Make extra payments on existing car loan or save exta $$$ for down payment on new loan?

If this doesn’t have a factual answer, please shoot it on over to IMHO.

My current vehicle has been a true disappointment in terms of repairs, and I want to get rid of it. I am upside down on the loan. Car’s worth about $2,000. Pay-off on the loan is $4,600.

I have some extra funds right now. What would be the better strategy? I can apply the extra $$$ to the existing car loan (where it will be applied to the principal), or I can sock the extra $$$ away for a down payment on the next loan.

I’m assuming paying down the existing loan will have a positive effect on my credit score, which could yield me a lower interest rate. OTH, not having to get a no-money-down loan should get me a lower interest rate, too – but the amount I’d be financing would be higher.

Which would I be better off doing?

Paying down the loan early won’t make much if any difference on your credit score. Moreover, even if it would, improving your score may not make much difference. For instance, if it’s over 700 or certainly over 750 you’ll qualify for prime lending rates, at least as far as your credit score goes. If your income is very low or you have a lot of other debt you still may not, but without knowing everything, raising your credit score isn’t likely to make much difference and paying back a loan early, as far as I know, isn’t a great way to significantly raise it.

Having money to put down on the new purchase would be a good thing.

The other issue to consider is the interest rates involved and how long you plan on waiting to buy the new car. Will you wait until the loan is paid off? If your current loan is at 7%, the extra principal you pay off will no longer be accruing interest at 7%. You’ll save 7% on all that money which is a lot like earning 7% on your money. What’s your money going to earn if you hold it for that new purchase? Under 2%?

If you are planning on buying a new car soon, I think it’s six of one and a half-dozen of the other. Your credit score goes up by history of timely payments, so I don’t think a prepayment would change anything.

In my experience, paying down the loan – unless you can pay it off completely – probably isn’t a good deal. At least, that’s how it was when I got my mortgage; they cared how much I was paying per month, but didn’t care that the principal had been paid down so far that I was only 6 months away from paying it off instead of 2 1/2 years.

Another way to look at it is at what price you can negotiate for your new car. If you need a new car sooner than later, see what car you want and negotiate down a final best offer from them. Then, tell them at that price you will have to sell your car because you can’t afford to maintain two cars. They’ll work out some numbers for you, but there you can then decide if it’s worth it. Obviously, it will depend on the numbers, but you need to compare that monthly payment to the payments you have been making plus the cost of repairs (not maintenenance – i.e. dont factor in pricey oil changes or xx000 mile check ups) and also keep in mind the utility of driving a better possibly newer vehicle.

A more simple thought process, already mentioned above, especially if you like the car despite the repair costs, is that paying down early is like getting x% return on your money.

Paying down the loan early adds to your equity in the car; if you are going to trade the car in on a new one, that equity is just as good as cash to the car dealer.

The thing to look at is the relative interest rates between the car loan, and where you would save the cash. If the car loan is at 7%, and your bank is paying 2%, it’s a no-brainer: pay down the loan.

Overall, you’re probably best off paying down the loan…

BUT in this economy, there’s something to be said for having a few months worth of cash to live on. If you don’t have a nest egg that will tide you over for 3-6 months (minimum) of unemployment, then I’d say keep the cash. Sometimes, a little security blanket costs you, but it makes all the difference when you need it.

pay off your loan… There is no penalty for doing this…Paying off the loan will look good on your credit report…buy a new car (consider Hyundai) there are special interest rates and rebates going on…these cars are priced right and carry ten year warranties