Pay Cash for a Car or Finance to improve FICO?

[or30313]

A little over 3 years ago, we filed Chapter 13 (old law) to get out of a few personal guarantees associated with a business venture gone bad. We've saved up enough money to pay off our Chapter 13 plan early and we will be fully dischargred in a few months.

We had a 780 FICO before filing and now have a 660 (not bad for an open bankruptcy). Of course, we want to improve that FICO to get a decent mortgage.

In the mean time, we're going to buy a car -- a $14,000 used minivan. We have enough money to pay cash and were planning to do it. Then, I thought about getting a auto loan instead and paying it off early for the sole purpose of improving our FICO.

Will that work? How long do we have does the loan have to be open to have a positive effect on our FICO? Because of our bankruptcy, we're not comfortable having any outstanding loans whatsoever, but would if it could improve our score. If we did take out a loan to improve our FICO, we would like to pay it off as soon as possible. Any insight would be helpful.

[Trixie007]

What a great position to be in, it sounds like you are to be congratulated for how far you've come! Just an idea, if you can obtain financing that is favorable, why not take out the loan, but put an equal amount of money into an investment account (cd or the like) and commit to not spending that money until the loan is paid off? That way you could offset some of the cost of borrowing, and give yourself the peace of mind that you could pay that loan off any time you like. Also, down the road that would be a nice little chunk toward your down payment on a new home...

In my previous life, ha-ha, I worked in the mortgage lending industry - I commonly saw a slight negative impact to scores when you get the new loan, but by the 3rd or 4th month of on time payments you would typically be back to where you started. Then I would think that by the 12 month mark on a new loan it should be showing some benefit to your credit scores. The competitively priced mortgage lenders typically want to see 2-3 active tradelines with a positive pay history for 1-2 years in order to give the best rates. You can also self-report other things to the credit bureaus - utility bills, cell phone contracts, rent payments etc.

[GoodwinRod]

Jeff-make sure you take the time to compare the cost of ownership if you are thinking hybrid. The data I have seen to date shows a higher cost than a conventional car. Much of this is due to the replacement cost of the batteries. Also, I have not seen anything since gas went through the roof. It was all based on gas prices around $120 a gallon.

[IBroke]

Why don't you finance the car, pick the longest term possible and pay off $13,500 a month later?

That gives you something to built your credit, virtual no interest due since it's almost paid off and no hassle on monthly payments since you already paid in advance.

That's a smart way to to virtually own the car AND get the credit back up!

[Flamingo]

You will make your decision when you find out what interest rate you would be charged if you are able to get a loan to finance that vehicle. Since you are not yet discharged, no dealership will touch you for financing without trustee permission. You will not be discharged until at least 6 to 8 weeks after you "buy out" of your plan early. You will also take hits on your credit reports with inquiries while you are trying to obtain financing which will also have an affect on your score whether or not you decide to finance a vehicle. You will also need to realize that after discharge you will have no credit to rely on and a safe stash of cash may be what you need to get you through while you recover and get back on your feet. I think you should weigh your options on what interest rate you would be charged on this vehicle freshly out of (right now still in) a Chapter 13 compared to paying cash and your future over the next few years trying to establish credit and keeping some cash on hand. It's a difficult decision. Also, in this economy, you may be able to get them to bring that price down more if you pay cash. Best of luck to you!

[or30313]

[QUOTE=IBroke;242907]Why don't you finance the car, pick the longest term possible and pay off $13,500 a month later?

That gives you something to built your credit, virtual no interest due since it's almost paid off and no hassle on monthly payments since you already paid in advance.

That's a smart way to to virtually own the car AND get the credit back up![/QUOTE}

Thanks.

Yeah, that's what we were planning on doing. However, on myFICO forum, I read that doesn't really work because the loan has to be outstanding for a long time to help your score. Or will the monthly payments adjust to the $500 remaining balance after I pay off most of the loan?

Another suggestion was to put 50% down and finance the rest. They thought that would have the best effect on my score while minimizing the interest.

[or30313]

You will make your decision when you find out what interest rate you would be charged if you are able to get a loan to finance that vehicle. Since you are not yet discharged, no dealership will touch you for financing without trustee permission. You will not be discharged until at least 6 to 8 weeks after you "buy out" of your plan early. You will also take hits on your credit reports with inquiries while you are trying to obtain financing which will also have an affect on your score whether or not you decide to finance a vehicle. You will also need to realize that after discharge you will have no credit to rely on and a safe stash of cash may be what you need to get you through while you recover and get back on your feet. I think you should weigh your options on what interest rate you would be charged on this vehicle freshly out of (right now still in) a Chapter 13 compared to paying cash and your future over the next few years trying to establish credit and keeping some cash on hand. It's a difficult decision. Also, in this economy, you may be able to get them to bring that price down more if you pay cash. Best of luck to you!

I wasn't planning on doing anything until the discharge is official and showing up on my credit reports. I know ever with the Chapter 13 dischared, I'll still pay a decent interest rate. Now, I just have to decide if it worth it to pay the interest just to improve my FICO .

[Logan]

[QUOTE=or30313;243803]

Why don't you finance the car, pick the longest term possible and pay off $13,500 a month later?

That gives you something to built your credit, virtual no interest due since it's almost paid off and no hassle on monthly payments since you already paid in advance.

That's a smart way to to virtually own the car AND get the credit back up![/QUOTE}

Thanks.

Yeah, that's what we were planning on doing. However, on myFICO forum, I read that doesn't really work because the loan has to be outstanding for a long time to help your score. Or will the monthly payments adjust to the $500 remaining balance after I pay off most of the loan?

Another suggestion was to put 50% down and finance the rest. They thought that would have the best effect on my score while minimizing the interest.

I would finance as much as possible with the lowest attainable interest rate then make 1 large principle payment so that you have 1 year left on the remaining balance and if your credit improves after 6 months pay it off.

Logan