Should I pay down a large amount?

gpie00001 · ‎04-09-2009

Hey everyone,

I bought a used car in November for ~$13,000, and am financing about $10k of it (I put down a bigger down payment). I've got a decent amount of cash saved up and am debating paying down a lot of my loan (I could actually pay it all off, if I wanted). On the one hand, my auto loan's interest rate (7%) is sucking up more money than my savings is brining in (1.5%). But on the other hand, it's very comforting to have a large number in my savings account, especially with the economy.

So my question is, what benefit(s) would there be to paying down/paying off my auto loan early? How would this affect my credit scores?

Thanks for any advice you can offer!

Anonymous · ‎04-09-2009

I'm quite similar like you. Every car loan I take, I have money to pay it off. Just that I like to keep my money in my bank whilst earning some credit history etc. for my credit profile. Some might argue about spending more money is stupid for no reason or insignificant reasons. 7% is quite high in my opinion, maybe refinance with a lower rate later (PenFed 3.99%). I feel paying a little for comforting yourself is worth it somehow. But to your question, I would pay it down a bit more (~50%) to make your credit profile looks a bit better than it is now.

Message Edited by Eiso on 04-09-2009 11:46 PM

Anonymous · ‎04-10-2009

Your question is not easy to answer, because you have not stated what you want to accomplish. Paying it down depends on a desired result.

If you want to pay less interest: Pay down or pay off, or refinance at lower rate (try a credit union such as Alliant). You can also pay extra each month (payment + extra principle) to accelerate the pay off and decrease interest paid over the life of the loan.

If you want to improve your FICO: Pay down the loan so that you owe less than 65% of the original loan balance.

What you "should do" is directly related to what you want to accomplish and what you are most comfortable with. It sounded like you are most comfortable with a lump of cash in savings, so if that is the case you might best be served seeking a better rate. Once you have a better stated outcome or result desired, then strategies can be adviced better.

Message Edited by txjohn on 04-10-2009 02:04 AM

gpie00001 · ‎04-11-2009

Hi txjohn - thanks for the feedback. I guess my goal is a combination of 2 things. One, I want to boost my FICO scores. Even getting below 65% of the loan will do it, then that's what I'll aim for. The second part is reducing how much interest I'll pay on the loan. I have the cash to pay off the loan completely now, but with the economy the way it is, I hate to reduce my savings so much, just in case something happens with my job, etc. But if I pay down to below 65%, it won't wipe out my savings, should help my scores, and also get rid of about a year's worth of interest!

Question about refinancing - how does refinancing affect credit scores? Does it make a difference that I just got the loan in November/started paying it off in January, and then would start refinancing it already? (I've never refinanced anything before, so it's all new to me.)

Thanks again for all the help!

Anonymous · ‎04-11-2009

STOP!!!

A FICO score is only important if you are planning on using it to secure a loan or financing.

Otherwise it is like Schrödinger's cat, no one can see it and it is simply in a variable state of existence waiting for observation to effect it.

In the current economy we are in, unless you have rock solid assurance of job/income stability, I would keep the excess cash you have in the bank and consider the 50-60 a month in interest you are paying as insurance against a future financial circumstance.

Anonymous · ‎04-11-2009

I have to agree with usmc on that point.....do not make financial decisions strictly to court FICO. Just as in the military you spit shine and carefully press for inspections....attempting to maintain the highest possible FICO does not achieve any extra benefits and can cost you money. Don't pay for FICO, earn the FICO through time and good financial habits.

Paying down your loan is good. Getting a better rate is good. Having cash reserves is good. Going into debt or maintaining debt for the sole purpose of FICO is bad.

gpie00001 · ‎04-11-2009

I reread my last post, and I don't think it came out quite the way that I wanted. My MAIN goal is to reduce the amount of interest I pay on the loan in the long run. As I mentioned, I don't want to pay off the whole loan, but can confidently spare a couple extra thousand to reduce the interest (and thus, I will actually save money in the long run).

Coincidentally, the amount that I can pay down on the loan would ALSO get me almost right at the 65% that would boost my scores. Granted, I don't have a need right now for higher scores, but it's an added bonus to my main goal of reducing the interest paid.

But I completely understand what you are both saying - I am still going to think things over before I rush out and make a big payment. Thanks again for the advice!

One other thing I'm still curious about - how does refinancing look on scores in the long run? If it would potentially let me reduce my interest rate (and thus, also help lower the interest I will pay), I want to also make sure (or at least be aware) if it will be a "scar" on my FICO scores down the road.

Anonymous · ‎04-12-2009

New credit will impact your FICO for a while, until it ages. However, once you have the new loan, having your FICO effected is not a problem because you have all ready obtained your new loan.

If you want to get a better rate, pay less interest and get the most benefit of FICO, then go to a credit union, get refinanced at a much better rate. Once you have refinanced....put your "couple thousand" toward the new loan. This will further reduce what you owe, at a reduced rate and pay down the balance from original loan amount. Use the savings in interest each month to go toward either replenishing your savings or toward principle reduction further on the car. If you can afford your current car payment, then once you get a lower payment, don't pay the lower payment, pay the current payment so that you get out of debt sooner.

The new inquiry and new account will ding you. But having a paid loan will hep you.

But be sure to focus on best financial decisions, not best FICO decisions. But, good financial habits will reflect positively on FICO.

Message Edited by txjohn on 04-12-2009 06:53 AM