Cash or carry?

October 18, 2007 8:02 AM

I'm buying a new car, I have bad to mediocre credit (my score is 563) and I have an inheritance I could use to pay cash instead. Which is best for me?

The car is $35,000 and I'd be putting down $15,000 against an interest rate of 13% through a CapitalOne loan (via the dealer).

I have a $100,000 inheritance sitting around that I could use to make up the remainder to avoid the interest rate, but that wouldn't do anything for my credit. I'm perfectly willing to take the loan if it will help me more in the long run, and the dealer says I can refinance the car in 6-9 months once my lazy bill-paying falls off the 30-90 day incident window for my credit cards.

As a software engineer I make $82k/yr and I don't have any other debt (I usually clear my cards every month) and my monthly overhead is about $1500 (rent control apt + utils), so I can afford the $550/mo car payment, but looking at loan calculators it seems I'll be paying about $8k in interest on the $20,000 loan. Though I've never bought a new car before (I'm 39), I'm very excited about this one and committed to getting myself something nice in general (though my second choice is a Scion, my #1 criteria being "size").

I'm thinking that while it's more expensive in the long run, my credit would really benefit from carrying the loan (how? I don't know). I'm kind of money-dumb, so I cast my numbers to the MeFi oracle.

posted by anonymous to shopping (18 comments total)

Can't you split the difference and put most of the money down and take a small-ish loan ($5000)? The fact that you're paying consistently on time is more important than the amount of your payment.
posted by ferociouskitty at 8:08 AM on October 18, 2007

my credit would really benefit from carrying the loan

Would you give me $8,000 if I promised something so amorphous? No. Pay cash if you have it. 13% is an expensive rate.
posted by grouse at 8:09 AM on October 18, 2007

Good credit is very important to someone who needs to borrow money. You don't need to borrow any money.
Keep paying your bills on time and your credit will improve on its own. A 13% loan is not doing you any favors.
posted by kc8nod at 8:17 AM on October 18, 2007

Yeah, go cash, the credit will fix itself if you are already paying off your credit cards.
posted by zeoslap at 8:27 AM on October 18, 2007

Nice car by the way :)
posted by zeoslap at 8:27 AM on October 18, 2007

Good credit is very important to someone who needs to borrow money

It's also somewhat important to anyone who needs to rent an apartment, insure a car, open new phone service, or get a job.

Anyhow, while I agree, in principle, that you shouldn't take the loan unless you need it, credit is often issued based on past performance on "similar" loans. Next time you buy a car, you might get a better rate if you take this loan even if, at that point, you have good (but not great) credit. (And especially if you want to finance because you're putting the rest of that $100k toward buying an appreciating asset.)

Those more versed in credit might know better, but I'd definitely consider taking the loan--or taking a smaller loan--and paying it off quickly (maybe set up an automated payment to pay it off in six months, or a year). Just make sure there are no penalties for that first.
posted by uncleozzy at 8:31 AM on October 18, 2007

If you have a credit union or bank, check with them first to see if they will give you a better interest rate. CU's in particular are more forgiving. Barring that, a community bank is more forgiving than a large national one, but probably not as much so as a CU.

Just making your payments on time will help your credit a lot, but having this loan might shore up your regular activity. I agree, take a smaller loan, and set it up to be paid off in 6 months or so unless there is a prepayment penalty. That way you avoid the majority of the interest but still get the boost from paying a car loan on time.
posted by Medieval Maven at 8:40 AM on October 18, 2007

1. You don't need to take the loan the dealer is offering. Shop around at other banks and credit unions. This is important.

2. As mentioned, if you do get stuck with a high-interest loan, you can and should refinance it as quickly as possible. This is what I did (with a rate that was much better than that, but not great). You'll wind up not being out so much on interest.

3. If you've got 100K sitting around on top of a good income and are "money dumb," go talk to a financial planner right now. You'll be out maybe $200 bucks for the meeting. Your HR person might be able to recommend someone if you work for a company.
posted by adamrice at 8:44 AM on October 18, 2007

I had a car loan through Cap One. I wrote about it here on MeFi. If you can possibly avoid it, do NOT borrow money from Cap One, EVER. That whole thread is a testament to how much effort they go through to have you rack up fees and charges, even if you are an educated borrower.
posted by astruc at 8:49 AM on October 18, 2007

Credit aside, are you willing to pay 43k for that car? Cars are not assets, they're consumer goods which depreciate as soon as you drive it off the lot. It's only real value is to you, so what you are willing to pay for it is what it's worth.

