Yesterday i purchased a brand new 2009 Prius. I am 19 years old, and have no credit score so i had to have my father co-sign the loan.
I have enough money in a CD to completely pay off the loan.
My question is, at my age, with my credit, what is the best course of action i should take? Making monthly payments will help build credit, but i will also end up paying $7000 in interest over the life of the loan. Or should i just get it all over with an cut them one check for the price of the car?
You are not my banker, lawyer, accountant, mother, etc.
PS: Not sure if it makes any difference, but this is Wisconsin. Furthermore, i have a student loan which is in deferral for another 2 years. I currently reside with my parents, and with my income i have no problem making the monthly payments.
I don’t think there is an easy general answer to this, it will depend on the specifics of your situation (are you planning on buying a house soon, how much interest could you make off the money if you don’t pay back the loan, what is the APR of the loan, etc).
That said, $7k of interest sounds like a lot for what is approximately a $22k car (we actually bought a 2009 Prius ourselves a few months ago, although we paid cash). I’m not sure over how many years your loan is but regardless it sounds like a horrible rate. It is hard to imagine a low risk investment that will return as much as completely paying off this loan immediately.
It just doesn’t add up that the benefit to your credit score is going to worth the extra money you will be spending in keeping this loan. Your credit score is going to suck for a while anyway since your credit history is so new. I’d concentrate on other ways to build it up that won’t cost you anything: for example, see if you can get a credit card, use it for everything you buy anyway, and pay it back every month. This should cost you nothing, and will build up a credit history. Some people will tell you that you should carry a balance because that looks better on the credit score. I suspect they are mistaken, but even if they are not the idea is just crazy. There is no need to spend money trying to improve your credit score. Use credit that is free by paying your credit card off every month, be generally responsible with bills and the like, and your credit score should get better and better.
It always seems vaguely incestuous to me when people suggest spending money on credit to make it easier to apply for more credit later on. And that is exactly what you will be doing if you spend additional money keeping this loan just to improve your credit score.
Best course of action is to stop paying for the car. Your dad will take over the payments, since he co-signed. (you did have the title in just your name, right?)
Then you can use the money that you would have used for the car to pay for rent, since your dad will kick you out of the house.
So you should end up with a car loan that your dad is paying for (since he won’t want to hurt his credit), a nice little rental payment history, and a free car!
But seriously, now that you have the loan and are making payments, start looking around at banks or credit unions to refinance the loan at a lower interest rate soon. Under 6% might be available. This assumes that you don’t have a pre-payment penalty on the current loan.
Yeah, 7.45% APR is terrible. Pay off that sucker pronto. You should have a savings cushion for emergencies, but since I’m guessing you’re still a student and your parents aren’t in any financial danger, you don’t need to worry about that yet.
I second Driver8’s suggestion of getting a no-monthly fee credit card (i.e, not a “Best buy store card”) from one of the major providers, and using it for anything you would normally pay cash for (don’t spend more than what you did before, for example). Pay off the balance in full every month, and don’t ever be late. If you can handle that, not only will you build credit for free, you can earn money via the reward system and from the effect of having a 0% 30-day loan that allows you to keep your money in the savings account for an extra month earning interest.
Pay it off. Your credit score is going to stay low as long as the student loans are in deferral. Once you start making payments on them your credit score will go up. The credit card method is also a fair way to go. I use my credit cards like 30 days same as cash, never carry a ballance. It has help push my credit scores over 800. It is fun filling out docs when purchasing a house. Because the only debt that I have and keep are mortage payments, all my other accounts have 0 ballance. It always cause the loan officer to ask more than once what my ballances and mim payment are.
I’d say go ahead and pay it off, but open a new savings account and transfer the amount of the payment to it every month. Don’t skip a month, and don’t touch it until you need a new car. You shouldn’t treat an early payoff as a license to lose the money from the CD.
I’d suggest a slight variation on this: keep the loan open for a month or two, making payments the whole time, then pay it off. This will have the credit report showing at least a couple of months of “pays as expected” and since you only have the loan for a couple of months, the interest charge shouldn’t be too awful. I’d say pay it off right away, but you’d like the loan to get reported to the credit agencies at least once. I’d worry that paying now would cause the lender to not bother.
Then, do as others have said, and get a Visa or Mastercard, use it for a few bucks every month, and PAY IT IN FULL. Credit scores take into account both longevity of account ownershop (the longer you keep the account, the better) and history of paying your bills promptly. NOTE: THat does NOT, as far as I know, mean “history of carrying a balance”, simply history of paying at least the minimum (up to and including the full balance) each month. Many providers are very eager to issue such cards - with a low-ish balance - to students.
I’ve got a card that I got as a student, nearly 30 years ago. Actually, soon I’ll be cancelling it because they wanted to jack up my rate (despite being a stellar customer), so I told 'em no thanks, I won’t accept the increase, and now I just have to not use the card any more.
Of course, if you pay it back in full every month the rate is not really that important. I do not even know what the rates on my credit cards are, and I don’t care. I have never paid a cent in interest.
It is more important that the card have no fees, and offer a good rewards program. Using credit cards they way I do has proven to be even cheaper than cash, since I have cashed in hundreds of dollars worth of rewards points for Amazon gift cards, etc.
Agreed - but every now and then, there are unusual expenses that might be handled by putting 'em on a card with a reasonably low interest rate, and paying them off gradually over a few months.
Which is not very relevant to the OP of course, I was doing a stream-of-consciousness thing with the fact that we’ll soon be getting rid of an account I’ve had for literally decades. Hopefully having it fully paid off will offset the “ding” due to lower average account age.
You may also want to check and see if there’s a prepayment penalty in the loan contract, and how much it is. Even if there is one, it’s probably still a good idea to just pay it off - but it’s something to consider.
I know a young lady who purchased a duplex, her dad had to co sign. Three years later she did a cash out refinance. Because of her payment history she did not have to have her dad co sign. She used the cash out to purchase a home for herself, again she did not need a co signer.
I am not familiar with Wisconsin law, but I hope you did not take out a loan with any prepayment penalties, and I hope you did not borrow from the dealer unless it was a very good loan–which does not appear to be the case.
Never ever never never never look at anything in terms of whether or not you can afford the monthly payments. There are only two questions: Can you afford it, and should you acquire it? Anything. Look at the total cost of acquisition. Period. House…car…boat…TV. Cost to purchase for cash. Not monthly payment. For a very occasional thing (pretty much just a house) you need to decide on a monthly payment.
Given the high interest rate you signed for, I also hope you got a very good deal on the car. For future reference, the way to do this is to get a cash price out the door with no trade and no loan. After that negotiate a trade and a loan.
Anyway, remember there is a middle ground: If you are just trying to build credit you can borrow a small portion. It’s not “all cash” v “all loan.”
6 years is too long a term. Congratulations on having enough money to pay cash; now make it a lifelong habit to never borrow for a car. Make your car payments to yourself and when you have saved enough again, you can consider another car.
Do not use all your cash for the car, though. It is a good idea to have cash in the bank in case the wolf shows up at the door. If you have 25,000 in the bank and decide to keep 5k in emergency funds, then either buy a 20k car or wait til you saved another 5k.
A brand new car is fun, and you should be able to do it once. Try to never do it again unless you really do keep that car ten years like you told yourself you would. One to two year old cars are much better deals. Be patient and snap one up from some guy for whom the wolf came.
It’s looking more and more like I am your dad, so I’ll quit here. Lots more I wish I knew when I was your age. Enjoy the car. It’s a good choice.