgage.

So...put half down on the mini van, take the balance left to a 36 month loan (for both the best interest rate and a relatively short term). Make payments on time. Take the "loss" of the interest you have to pay as a "fee" to help re-establish. You may have to finance a minimum of 5K or 7K as some banks do not finance less than that.

Question: if your chapter 13 is not discharged can you purchase a vehicle without having approval to do so?

Anonymous · ‎01-23-2009

@Anonymous wrote:

Question: if your chapter 13 is not discharged can you purchase a vehicle without having approval to do so?

I can pay cash for the minivan but cannot use credit without approval. However, I have enough cash to pay off the balance on Chapter 13 plan and will be doing that next month. I was just waiting for my plan to go over three years per my lawyer's advice. Once that is paid off, it usually takes the trustee another two or three months to file the final discharge. After that, I can use credit again without approval from the trustee.

I like your advice on paying half down -- perhaps it will get me a better rate too. However, does it really need to be 36 months? Can I get a 36 month loan and pay it off early?

I'm not worried about interest cost-- I'm more worried about my change in philosophy. After getting into trouble, my wife and I have decided to live the rest of our lives debt-free with the exception of a mortgage. However, with a 660, we'll have a problem qualifying for even bad mortgages. So, I am willing to do the absolutely bare mininum with credit to bring the FICO up -- but, I want to be as debt free as possible while trying to get the FICO up.

203bravo · ‎01-23-2009

For FICO to give the loan a rating that wil be most benifical to you, it's not good enough that you have the loan but that you pay it in a responsbile mannor. If you have no intentions of paying the loan for 24 months, it would make more since for you just to pay cash. And of course you can get any length lan that you wish and pay it off early, just make sure that it's a reputable loan company and no penatly for early pay out.

Message Edited by 203bravo on 01-23-2009 10:57 AM