Should I make a large down payment on a used car or pay down credit cards?

Question

I will be getting a $5,000 tuition refund next month. My wife and I have $14,000 in high-interest credit card debt. We need another car that will last us at least 30,000 miles. Should we use the $5000 to pay towards the credit cards, or use some of it for a down payment towards a used car. Or should we try to find a car under $5000 and pay cash? Keep in mind that if we choose to finance a car, our credit card debt is probably hurting our credit score which will cause the car loan interest rate to be higher. We are using 71% of our available credit. Because I have not finished college, my schedule changes frequently, but our debt-to-income ratio on any given month ranges from 30-45%.

If we use the money to make credit card payments, presumably we would get a car loan with no down payment and our monthly credit card payments would be smaller. I'm thinking this would actually be better because the interest rate on our credit cards is 15-20% whereas a car loan would probably be lower.

Basically, here are our choices:

Choice A: Use all the money to buy a used car with cash.

Choice B: Use some of the money to put a down payment on a car and use the rest to pay credit cards.

Choice C: Use all the money to pay credit cards and get a used car loan with no down payment.

Answer 1

Tis a quandary.

You need a car. You also need to get that debt paid down. Using 71% of your available credit is lowering your credit score by a bunch. You really need to get that under 30%.

If, and this is a big if, you can find a lender that will loan you money to buy a used car at a lower interest rate then your credit cards, I'd pay the cards down and take a loan on the car. However, finding a lender for a used vehicle is difficult enough, let alone one that will give you a decent interest rate.

Also, I'm not sure I'd want a car that's only going to last 30,000 miles. That's only a couple years of use, depending on your usage.

Answer 2

I would try first and get preapproved with E-loans or lendingtree.com or capital one-- so that you can find out the rates on a 0 down loan and make sure they're reasonable, and also that you can afford the payments and are approved. They can overnight you a blank check that you take with you to the dealership for the car. Dont use car lot financing if your credit is even a little iffy becuase they take advantage and give you a MUCH higher rate than you could get yourself.

Next, use the $5K (if you dont need it for the car-- you DO need a car to get to work which is the #1 prioirty-- working). Instead of paying on the highest interest, pay the smallest cards off. If you have, say, 5 cards and you can pay 2 in full and then a portion towarda a third, you'll lower your monthly obligations more than paying down portions of all cards. Then you use the money you WERE Paying towards the smaller cards and you pay them towards the larger ones so that they can get paid off more quickly.

Answer 3

Use all the money to pay credit cards and get a used car loan with no down payment I think its the best option. I'm sure your paying alot on this credit card. If you pay the credit card it will improve your credit score. You should not be using more than 30-35% on your credit card. I'm sure if you pay down your credit card you will get a good rate on car. I think those high interest credit card are killing u. I know how you feel I have been there with my credit card but now its paid. Try to apply for a car loan through credit union usually you will get better rate.

Goodluck to u

Answer 4

One of the #1 things preached by Financial education website The Motley Fool is ALWAYS make paying off credit card debt your priority. http://www.fool.com/ccc/debt/debt.htm

These days you can pick up a decent used car for almost peanuts that'll last ages providing you service it often enough..... My Dad's last car was a 1981/82 Vauxhall Cavalier (main GM brand in the UK, the Cavalier being losely based on the US Chevy car of the same name) that belonged to my Grandad until 1992 and had just under 100,000miles on the clock...... that lasted us until about 2000/2001 and another 45,000miles or so before part of the bodywork (wheel arches where the back suspension connects to it) was deemed too expensive to fix, otherwise it'd probably still be doing pretty well now.
Motley Fool section on buying a car:
http://www.fool.com/car/car.htm

Answer 5

Buy a cheaper used car and put the rest towards the credit cards. More debt would be bad at this point.

Answer 6

Definately pay down existing bills. The interest on the credit cards will kill you! PLUS, this will improve your credit. Maybe keep $1000 for a down payment... afterall, down payments are "scams" it doesnt lower the cost of the vehicle, just knocks a few dollars and cents off the monthly payment.

Good luck!

Answer 7

Suze Orman strongely urges you to pay off any credit card debt first - these credit companies are designed to keep you paying for years and years so you end up paying several times over what you borrowed - if you ever get it paid off! Keep your eyes out for a cheap car - they show up every now and then on craiglist. For long trips, I rent one instead.

Answer 8

pay credit card debts off first then a car I wish luck in what ever you do its up to you

Answer 9

b...unless you know how to work on cars, dont buy a junky car...try to get something halfway decent