Taking out a car loan to reduce rates on a house?

 Hello,

So one of my friends has a new job as a programmer and currently lives
in an apartment.  There is this car that he wants which he can buy if he
waited a little.  However, somebody told him that he should -take out a
car loan on purpose- so that it will somehow boost his credit ratings so
that when he eventually wants to buy a house, he will get lower rates
and save money in the long run.  Does this tactic work, or is it just a
waste of money?

Thanks

 

That is a good plan--wait a little, and avoid going into debt.
A new job can always be an iffy time in life.  You can be let
for for any reason or no reason.  Best not to take too much risk
right now.


If he has no credit history, it sometimes helps to do something
to establish some credit.  You can normally get a gas card or
a store card, and then use it a few times.  That is normally
enough to get a Mastercard or Visa card.  Use that a few times
in a responsible manner, and you will have all the credit that
that you will need.  There is no need to pay tons of interest
on a car to build credit.

It does help to have an established credit record when you
go to buy a house.  But it helps even more to have a good
cash flow position.  Having a car payment will very much
count against you since you are only allowed 38% of your
income to go to pay for the house and your debt.  A car
payment will impact your ability to buy a house.

The best bet is for your friend to visit a house lender
today and do a thing called a "pre-qualify".  That will
let him know how his credit is doing, what he will likely
be able to buy, and what he has to do in what timeframe in
order to qualify for a house loan.

-john-

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John A. Weeks III           952-432-2708            john@johnweeks.com
Newave Communications                         http://www.johnweeks.com
======================================================================

 (Stupid isp.com dialup)

Ditto the above, I'd tell him to -

a) Make a budget for what he spends now, like in Excel.

b) Get a Visa or MC (not a secured one).  May have to get a Shell card
or an Amex first, but the goal is to wind up with a Visa or MC that
pays a cashback bonus on groceries and stuff.  Then run all his
purchases through it.

c) If he needs a car, buy the cheapest one that will suit his need,
like a Corolla or Saturn.  Not an Infiniti or a Yukon or whatever else
you d*mn kids drive these days.  :o)

Problem with cars is they depreciate like rocks and carrying car debt
(or lease) ties up capital.

d) With your cash flow positiv, enjoy life and save money.  There's
plenty of time to worry about a house.  If he lives in a 'hot' area, we
may be in a bubble.  If he lives in Akron or Muncie, houses don't
appreciate anyway.  If he thinks he's gonna stay put in whatever town,
he should consider buying a double and living in one half, rent the
other.  It's a bit of a hassle but the tenant may cover most of the
house payment.

 Thanks for the suggestions.  I should have mentioned that he's in his
mid 20's and has been done with graduate school for a few years now.  So
he's already had a credit card (which he pays off the balance every
month) and already has a car (he just wants a better one).  The purpose
of the car loan is not that he doesn't have enough money (coz his family
can basically give him the money, or else he can pay back the loan
pretty quick with his new income).  The purpose of the loan is to boost
his credit rating (or whatever rating lenders use) for a future home
purchase.  Is this possible?

 

First, you need to make a case that his credit is not good enough
to buy a home.  Second, you have to make a case that getting a
car loan will make the difference.  In my opinion, buying the
new car is a bad financial move, and getting a loan on a car
just makes it worse.  He will be far better off going into the
home loan process with no car payments and a healthy down
payment that was saved up due to not wasting it on a car that
only goes down in value.  If you really want to know, check out
the FICO score simulator at myfico.com.

-john-

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======================================================================
John A. Weeks III           952-432-2708            john@johnweeks.com
Newave Communications                         http://www.johnweeks.com
======================================================================