Advice needed on financing a car

Parent Cafe
1

We just bought D her first car - a nice used EV from Carvana. However, Carvana offered me the outrageous APR of 20% - despite having excellent credit and low debt. I even brought a previous vehicle from Carvana with a 7% APR which was paid off in full and on time about six months ago. So the 20% APR this time is mind-boggling.

Anyway, I have some options and was hoping to get insight from people who know about this stuff, because I do NOT know about this stuff.

Option 1.
My credit union can refinance the loan. They can’t tell me the exact APR they’d offer until I submit a formal application which would also trigger a hard pull on my credit - something I want to avoid unless I decide to proceed with this option. They guessed it would likely be around 6-8%.

Option 2.
The company that holds my retirement account offers personal loans at an interest rate of 8.5%. In other words, the rate here is likely a little higher than what the credit union would offer, but it has - what I think is? - the advantage that they just transfer the money to my bank account and then I can use it to pay off the car loan in full. This would mean that we own the car outright. Is that actually advantage? I mean, it sounds good to me. Is it worth paying a slightly higher interest rate to pay of the car loan and then just pay this off as a personal loan? (To clarify: this is just a loan, not an early withdrawal so it doesn’t have any penalties or anything.)

Which is the better option here?

1 Like
2

Make sure it’s not you borrowing from your account.

#1 assuming no upfront fees.

How long til you pay off this loan ?

1 Like
3

It’s clearly a bad situation. You might review how the situation occurred and what steps could be taken to avoid similar issues in the future. Carvana is generally overpriced compared to alternative used car sellers, and the average used car loan is far below 20% APR, unless credit score is very poor. If you have a unique financial situation such that this really is the best option you have for buying a car, is it absolutely critical that you buy your daughter a car, without her contributing to the finances?

Regarding the options, it’s important to distinguish whether option 2 is a 401k loan such that you pay interest to yourself vs a general loan with the retirement account brokerage such that you pay interest to the broker/bank.

3 Likes
4

Are you a member of a credit union? Ours will do “refinances” of car loans…and the rate is far lower.

ETA…I see you are and yours will refi…and the rate sounds favorable. I think I’d do that.

Heck, our HELOC has a lower rate.

The loan is in your name…but the car is titled to her? I wonder if that adds to the issue.

1 Like
5

If you are borrowing against your 401k then the interest you pay would go into your 401 account.

2 Likes
6

But you risk borrowing in a rising market, why why #1 is better - imho.

7

We only buy cars with cash. Used cars $11k or under. Is the purchase already complete?

8

It depends on several factors including what the 401k is invested in, and whether the loan interest paid to yourself results in increased 401k contributions beyond what you would have made had you not taken out the loan.

If I assume $10k loan for 5 year loan at 8% interest, 10% return on 401k investments, no loan origination fees, loan paid off on time (be aware of 401k penalties), and loan interest results in increased contributions to 401k; then after 5 years:

401k Loan – $751 lost investment gains
Personal Loan – $2,166 interest payments

Of course the lost investment gains increase over time with compounding. It is relevant whether the saved money after 5 years results in increased future 401k contributions or other savings in future vs increased general spending in future.

9

This is good point and something I don’t fully understand. What exactly is the downside to that? I imagine if I default - which I don’t plan to do - then it would be pulled out of my retirement account, get an early withdrawal penalty, and be taxed. But maybe that’s still better than defaulting on a car loan and getting the car repossessed. Is there more to it than that, though? My retirement account isn’t huge, but it’s enough to absorb this debt. The total car debt is under $15,000.

The Carvana financing is a 36 month loan, but I’m hoping that it will actually be paid off in 24 months or less.

It’s a head scratcher to me. I checked my credit scores and I’m comfortably in the 790/800 range. I carry no substantial debt - I have a few thousand on a credit card at the moment, but I always pay off my credit cards in full each month, so that will be zero in a few days. No student loan debt. The previous car I purchased was paid off in full and on time (actually several months early) about six months ago. I have a long track record of paying things off on time - even with Carvana itself.

She contributes - she’s been working part time for a few years and has put some money in. Her salary will also be contributed to the loan payments.

That’s a good question and one that I wouldn’t have even thought to ask. So I really appreciate this!

