Ask Liz Weston

Get smart with your money

Car Loans

Q&A: Should I borrow to boost my credit scores?

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Dear Liz: I’m one of the beneficiaries named in my late relative’s will, and plan to use the money to buy a new car. Should I pay cash up front and avoid the interest charges on a loan, or set up monthly payments to help enhance my credit score (currently just under 800)?

Answer: A car loan might boost your scores, especially if you don’t already have an installment loan such as a mortgage on your credit reports. But once your credit scores are in the high 700s, you’re typically getting the best rates and terms from lenders. You’d be paying interest for no reason other than bragging rights.

Q&A: To lease or to buy a car, that is the question

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Dear Liz: You recently answered a question about whether to finance a car purchase. I bought a car in 1963 whose wheels couldn’t stay in alignment. By the time I had driven it 20,000 miles, I was on my third set of new tires. My next car had other repeated problems. Solution? Since then I have always leased and when the lease is up, I buy the car if it has been reliable. By then, the car is cheaper.

Answer: There are at least two ways to view your approach to cars. One is that you found an approach that suits you. The other is that you’ve been overpaying for vehicles for decades based on two long-ago experiences. Meanwhile, car reliability has steadily — and dramatically — improved.

Although there are exceptions, leasing is generally the most expensive way to pay for a car. And buying cars after the lease is over also can be problematic if the buyout price, which typically is set at the beginning of the lease, is higher than the vehicle’s market value.

On the surface, leasing can seem like a good deal. The car’s always under warranty and unlikely to need repairs. Lease payments are often lower than loan payments, since you’re not paying principal. That means you can drive a more expensive car than you could afford if you were paying cash or financing.

But that also means you don’t have any equity in the vehicle. Plus, leasing means you’re paying for cars during their first few years on the road, when they’re rapidly depreciating.

Sometimes manufacturers sweeten lease deals to make them less expensive than an equivalent loan, but usually you’ll pay a lot more over time leasing than you would buying.

Q&A: I need new wheels. What’s the best way to pay for them?

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Dear Liz: Is it better to buy a car with saved money or finance the $25,000 needed? In my case I will have to sell stocks. Maybe this is a good time to do that since things look like they are taking a turn in the stock market.

Answer: Borrowing money can make sense when the asset you’re buying is likely to increase in value. For example, a mortgage could allow you to purchase a home that will appreciate over time, and a student loan could help increase your earning power.

Borrowing money makes less sense when you’re buying something that’s all but guaranteed to lose value, such as a car. Many people don’t have enough cash to pay for a reliable vehicle, of course, so financing is their best option. If you do have a choice, however, cash is best.

Selling stocks can help you raise cash, of course, but probably will incur a tax bill. Also, stocks are meant to be a long-term investment, and you really can’t time the market. Yes, your shares may decline, but they could also rise, and historically they have done so over time.

If you don’t have cash savings but do have stocks that aren’t earmarked for another cause, such as retirement, then you might consider selling enough stocks to pay for the car and the tax bill. For your next car, though, consider saving up for the purchase in a high-yield savings account.

Q&A: They lent their friend a van. It’s getting awkward. Now what?

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Dear Liz: A friend of ours had a huge problem with car repairs last year. This friend got ripped off by a mechanic who took money for the work to repair his car and never repaired it. So my husband and I were kind enough to loan him our van for what we thought would be a short time. The loan has now lasted a year. He put a lot of repair work into it, but we need to ask for the vehicle back. It is not titled to him. I feel bad that he has spent money working on the van. Should we offer him any money or reimburse him for the work? I have a feeling it’s not going to go over very well. Any thoughts or advice on how to handle this would be appreciated.

Answer: As you probably know, the pandemic and a lingering microchip shortage have upended the car market, dramatically raising prices for both new and used cars. Interest rates have gone up as well, making car loans a lot more expensive. Your friend may well have made the calculation that repairing a borrowed vehicle made a lot more economic sense than trying to buy a replacement. He avoided lease or loan payments, plus he may have benefited from free insurance coverage if you continued to pay those premiums.

One approach would be to put a rough dollar value on those savings compared with what he spent on repairs and offer to reimburse him for the difference.

Should you ever again want to loan a potentially valuable asset to a friend, consider discussing in advance who will be responsible for maintenance and repairs as well as how long the loan is expected to last. Putting the details in writing could help both parties avoid awkward misunderstandings.

Q&A; An auto dealer keeps checking my credit. Is that a problem?

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Dear Liz: How do I remove inquiries from multiple auto lenders? One of the dealerships pulled my credit at least eight times over a two-day period. I thought this could only be done while the customer is physically at the car lot.

Answer: Dealerships aren’t supposed to check your credit without your permission, and they can’t check your credit if you don’t give them your personal information, including your Social Security number. Some dealers use deceptive methods to get your personal information, such as claiming they need your Social Security number for you to take a test drive. (They don’t.)

If you did give permission, though, there’s not a lot you can do about multiple inquiries. Dealerships can, and will, check with multiple lenders to see what rates and terms they’ll offer you. If your credit isn’t great, multiple inquiries may be necessary to find you a loan.

The good news is that multiple auto loan inquiries in a two-day span won’t hurt your credit that much or for that long. Most credit scoring formulas don’t count each auto loan inquiry separately, but instead aggregate such inquiries together and count them as one. The ding against your credit scores is typically small and lasts only a few months.

Ideally, though, you wouldn’t continue to do business with a dealership that wasn’t crystal clear about why it needed your personal information and how it was going to be used. Also, consider applying for a car loan from a local credit union before you step onto a car lot. Credit unions are member-owned and tend to have good rates and terms, without the runarounds and add-ons that are so prevalent at car dealerships.

Q&A: Learning an expensive car loan lesson

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Dear Liz: My grandson bought a new car with a loan that has a 24% interest rate. He owes $17,000, and the car is now worth $5,000. What options does he have to get out of this situation?

Answer: The best solution would be to refinance, but that can happen only if your grandson has some equity in the car or is able to get a lower-rate, unsecured personal loan to pay off the car loan. Your grandson probably would need good credit and steady employment to get a personal loan, as lenders are scrutinizing applications more closely these days.

Otherwise, his best course is to “drive out of the loan,” or keep making payments until he owns the vehicle free and clear. He should be making extra principal payments, if possible, to speed up that day.

You can encourage him to hang on to this car as long as possible after it’s paid off so that he can save up the cash for his next car. If he can learn from this experience to pay cash for cars, or to have at least a 20% down payment, then the expensive lesson may have been worth it.