Right Approach with Auto Loan and CC?

[jrands]

Sorry everyone if this is the wrong forum. Just want to know if this is the right approach to take regarding my auto loan and paying down my CC utilization.

So I am looking to get a car where after TTL, the loan amount will be about $21,500. I currently have CC debt of $24,000 and therefore a utilization in the 90%'s. My current TU Fico is 686 and let's just say that my credit is for the most part spotless and it's the high utiilization that's keeping my score down. So my scenario is this:

I am deciding between either a 60 month auto loan or a 72 month auto loan. Both will have the same APR at 4.25% The 60-month loan would result in a monthly payment of about $395 a month with the total paid amount at $23,850. The 72-month loan would result in a monthly payment of $335 and a total paid amount of $24,330. Therefore, the difference in interest accrued between the two would be $480.

I am currently paying about $485 a month for my car and have about 40 payments left, so either term would reduce my monthly payment. My thought process is that it would be more prudent of me to go with the 72-month term and use the difference of $150 to pay down my CC. My circumstances are such right now that it would take me about 6.5 years to pay off my CC debt. If I've calculated things correctly, the extra $150 would shorten it by almost half to 3.5 years ro about 30 months. Once I pay off my CC debt, I can then start paying double the amount of my monthly car payment of $335 which would cut down my 72-month term down to 54 months and reduce my total payments down to $23,950 for a savings of $380 in interest. It would still be $100 more than I would pay for the 60-month loan term.

The benefit I see is that currently, the APR for my cards range from 10% to 20%. Overall, I would save money in the long term by using the money saved to pay off my higher interest CC's. Compared to my current car and the remaining loan amount that's left, buying a new car would set my back by about $4,500. However, as I would use the money saved from the lower car payment towards my CC's, it would shorten my CC payments by about 30 months which would equate to a savings of $19,000 in credit card payments. Therefore, it would result in an overall net savings of $14,500. Aside from the savings, it would also result in increasing my credit score in the case that I start searching for a home (most likely 5-6 years from now). Also, with the 72-month term, it would give me some wiggle room in the case I need it for whatever reason.

So what do you all think? Is this a good idea? Have I missed out anything that I should look into? Thanks in advance.

[Anonymous]

Yes, you have the correct approach as far as doing everything to pay off the CCs first, as that is the higher APR.

However, why do you need a new car?  More specifically, why do you need a $20k car?  Have you been approved for an auto loan?  I can't imagine that you would have an easy approval, although your scores are decent, simply because you are maxed out on your credit card util.  What is the combined minimum payments of the CC debt?  Have you calculated your DTI ratio?

[jrands]

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@Anonymous wrote:

Yes, you have the correct approach as far as doing everything to pay off the CCs first, as that is the higher APR.

However, why do you need a new car?  More specifically, why do you need a $20k car?  Have you been approved for an auto loan?  I can't imagine that you would have an easy approval, although your scores are decent, simply because you are maxed out on your credit card util.  What is the combined minimum payments of the CC debt?  Have you calculated your DTI ratio?

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Hi, thanks for the reply. I don't absolutely need a new car, but would like a different car that would serve my needs better and at the same time lower my monthly payments of which I can use as outlined above. My car is a MY2010 GTI and is probably at it's highest trade-in-value at the moment. Fortunately at this point, the estimated trade-in value (based on Edmunds and a VW Sales Manager) is either on par or just above what I owe on it and therefore the equity would be net zero at the very least. Due to circumstances, this will be it as far as a car goes for me so I would like something that is reliable, cheap to maintain, and again serve my needs. The specific car I am looking at is a 2012 Subaru Impreza. I don't like the car purchasing process and don't want to get a cheaper car now that doesn't meet my needs and then end up having get another car a few years down the road and go through the process all over again.

I have been pre-approved for an auto loan of which I detailed in my original post. My decision was definitely dependent of the terms I would get. As you alluded to, I definitely did not feel confident about what type of APR I would get, but surprisingly got a great pre-approval from a local CU. I really didn't expect anything lower than 10% and maybe 7% if by miracle.So I feel fortunate to have gotten a more than favorable rate.