If you want to get a loan to show a good payment history get an Apple loan for a new laptop or something, and pay it off quickly. $8000 is a lot for the relatively small bump it will give to your credit score.

Oh, and set up automatic online payment for your bills and watch your credit improve with no effort.
posted by OmieWise at 8:49 AM on October 18, 2007

my situation is nearly identical to yours but my credit was worse.

i had $25,000 left over from a condo i sold, which was sitting in a GIC. i wanted to borrow $10k to pay for a truck (i had the rest in my savings account), so i let the bank use the GIC as security, which kept the interest rate way down.

i could have paid for the entire thing in cash, but i want to buy a house one day. and my credit history was just a complete, utter train wreck. i'm trying to demonstrate to the Man that i've grown up a little over the last few years.
posted by klanawa at 9:04 AM on October 18, 2007

Put as much of the car as you can on your credit cards, and pay them off the month you get the bill. Pay cash for the rest.

Possibly-better credit isn't worth $8000.
posted by designbot at 9:04 AM on October 18, 2007

(Oh, and try calling your credit card companies first and asking them to increase your spending limit. They usually will, if you've been keeping up with your payments. That could help your credit rating too.)
posted by designbot at 9:07 AM on October 18, 2007

I am siding with a lot of other people in this thread. Consistently using credit cards and paying off the balance each month is going to help your credit score as much or more than taking out a loan and paying a bunch of interest that you don't need to pay.

Here is another way to think about it. Pay cash for the car. However, each month take the $550 you were going to make as a payment and save that, so that the next time you need to buy a car you will also have cash. Again, the whole purpose of a good credit score is to reduce your individual cost of capital (interest rates) when you need loans. So it does not make sense to pay $8000 in interest to "possibly" reduce your interest rate in the future by 3-4%. If you invest your money wisely, even if your credit score doesn't improve dramatically, the interest you will have made on your investment will be more than you will lose by taking a loan with a slightly worse interest rate.

Also, someone above said to talk to a financial planner. I think you can either do that, or take the time to get educated about financial stuff yourself. Our very own jdroth has a great website called Get Rich Slowly that is a great starting place to learn more about personal finance.
posted by bove at 10:33 AM on October 18, 2007

I'm thinking that while it's more expensive in the long run, my credit would really benefit from carrying the loan (how? I don't know).

You can look in my posting history to get a clear impression of my opinion on credit (bad for everything but houses) and also to find a good description of exactly how your credit score is arrived at. Here's one of several.

Of note there is that your score is best when you have a variety of types of loans (so having had a car loan will boost your number), having a utilization in the 5-15% range, and having a good payment history.

A car loan, being installment rather than revolving credit, has little to no impact on utilization numbers so when you add this up you can realize a very important fact:

Taking a $40,000 car loan and making on-time payments every month for 5 years is EXACTLY IDENTICAL IN FICO SCORE BENEFIT to taking a $4,000 car loan and making on-time payments every month for 5 years. (And, in fact, if your open revolving credit numbers are low it can even be better to have the smaller loan)

So if you really believe it's important to you to improve your FICO, go put down a 95% down payment and buy the car. You may not, in fact, be able to get an identical loan term on an amount that small but if you think you may buy a home in the near future it's way more important you move from 560 to 660 than 660 to 720.

Additionally, if you have that kind of money then find some solution to your "lazy bill-paying" whether it be epayments, online banking, or even some kind of concierge service. (The Wall Street Journal wrote an article comparing some online personal outsourcing services in the last three months but I am sure you can find some information other places as well.)
posted by phearlez at 11:14 AM on October 18, 2007

You would be crazy to pay 13% for a loan when you can pay cash. There is nowhere in the world you can get a riskless return on an investment that even approaches 13%. Paying cash is the equivalent of a riskless 13% return.

By the way, you might be interested to know that buying a $35,000 car instead of foregoing the purchase and investing it instead will cost you approximately $240,000 that you could otherwise use for retirement.
posted by JackFlash at 12:00 PM on October 18, 2007

Just pay for the whole thing in cash. And stay regular with your payments from now on. within a year, your credit rating will be just dandy.
posted by special-k at 1:43 PM on October 18, 2007

I'm a VW fanboy but a souped-up VW Rabbit for $43k. Yowsa.
posted by lazywhinerkid at 4:48 PM on October 18, 2007