Hey all.
I'm going to be buying a car in the next couple months and have a bit of a dilemma. Would it make sense to pay off a 4 year 0% interest loan to help lower my credit utilization and lower my 'minimum monthly payments? Could this help get a lower interest rate?
Currently sitting on a credit score in the 780s, with about 23-24% of the down payment for the car saved (won't buy the car until I have at least 25%), not including the one I have to trade in, and 14 months of minimum payments left on the 0% loan until it's paid off. The 0% loan is at about 21% utilization right now, putting my entire credit card utilization at about 3-5%/ mo and the minimum payments equal 2% of my total monthly income.
I've been paying extra for a while now and have the cash on hand to pay off the loan any day of the week, and was planning on paying it off a week or two before I go in to buy the car. Not paying it off would give me about another 1.5% more towards the car down payment.
TLDR: Pay down 0% debt or save for car down payment?
Do you need to get a different car ASAP? Theoretically, the longer you can prolong paying off your 0% loan the better because of TVM and inflation.
Kind of off topic- but never trade in a car. It's a hassle but sell it separately. It'll be worth the extra cash. And if you don't need that money to put the down payment on your next car, even better. Imo just wait until you reach your savings goal. And see if you can get into any credit unions. My mom is a teacher so I got School's First a while ago. They offer 1.9% APR on auto loans or something ridiculously low like that.
If your credit score is in the 780s range you are basically in the top bucket for lending. I am not sure how much better of a loan rate you could get by lowering your utilization or monthly payments.
Save for a down payment in a higher rate savings account (1.9%) and you will increase your savings and get a return on the money higher than the 0% you could have paid off.
You need 800+ to get the best rates, at least in my experience in getting a mortgage.
For a mortgage I agree, I don't think it is as difficult to get the best rate on an auto loan. He is in the 780s, which should be around the best in general for an auto loan.
I think you're likely already eligible for the lowest rate with most auto lenders.
Another question worth asking: would paying down this loan early actually improve your credit score? I'm not sure you're using "utilization" correctly, which is (loans outstanding / total available credit ). I can't imagine your 0% loan is revolving, so what denominator are you using to call it 21% utilized? AFAIK, your monthly income does not directly affect your credit score; it's considered by lenders separately.
It's revolving, total utilization on the account is 21% of the max limit.
How did you get a loan like that? Is that an intro rate?
Why not have it 100% drawn at all times? Use it to pay down interest-bearing borrowings or put the cash in a savings account?
Ullam unde ipsa voluptas recusandae. Consequuntur animi laudantium quis. Aperiam est non omnis quod. Asperiores omnis perferendis dolore quo laborum ut quis. Omnis rem eveniet impedit.
At et aut dolores eos rerum. Commodi veritatis nemo sapiente ut. At harum est sit voluptatem corporis libero animi sit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...