Should I payoff my auto loan first before trading it for a new car?

[Anonymous]

Hi. This is my first post here and hopefully someone can offer some advice on this.

My current car is a 2017 Subaru STI, being making payment for 20 months and it still has $24,000 to go. With change of lifestyle, I am interested in trading it in for another car around $50,000. The new car will be financed with minimum down.

My credit background.

Own house, no mortgage. My only installment credit history is from Subaru auto loan (20 months old), never late. My FICO is 790~810. My total available credit from credit cards add up to $6,5000. I usually use 15% of it, and always pay off the entire balance each month.

I have two opinions:

1. Pay off Subaru immediately before trading it in.

2. Trade it in with existing auto loan not paid off.

Question 1:

The current trade in value for the Subaru is around $30,000 so I am not underwater. Does paying off existing car before applying for a new loan help me secure a better interest rate? Does it matter much?

Question 2:

If I trade the Subaru in with $24,000 loan balance for a car priced $50,000. Do I pay sales tax on the entire $50,000 or the difference ($26,000)? BTW, I live in California. 

Again, I appreciate your help!

[sccredit]

In California you pay the sales tax on the enitre purchase.  

Frankly it is your choice on whether to pay it off or not.  If you trade it in for $30k you will have $6k in equity toward the next.  If you pay it off you will have $30k equity toward the next one.

Your other option is to sell it to CarMax and take it out of the equation with the new car all together.  

[Anonymous]

Thank you for the quick reply. I am planning to put only the minimum down payment with either route. Now, which option of the two would give me best interest rate? 

[sccredit]

Neither should effect the interest rate

[Anonymous]

But Isn't paying off my existing loan before trade in should put a positive record on my credit history? Assuming I waited for a month or two before getting the new car. Especially this is the only installment loan I ever had. Why it won't help the interest rate?

Also, if I trade in the Subaru toward a new car with existing loan not paid off. When applying for a new loan, wouldn't the bank see that I have a higher monthly liability?

Many thanks in advance. 

[pipeguy]

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@Anonymous wrote:

But Isn't paying off my existing loan before trade in should put a positive record on my credit history? Assuming I waited for a month or two before getting the new car. Especially this is the only installment loan I ever had. Why it won't help the interest rate?

Also, if I trade in the Subaru toward a new car with existing loan not paid off. When applying for a new loan, wouldn't the bank see that I have a higher monthly liability?

Many thanks in advance. 

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With your current scores, it should not matter, especially since you have "assets" aka paid for home/real estate, but generally, vehicle lenders don't look that deep aka a complete financial statement.

When you pay off your current installment loan it will report as paid but expect to take a 20 +/- hit/drop in your scores for the lack of an installment loan which is a key part of "scoring". Your score will recover when you add another installment loan with the new vehicle loan. 

You should also acquire your own financing before you go into the dealer because not only will you have to put up with the wheel & deal (with accompanying BS/lies), but then when you get to finance, they are going to manipulate you with interest rates, pay-off of the old note, trade-in value, add-ons like "Gap" and et al. Unless you are very careful/stubborn/knowledgeable if you go into a dealer with a car that still has a payoff and you let them finance the new purchase - to put it nicely, you are going to overpay.

#1: Have your financing set up and pre-approved from your bank or credit union before you go to the dealer.

#2: If you have the funds, pay off your current note before you trade in or better yet personally sell the car (btw you will need the title in hand to trade in lien free or sell it directly).

#3: Don't get suckered into financing through a dealer unless it's zero percent end of year financing offered through the manufacturer - but double check that it's not in lieu of a "cash rebate" and if so check the numbers to see if your low interest "in hand loan" is a better deal. Example: Vehicle has a $4000 end of season cash rebate -OR- 0% financing for 48 months. You have an in pocket preapproved 2.49% 48-month loan that will cost you $2300 if you pay it off over 48 months - in this case taking the rebate will save you $1700 - more than that if you don't need 48 month3 to pay it off.   

#4 if you want "GAP" insurance (I never do) buy it through your lender or insurance company - it's MUCH cheaper. 

[Anonymous]

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@pipeguy

When you pay off your current installment loan it will report as paid but expect to take a 20 +/- hit/drop in your scores for the lack of an installment loan which is a key part of "scoring". Your score will recover when you add another installment loan with the new vehicle loan. 

Thank you very much. This is the exact information I am looking for.

I guess I should apply for a new loan through 3rd party bank/CU first before paying off the existing car? I will also explore the option of selling it privately.

Do you think it matters if pay 95% of the balance on my existing loan? Theoretically, I still have an ongoing installment on my report but only owe 5% of the original financed amount. This should be a positive right?

I know I am nitpicking on the subject. Lol I just want to understand how each factor effect interest rate by how much.

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[pipeguy]

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@Anonymous wrote:

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@pipeguy

When you pay off your current installment loan it will report as paid but expect to take a 20 +/- hit/drop in your scores for the lack of an installment loan which is a key part of "scoring". Your score will recover when you add another installment loan with the new vehicle loan. 

Thank you very much. This is the exact information I am looking for.

I guess I should apply for a new loan through 3rd party bank/CU first before paying off the existing car? I will also explore the option of selling it privately.

Do you think it matters if pay 95% of the balance on my existing loan? Theoretically, I still have an ongoing installment on my report but only owe 5% of the original financed amount. This should be a positive right?

I know I am nitpicking on the subject. Lol I just want to understand how each factor effect interest rate by how much.

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Does not really make any difference on an installment loan - 5% balance or 95% balance basically score the same. Utility meaning amount of credit limit used verses amount available has more to do with revolving credit especially since the available credit "can be" used - no so on an installment as 5% or 50% paid off, you have no additional credit line available to use. You won't see the "hit/drop" in score until after the loan is paid in full and even with a second installment loan your score will drop by paying one off. 

Yes, get your loan preapproved at your bank/CU for what you want - I know DCU and NFCU will pre-approve you for "up to" $xxxxx - I've used each. Although many folks don't want to deal with the extra steps, the best way to do this is to get your own loan, then sell your own car and get fair market private party sale price rather than low ball trade in price, followed by getting your best deal at the dealer (rebates and discounts) - you will save thousands on each step - at least in my experience and I'm in a large metro area so there are a lot of dealers. 

[Anonymous]

California does not offer a trade in credit, so yes you'll be paying sales tax on the full amount.

[Anonymous]

I went ahead applied through DCU without pay off my existing  loan and was approved for 2.74% on an used car. Apparently, they do have the lowest rate no joke. Thank you!