Pay off car loan or buy first rental?

68 Replies

So I have a car loan with about 4 years left. The interest rate is at 24%. I have been building my credit up and I'm around 700 now but when I tried for a refi i was denied. Should I pay off my car loan first before I pursue getting my first rental with a VA loan? It seems to mathematically make sense that I payoff the loan first because of the high interest rate but if someone has a strong argument for acquiring my first property then i'm all ears!

Hey @Daniel Lehman at 24% I think it is a no brainer to pay the car loan off first.  I can see making a case of not paying it off if you had a low interest rate. I would pay the car loan off keep working on the credit score and save. 

Promotion
Ashcroft Capital
A national multifamily investment firm
Three Reasons Investors May Prefer Real Estate
Read three reasons why investing in real estate private placements may provide several advantages.
Read More Here

I agree. As badly as I want to get investing in my first property, I realize that I won't make a higher return than 24% from an investment so I'm definitely leaning towards paying off the car loan first unless I can get someone to refi it. 

If you have an account with Navy Federal Credit Union, Pentagon Federal Credit Union, etc., they normally have amazing rates on auto refinancing. I have used both in the past and really recommend you look in to that. You could both lower your payment drastically AND still pay it off sooner. It would also help building that credit...

yeah man, I would talk to different lenders and work hard to refi.  I'm looking to do what you're talking about, but don't have a car loan. I do have a student loan though, multiple actually, but the interest rates are so low that I'm moving forward on a property.

Good luck buddy and stay at it!

I may go one further and sell the car if the value is approaching 1/2 of your annual income. Drive a beater to your first closing with pride.  It is our largest purchase that goes down in value.  

Glad you are addressing this @Daniel Lehman .  Never go to car payments again after this one is dealt with!

Pay the difference between what it's worth, and what you owe. Then sell the car, buy a $1500 beater, the FLOURISH.

I drive such a beater that when I went to leave my last closing, where I paid cash for a house, my truck wouldn't start and I was out front of the law office with the hood popped trying to finagle the thing to start.

cars will always lose 100% of their value, pay as little as you can for one.

Sell the car and buy something less expensive for cash say around $3K or less. As long as it has 4 wheels and runs it will do the job. Save the money and get into RE as fast as you responsibly can. Also, take this as a lesson to never buy a car with an interest rate that is so insane. I drove a beater up until 6 months ago no I drive a modest $7K car that I paid cash for. Having a nice car doesn't make you a different person just a poorer person in this scenario. 

Even if the car loan was only at 2%, I would still pay it off first. Or, like others have suggested, sell it and pay off the loan. Imagine how much faster you could save up cash if you didn't have a car payment.

I agree with the folks saying to drive a beater.  Sell the car and go all in on real estate.  Don't use debt to buy a liability.  Leverage debt to buy assets that cash flow.

You shouldn't be thinking about investing. With a 24% loan on a car, you are paying sub-prime rates, which means your credit needs repair or you have too much debt. Get your debt under control and focus on saving up money. Then think about investing. Thanks for your service to our country.

Promotion
PPR Note Company
Note Investing
Diversify your portfolio and get completely passive cashflow.
All without tenants, repairs, or vacancies - in a real-estate-backed investment fund.
Here's how.
Originally posted by @Alexander Felice :

Pay the difference between what it's worth, and what you owe. Then sell the car, buy a $1500 beater, the FLOURISH.

I drive such a beater that when I went to leave my last closing, where I paid cash for a house, my truck wouldn't start and I was out front of the law office with the hood popped trying to finagle the thing to start.

cars will always lose 100% of their value, pay as little as you can for one.

 @Alexander felice, loved this story! haha

Originally posted by @Alexander Felice :

Pay the difference between what it's worth, and what you owe. Then sell the car, buy a $1500 beater, the FLOURISH.

I drive such a beater that when I went to leave my last closing, where I paid cash for a house, my truck wouldn't start and I was out front of the law office with the hood popped trying to finagle the thing to start.

LOL !  I'm sure you're tenants won't mind buying you another one. A couple of months of collecting rent will buy you another beater I'm sure. 

I am concerned that you chose to buy a car with a loan at 24% interest. I don't know anyone who does that and is considering real estate investing. Even if you never buy a house ever in life, get rid of the car at 24% interest today! 

well guys, I think it's unanimous. Lol. I'm currently paying $294/month.  And I bought the car (Honda civic) Bc I need something reliable for my 70 minute drive to work. But perhaps if I sell the car and get something for around $2-3k it would be reliable enough. I'm putting about 3k miles a month driving. So I should look into selling. 

@Daniel Lehman

First I think you need to get rid of that loan at all cost (ie. refi, payoff, sell). That might depend on how much is still left on the loan and how much it is worth. If its only worth $5k it probably is not worth trying to sell and buy another car, though if it is worth ~$20k it might be better to sell and buy a cheaper car. You might not have been able to refi because you might owe way more than it is worth because of the high interest rate.

Assuming a 6 year loan at 24% you would have taken out a $11,000 loan. After 2 years you would still owe ~$8,800 on this loan.

Assuming a 5 year loan at 24% you would have taken out a $10,000 loan. After 1 year you would still owe ~$8,800 on this loan.

From this I'm assuming it is not a $20k car and it is probably worth closer to the $5k mark. If you were to sell the current car for $5k you would still owe the bank $3,800 plus the $3k you spend to buy a cheaper car and you are in $6,800 and now you have a cheaper(possibly less reliable) car. If you just pay off the loan you will be in $8,800 and have the same car you previously wanted(1-2 years ago) you would better know the reliability of the car and the recent maintenance of the car and you spent nearly the same amount.

Just some food for thought. Best of luck in your decision making and your investing.

@Daniel Lehman I'd say do both, but what kind of auto loan did you get with a 24% interest rate? Is that even legal?? It would have been cheaper to swipe a credit card for the purchase (please don't tell me this is what you did). Of the $294/month payment how much of this is just interest? Over $100?

Sell the car is the easy answer, but doesn't take everything into consideration. How much do you owe on it? How much do you have saved? If you're upside down on the car, you should refi by any means necessary. Sounds like your credit was not around 700 when you went to refi, so if it's improved you should definitely try again. Google "best bad credit car loans" and find a solve based on your credit.  You need a reliable car, but not necessarily a "new" one. Understand why some say to get a clunker, but if it makes you late for work and you get fired you'd have a whole different set of issues.

Free up the money here and you'll be better positioned for your first rental.

Our stuff is supposed to work for us- not the other way around. A car is a tool. Tools are made to make our lives easier. When the cost or use of any tool causes life to be more difficult, it's usefulness is is no longer worth the cost.

Ditch the car.

Question is, how long will it take for you to find and buy a property and start collecting income from it? And how much money would you have thrown into the car in that same amount of time?