Yesterday, the mechanic called and said the car my husband drives, which was my late grandma’s car, was not repairable anymore (we had saved cash and fixed it). They said to buy another car. I had the cash to pay for a 2017 Toyota SUV, and put $ 1,200 down and the total came to $ 20,000. It costs $ 335 per month all in.
My husband blew a gasket when I told him about my financing and he said, “Pay it off immediately,” when I get the bill. Is it OK to finance and then pay off the note right away? I did this with a fridge recently, but never a car. My grandma did it with a new car she bought and said that’s the way to go.
I couldn’t get a cashier’s check at the dealer yesterday as I had my four kids with me. Also the dealer got me a warranty which he said is included but I suspect he rolled this into my loan. Will I get to keep the warranty from the dealer if I pay it off? Would leaving the debt and paying it monthly improve my credit.
My grandmother recommended financing a car for a month or two and then paying it off as soon as possible to avoid debt. My sister-in-law recently financed a two-year-old SUV and she is paying almost $ 700 a month. She barely can afford it and I do not want to get in the position that she’s in. What do you think?
Wife, Mother & Driver
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Dear Driver,
Not sure if you were going for some auto-related wordplay with your husband “blowing a gasket,” but well played regardless.
He’s correct in two ways in how you approached this purchase: You probably should discuss this as a family before committing to a monthly payment, as it impacts both of you. And always read the fine print before signing. But based on these estimates from Teddy Autos and CarMax, you got a pretty decent deal.
Oftentimes, you can get a better deal if you buy a car on financing, and then pay off the note after a month or two. But you need to check your contract to see if there is a prepayment penalty. Such penalties usually run at around 2% of the loan balance, but it all depends on what you agreed to when you signed that loan agreement.
Not every state allows prepayment penalties for borrowers in these situations. In 36 states and Washington D.C., for example, lenders can charge prepayment penalties on loans with a term of 60 or fewer months, according to Bankrate.com. “Federal law prevents lenders from charging prepayment penalties on loans with longer terms,” it adds.
The interest rate you pay, in theory, will depend on your credit score. The average car-loan interest rate for new cars in the second quarter of 2024 was 6.8%, while used cars had an average rate of 12%, according to Bankrate. “Other factors such as the lender, amount borrowed, length of the loan and economic conditions also play a role,” it adds.
By paying off the loan, your credit score will drop, but only temporarily, so if you are planning to buy a home in the next month or two, it’s not a good time.
If you have an “excellent” FICO Score of 781 to 850, expect to pay a 7.3% interest rate, on average, for a used car. But that could rise to 21.5% if you had a credit score of 300 to 500. So financing makes less sense if you have a lower credit score. Where you buy also matters: Mississippi has the highest rates, while Maine has the lowest rates, Bankrate adds.
By paying off the loan, your credit score will drop, temporarily, so if you are planning to buy a home in the next month or two, it’s not a good time. Otherwise, you could be looking at a higher interest rate and the 30-year interest rate is already hovering at 6.9%. If you don’t have an emergency fund of 6 to 12 months, it’s another reason to repay it.
Here are some reasons when it makes sense to pay off a car loan, per Bankrate, some obvious perhaps, some less so: “The auto loan has a higher interest rate than what you could earn by investing. You recently received a windfall and have enough cash in reserves for emergencies. You want to avoid having negative equity or being upside-down on your auto loan.”
Warranties can be slightly more complicated. They often come with the vehicle, and are connected to the car’s vehicle identification number rather than you, the owner. So if the automobile changes hands, the warranty remains. An extended warranty, on the other hand, covers the cost of a mechanical failure and gives you more peace of mind for repairs.
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Car-dealership tricks
There are many decent, honest car dealers, but when prices are negotiable salespeople are out to cut their margins and get the best deal possible. You bought your car at a particularly competitive time as demand for used cars and prices are elevated along with inflation. It’s wise to have your financing in place before you set foot on the car lot.
The average used car listed for $ 25,415 in July, $ 164 or 0.6% higher on June’s average price, according to Kelley Blue Book. The good news: Prices remain more than $ 1,600 lower on average than July 2024, but you want to make sure you’re getting those prices. On a positive note, KBB sees further price hikes ahead.
Dealers are paying higher prices at auction for used cars and must pass those costs on to buyers, KBB says. “Used cars below $ 15,000 continue to show low availability, with only 31 days’ supply. Ford, Chevrolet, Toyota, Honda, and Nissan were the top-selling automakers, accounting for 51% of all used vehicles sold.”
The dealer could tell you that you don’t qualify for certain financing options when the opposite is true — it may be due to oversight rather than malice — and offer you an attractive monthly repayment over a longer period of time where you end up paying more money. The manufacturer’s suggested retail price (MSRP) is not necessarily what the dealer paid for the car.
You bought your car at a competitive time as demand for used cars and prices are elevated. It’s best to get your financing in place before you arrive at the car lot.
Bankrate warns buyers about the “yo-yo yank”. Here’s how it works: “Spot delivery, also known as spot financing, allows you to sign a contract and drive your car home before the financing is finalized. While it is often legitimate, it can sometimes be used to back you into a loan with higher rates than what you might otherwise qualify for.”
It also says buyers should be wise to the “rate razzle dazzle”. Basically, offering 0% interest to finance a car. “Most financing incentives are for shorter terms, and you need a stellar credit score,” Bankrate says. “And with short-term loans, such as 24 or 36 months, payments on even a moderately priced car can be hefty.”
“You may be better off finding your own financing and then taking the dealer rebate,” it adds. Say if you’re buying a $ 20,000 car with a $ 4,000 trade-in, “you can choose between 0% financing or 3.49% with a $ 2,000 rebate. The term of the loan is 36 months. At the loan’s end, you’ll come out ahead by more than $ 1,200 if you take the rebate and the 3.49% financing.”
A side note: You obviously lead a very busy life with four young children, and you are juggling a lot of daily responsibilities — school runs, doctors’ appointments, groceries, work, hobbies etc., the list goes on — but if you are making a big-ticket purchase, do so on a day when you have no distractions. Car dealers, like any salespeople, will see you coming a mile off.
You got more than you bargained for with my answer. Better here than on the car lot.
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The Moneyist regrets he cannot respond to letters individually.
More columns from Quentin Fottrell:
‘I never thought they would be in this situation’: Our daughter and son-in-law spend money as fast as his parents give it to them. Do we butt in?
‘We don’t have a joint account’: My husband has a tenant from hell. He forces me to pay for all his rental-property expenses. Am I being used?
I give my mother’s ailing next-door neighbor $ 500 a month. She agreed to sell me her house, although she’ll continue to live there. Is this wise?
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