Regarding my CC, I'm currently paying about $675 a month in minimum payments. I had my CC balances maneagable, but unseen emergency circumstances the past year required using my CC and therefore the utilization is where it is at currently. As I outlined in my initial post, just adding the $150 dollars more would reduce the number of payments when compared to just paying the minimum by about 30 months. I should add also that currently, I'm able to meet my monthly financial obligations

Overall, it's really just a balancing of everything. Again, I am able to meet all of my financial obligations, but have found the stars aligning to make my financial health even better in the short- and long-term while by chance also enabling me to acquire the car that will serve my needs for the forseeable future and beyond.Thanks again, looking forward to yours and others replies.

[Anonymous]

Hmmmmmmm.  I must have been sleepwalking through your original post and not gleaned any information from it.  Sorry.

If you can reduce your payments, it's definitely in your best interest to put all of that money towards the CCs, rather than the auto loan.  Have you thought about balance transfer offers to get that massive balance down to a lower APR?

I don't know all of your situation on the cards, and I doubt you would be approved for any new cards with decent offers in your current util situation.  But maybe you could look into an installment loan with a CU?

[jrands]

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@Anonymous wrote:

Hmmmmmmm.  I must have been sleepwalking through your original post and not gleaned any information from it.  Sorry.

If you can reduce your payments, it's definitely in your best interest to put all of that money towards the CCs, rather than the auto loan.  Have you thought about balance transfer offers to get that massive balance down to a lower APR?

I don't know all of your situation on the cards, and I doubt you would be approved for any new cards with decent offers in your current util situation.  But maybe you could look into an installment loan with a CU?

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No problem, I sleepwalk though things I read sometimes too. It happens to the best of us...lol

Regarding the installment loan option, I get unsolicited offers for this instrument everyday in the mail probably from unscrupulous companies. Since I'm with a CU now, I'll look into it further. Just quickly though. would it hurt my credit score if I go with this installment loan option?

[Anonymous]

I would think it would help your credit score by drastically reducing your credit card utilization.  I'm not really sure the effect the large installment account would have on your credit score, and how much that would offset the impact from the paid off CCs.

[lolabelle]

Do you absolutely need to buy a car?  Personally, with that sort of credit card debt, I'd either look at selling my current car (if possible) and buying a cheap used car or trading in my current car and leasing another.  There are very decent lease deals around right now that would lower your payment much more  (by a few hundred a month) so you could really attack your credit cards over the lease term, then buy something you like once the lease term is up.

Just a thought... maybe not a popular one, but a thought, anyway.  

[jrands]

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@lolabelle wrote:

Do you absolutely need to buy a car?  Personally, with that sort of credit card debt, I'd either look at selling my current car (if possible) and buying a cheap used car or trading in my current car and leasing another.  There are very decent lease deals around right now that would lower your payment much more  (by a few hundred a month) so you could really attack your credit cards over the lease term, then buy something you like once the lease term is up.

Just a thought... maybe not a popular one, but a thought, anyway.  

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Thanks for the input. I had the same exact thought that you stated as well However, I don't think I'd qualify for those great lease offers anyway due to my current CU I have my own lease spreadsheet and I would end up most likely paying more for the lease, or the difference in the lease vs the financing would be very little and not worth it for a rental. Also, I leased a car before, but did not enjoy the experience at all because as I was always paranoid about every little thing and always worried about mileage issues and whatnot.

My plan is king of a having cake and eating it too plan, this I admit. Again, didn't really really think about this plan I "hatched" up until I got the pre-approval which is making this plan plausible and possible. Though I have a high CU, I don't have anything pressing coming up that would require me to have a high CS. Again, not looking or even thinking of buying a home for at least another 5-6 years down the road. So considering all the things I want/need/should do, I think my approach takes them all into consideration.