Should I open a secure loan or pay off car loan.

[Cavedog]

Hi,

I filed chapter 7 and it has been discharged and closed. Looking to buy a house in 15-18 months or so. We have a secured credit card with a $4000 credit line that we pay off in full each month.

I have a car loan with Santander (I got approx 9 months prior to filing BK at 21% interest) who according to all three of my credit reports has never shown being open or reporting as being paid as agreed. I am trying to rebuild my credit.

The car loan is only like $4200. I dont like paying 21% interest on a loan especially if it doesnt show up on my credit report at a good payment history. I received my tax refund. I think I have two options. 1) Pay off the car loan directly. 2)Open a secured loan with my credit union at 2% interest in order to have an installment loan being paid on time, then in like 12 months pay that off. Would that be a better option for my credit score than paying off a loan that is not even showing up on my report?

Thanks

[LadyInTheRed]

So, option 2 is to refinance the existing loan, right? That is what you should do. Payoff the existing loan whether you get another loan or not. It's costing you money and doing you no good. Having a loan that you pay off on time and that reports to credit agencies will help improve your credit rating.

[Cavedog]

Thanks Lady. I sent the check today to pay it off!

Figured since the debt wasnt being reported to the credit bureaus anyways, if I applied for a secured loan the credit union would still have to pull my report which would cost me an inquiry, and a new debt would then be added to my report (since none was there because Santander Consumer wasnt reporting my account), so why add both of those items to my credit report and lower my score just so I can raise it back with on time payments? Plus it does feel good paying off my last debt and saving 21 percent interest!!

[IBroke]

You could have used the money to obtain a secured loan and use the pay out of that loan to cure the auto-loan. That would have been the best way to take advantage of your funds in both ways..

[Cavedog]

The downfall would have been another inquiry, a $4000 increase in our debt on the credit reports, and paying interest again. Our scores were 640 post filing and already within 3 weeks after our bk was discharged and closed have risen 20 points to 660. Feels good paying of our last debt too :-)

[IBroke]

The downfall would have been another inquiry, a $4000 increase in our debt on the credit reports, and paying interest again. Our scores were 640 post filing and already within 3 weeks after our bk was discharged and closed have risen 20 points to 660. Feels good paying of our last debt too :-)

If you ask me, an additional single inquiry (which, BTW, won't impact your FICO after 12 months) and a $4,000 increase in installment-debt (which will be secured) has virtually no negative impact on your credit-rating - certainly not more than ANY new account would have when it is established. I can assure that if you do not open new accounts after a CH7 discharge just in order to avoid an inquiry, you certainly won't be better off in the future. Any new account that is handled right becomes an asset in the future and once discharged, you have to start somewhere. The sooner, the better.

In order to get a mortgage in 15-18 months, I strongly recommend establishing an installment-loan - especially since your auto-loan hasn't been reported.

A secured loan is probably as cheap as it gets. I obtained one from my local CU at an interest-rate of 2.6% which is far cheaper than the cost of a subprime CC. And I never considered a 100% secured loan to be "debt". Since my CU is holding as much as I owe (or even more) on a savings-account, it's actually quite even. After all, you can always pay off the complete loan and in return, get access to the same (or higher) amount on your savings account.

[SMinGA2]

If you're looking to buy a home in 15-18 months, inquiries now won't be an issue. Even though they show for 2 years, they affect score only for 6-12 months.

Revolving debt (with high balances) is bad for credit scoring. Having an installment loan doesn't have the same impact. Though increasing your monthly payments could have an impact regarding DTI. A small loan would have a small payment though.

Since you have time to work with - I'd say contact a mortgage officer NOW for advice. They may require X number of open, positive tradelines with 1+ year of history. If so, you can open more now if you need to.

Good move paying off the car loan - 21% interest, if you don't need to pay it, is a waste.

[IBroke]

Since you have time to work with - I'd say contact a mortgage officer NOW for advice. They may require X number of open, positive tradelines with 1+ year of history. If so, you can open more now if you need to.

Very good advice!

[ValleYum]

SMinGA & IBroke - Y'all ROCK!!!

[LadyInTheRed]

You could have used the money to obtain a secured loan and use the pay out of that loan to cure the auto-loan. That would have been the best way to take advantage of your funds in both ways..

Yeah, I agree. That's what I thought the purpose of option #2 was. To refinance the high-interest non-reporting auto-loan.

If the goal is to rebuild credit for a mortgage in a year or 2, you need to have more than one reporting trade line. The benefit of a postivley reporting loan will greatly outweight any negative effect of a hard pull a year before your mortgage application..

The suggestion to contact a mortgage broker now for advice is an excellent one.