Yes, that is Option 1: to refinance through my credit union. They estimated between 6% and 8%, which I would be fine with.

Right now, everything is in my name.

That is good to know and something I hadn’t even thought about.

These insights are exactly why I asked this question on CC - I knew there would be people who actually understand this stuff because I definitely don’t. I appreciate you raising these issues.

Purchase is already complete. We paid $10K upfront, but have just over $14K for the loan. I couldn’t do that without draining my bank account. I live in the Bay Area - you can’t even walk down the street here for under $11K :wink:

This is what I need to find out then, because I have no idea.

Well, about $14K over 2 - 3 years is what we’d be looking at.

10

My OEM has rates. But dealers can mark them up. Sometimes one point. Sometimes more. It might simply be a greedy finance manager. That’s how they get paid - by knocking the heads off of customers.

My guess is though that because repos are at a many year high and I get dealers complaining good people can’t get approved, you’re likely just a victim of a tight market.

You might ask for a re review though - they’re treating you as subprime.

Depending on the price of the car, you might consider new. Lots of aggressive rates out there that could make up some of the gap. Not sure your price point though - if it’s gently used or really used.

11

I did ask their customer service to explain why I was being charged such a high rate, and they couldn’t tell me anything. My best guess is greed? But I have no idea. So that’s why I just want to quickly refinance it before the payments start coming due - either refinancing through my credit union or just paying it off in full by taking out a personal loan. Either way will end up being cheaper than paying the Carvana 20%.

It’s gently used and it was a really good price. That’s why we jumped on it, despite the 20% APR offered - we didn’t want to lose the deal, and I figured I could find a way to refinance my way to a better rate after the purchase.

12

The OP said they already bought the car. Perhaps they can clarify but I do not think they are now considering buying anything else.

13

Well, per the Carvana agreement, we technically have 7 days to decide and can return for any reason during that time. But I would prefer to keep what we got - as I said above, it was a very good price for what it is. We have been pricing these out for a while, and this one was a good deal that would surely have been snatched up fairly quickly if we hadn’t pulled the trigger on it when we did.

1 Like
14

Boston area is expensive too. I got a Chevy Spark used for my kid for $13k including tax. But moot point if the sale is done.

1 Like
15

Can’t the credit union finance it from the get go ?

So if you bought it, how did you get it or you haven’t signed yet ?

The other thing you can do is check your brokerage if you have one. You can borrow on margin easier than signing for a new loan. Check the rate but it won’t be close to 20%. Maybe 10%. And pay it down quick.

It’s basically borrowing against current securities. Perhaps that’s what your broker was recommending.

1 Like
16

Car is already purchased. They could have, but processing the loan would have taken 5 business days, which would bring us into next week, and we didn’t want to wait as we were worried someone else would purchase the car we wanted. So we decided just to make the purchase, with the plan to refinance ASAP post-purchase.

1 Like
17

Carvana is like Amazon Prime - we got free next day delivery (so we received yesterday in the late afternoon).

I’m not even totally sure what this means (I told you, I know NOTHING about financial stuff). But this is good because I can call and ask these questions on Monday.

1 Like
18

It would be on a current account.

Let’s say you had a Schwab account or similar (non 401k) and you had $100k in it, you could in theory borrow $50k against it. No papers. No signatures. Nothing.

But doesn’t sound like you’d have an account with margin.

Sounds like you have a good plan with the credit union.

Congrats.

1 Like
19

So you buy a car before seeing it in person or test driving? And then you can return it within 7 days? My niece is in the market for a new-to-her used vehicle so I’ve been helping her look online since we live in different states. I’ve been looking at Carmax and Nucar, but am curious about Carvana now.

20

Pretty much! We bought our last car with Carvana and it was very easy. That time we got 7% APR, which was acceptable to us. That purchase had been an overall good experience, they do all the paperwork for you, deliver it, and give you 7 days to decide. That’s why we decided to go with them again - and the purchase itself was easy enough once again, it’s just the new APR that’s been unpleasant.

(In terms of delivery, however, you must check on each car - some are free delivery, if they are located within a certain range from where you live, but some have a delivery fee, if they are located further out.)

1 Like