We have about $9,000 remaining on our car loan at 5.99% interest. We'll be buying a second car soon and have been offered a 1.99% auto loan. Now we are wondering if we should use some of the money we had planned to use for a down payment on the new car to pay off the 5.99% loan and put less down on the car with the lower-interest loan?
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That could be a good way to take advantage of today's low interest rates if you're going to buy a new car.
Find out how much of a down payment is required to qualify for the 1.99% rate -- a 10% down payment is common, says Greg McBride, senior financial analyst with Bankrate.com. "With a rate that low, there's no incentive to put down more than you have to," he says. And make sure your old lender doesn't have a penalty for early payoff (most don't for standard loans).
You may be able to get an even better deal on your new loan, especially if you have a good credit score. Gerri Detweiler, of Credit.com, says the 1.99% is attractive, but the lowest national rate is currently just 0.74% for a four-year loan and 1.37% for a five-year loan. You could also refinance your current car loan -- the low is now 1.29% for a four-year loan, says Detweiler. You may also have to pay an application fee or closing costs to refinance.
Detweiler notes that if you do put little money down on the new car, you could be upside upside-down for a while -- meaning you owe more on the loan than the car is worth. You can minimize this problem by boosting the down payment, shortening the loan period, buying gap insurance to pay the difference between the car's depreciated value and the loan balance if your car is totaled, or keeping extra money in savings to self-insure this potential risk.
If you have extra cash beyond the minimum down payment, ask yourself whether paying off the higher-interest loan on your other car really is your top priority. Consider your overall financial situation and how the extra money can help. "That cash may be better used to pad their emergency savings, pay down other higher-cost debts, or make an IRA or college-savings contribution," says McBride.