Upside down Loan (Cap 1) What to Do?

[dannyb407]

Details:

Original Loan Amount ($33,700)

Open Date - July 2018

Loan Term - 86 Months

Interest Rate -  8.49% APR

Monthly Payment - $536

Pretty much got strongarmed into purchasing the gap coverage as well as all the extra coverage

Payoff Amount $27,187

IF I cancelled the additional coverages and insurances, I'd get back around $2k

I will have a significan amount of money coming in around December that I could use to pay off this loan completely. The APR is killing me and I'm pretty much looking to stop paying that huge (unnecessary) monthly payment. I have also thought about refinancing, but we're in the process of buying a house (Close around Jan. '21) and won't be making any credit moves until then. Can some of you pros help me with what the best course of action should be moving forward? 

Thank you!!

[dannyb407]

I should add the resale value of the vehicle is around $22k and trade in is around $19k

[nycsimone]

Unless you have marginal credit then you should just go ahead and refinance now. There's no reason to be paying that kind of interest. IF you drop the loan down to about 4% with 72 months then it would drop the payment down to about $420 per month ($100 savings) which helps your DTI ratio.

The one problem you may run into is that if the value of the vehicle is $22,000 and you're trying to refinance $27,000 thats about 125% of the value and some banks may not do it. It's worth a shot but other than refinancing your only other option is buying a new car with a ton of incentives to eat up that negative equity. There's certainly plenty of vehicles out there that fit the criteria. I just bought a 2020 GMC Terrain for $20,300 and the MSRP was $30,090. Just to give you an example.

[dannyb407]

Thanks for your reply, I agree, NO ONE should be paying that much interest. To see how much of the $$ goes away from the principal balance is disgusting, but now I realize how I got myself into those situations and won't ever go back. I'll definitely have a conversation with my LO about this one as well, as I don't want it to harm my score. Good tip about it helping the DTI as well. 

I'm thinking about just paying it off and closing the account in December to be honest with you. I know that will eliminate a revolving account and could drop the score some, but I have peace of mind.

[AllZero]

For FICO scoring perspective:

Is that your only open installment loan?

What is your current reported aggregate installment loan utilization %? Is it 81%?

Do you know your MMS Middle Mortgage score? Purpose to know is if you have the score padding to absorb the score loss if you close your only open installment loan. If your aggregate installment loan utilization is 81%. You may or may not see that much of a score loss.

If you have other open installment loans, the below may not be applicable.

If that is your only installment loan and if you have the ability to pay off and close the loan in December, have you considered paying it down to 9% reported aggregate installment loan utilization? Purpose is to get the score boost if that is a concern. Then, once mortgage closes, pay off your car loan in January.

[dannyb407]

@AllZero 

Yep. Only installment loan. 

"What is your current reported aggregate installment loan utilization %? Is it 81%?" - Can you help me find where this information is located? 

As of 8/1 my middle mortgage score is 697. Ideally I'd like to be close to 750 pre- closing.

[AllZero]

@dannyb407  I was going off by your data. If you look at your latest credit report, it should show you the data as well.

Original Loan Amount ($33,700)

Payoff Amount $27,187

[DaveInAZ]

---

@dannyb407 wrote:

Details:

Original Loan Amount ($33,700)

Open Date - July 2018

Loan Term - 86 Months

Interest Rate -  8.49% APR

Monthly Payment - $536

Pretty much got strongarmed into purchasing the gap coverage as well as all the extra coverage

Payoff Amount $27,187

IF I cancelled the additional coverages and insurances, I'd get back around $2k

I will have a significan amount of money coming in around December that I could use to pay off this loan completely. The APR is killing me and I'm pretty much looking to stop paying that huge (unnecessary) monthly payment. I have also thought about refinancing, but we're in the process of buying a house (Close around Jan. '21) and won't be making any credit moves until then. Can some of you pros help me with what the best course of action should be moving forward? 

Thank you!!

---

Have you already started working with a mortgage lender? If so talk to them and see what they say. Normally you do NOT want to apply for any new credit at least 6 months before closing on a mortgage. But mortgage lenders are very strict on DTI, Debt to Income ratio. Mortgage lenders don't like to see more than a 36% DTI, that includes the new mortgage payment and all debt payments - car loan, credit cards, etc. That $536 car payment may be a problem for your DTI. But, if you can refi the $27k current balance at 4.99% that lowers your payment $154 bucks to $382 at 84 months. If you get a 3.99% loan that lowers your payment to $369. May be worth doing before you do your mortgage, and if you explain to the mortgage lender why you did the new car loan and what it lowered your DTI to they should be OK with it.

[dannyb407]

Yep already went through underwriting and they had zero questions on the DTI. Got underwriting approval and waiting on the home to get built and closing should happen around January. I'm actually calling him today to ask him about the car. Other than the car I'm at less than 10% DTI.