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Okay here is my situation. I have a vehicle I'm currently interested in. It's around 42k. My vehicle that I own is worth around 28k KBB. I only owe around $5600 on it. I have the money to go and pay it off right now if I wanted. But, I've just been keeping the payment around to help my credit score for on time payments.

I want to put 8500 to 9500 down payment on my new vehicle when I trade in but I'm not sure if it's better or worse to pay my car off first. Obviously if I pay it off then I wont have as much to put on a down payment towards the new one and it all may come out the same anyways but just wondered if there would be any benefits to paying it off first vs just trading it in.

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    Hi new user! One thing, it's a shame to spend so much on a car. You could put $10,000 in an investment and watch it grow. It's great to have "no car payment". – Fattie Nov 13 '18 at 3:33
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    Given that it is a dumb idea to have a car loan, then yes you should pay off the car and stop there. Wait until you can actually afford the 42K car (by paying cash), and only then purchase it. How long will it take you to save up 11K once you have no car payment.? – Pete B. Nov 13 '18 at 11:44
  • I would love to put money in an investment but I'm not sure where to start looking....my current vehicle is a sports car and its winter time and I would prefer to have a all year round vehicle like a truck. And, if I'm going to spend the money it might as well be a nice one that will hold its value I'm 10 years as I plan to keep it that long. – Angelus Nov 13 '18 at 13:09
  • @PeteB. I don't think it's always a dumb idea to have a car loan. My last car I bought I could have paid cash but chose the 0% financing instead. I had equity in the car I traded in and had them send me a check for that too. – TTT Nov 13 '18 at 17:26
  • @Angelus: No real reason you can't drive a sports car in the winter. I drive my Miata all year long, including to go skiing in the Sierra Nevada. Does as well as any other non-4WD vehicle I've ever owned. Just put on snow tires, and carry chains. – jamesqf Nov 13 '18 at 18:28
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Being interested in a car is one thing. The need (or ability) to buy it is very weakly related to this. And the absolute need to have that car is a third thing, as long as yours still works.

If you have the money to get rid of the loan, I would first do that (essentially, it will you serve most in this way).

The remaining money should be invested somehow (be it short or long term), as well as the monthly downpayments which now fall away. Then, if you have enough money to pay the car, you should buy it. Going into new debt for a car is an option, but not necessarily a good one.

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just wondered if there would be any benefits to paying it off first vs just trading it in.

It won't make much difference financially. The dealer will calculate the equity in the car and use that as the basis for your trade-in.

If it were me, I would just pay off the car today, and have the car free and clear. It will make the trade-in smoother (since the pay-off of the loan won't be part of the transaction) and you'll have greater leverage when negotiating trade-in value (it's easier to sell a car without a lien attached).

Another option would be to pay off the car, use the remaining $4k as a deposit on the new car, and sell your car to a private party (NOT trade it in). You will get more for the car selling it yourself that by trading it in (though you have the hassle of listing the car somewhere, cleaning it, showing it, etc.). The only reason I wouldn't do this is if you'd be tempted to keep the proceeds in cash and keep the $40k car loan (paying $100 a month in interest) to "build your credit".

Hopefully your $9,500 is in addition to the $22k in equity you have, for a total down payment of $32k, leaving only a $10k loan.

Or just save up another $10k and pay cash :)

  • It seems to make sense that: the overwhelming issue is, you will get more money if you sell privately. – Fattie Nov 13 '18 at 7:18
  • Perhaps not with winter coming. Selling a sports car in spring would be better. – mkennedy Nov 13 '18 at 22:41

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