Auto Loan Strategy?

[dman23]

In April I really decided to monitor and improve my credit reports. Learned so much from myFICO Forums. Last August got 19,000 personal loan to build credit and (13,000 balance now, all paid on time.) 3 credit cards in April. (keeping utilization at 5%)

I need a car and decided to buy used (~$20,000 limit) I want to put 50% down but now I'm thinking strategically from a credit report/score standpoint that I should do the following:

How does this sound?:

I put the minimum (if any) downpayment required.

Let's  say none and I have a loan balance of $20,000

With my  first payment I then pay the 50% I would have used as a down payment.

My credit report will show the $20,000 as original loan amount and now an approximate $10,000 balance.

Now I have paid 50% back which is good, I have a 5th active account which is good. I know my AAoA will drop but that will happen regardless of what I do or you all suggest.

Any thoughts?

[Creditaddict]

1. the only real advantage is later if you need another auto loan it shows that you can handle at least $20k loan but probably not really much of a factor until you get into super high loan amounts.

2. THE BIGGIE is that if you take out said loan at $20k for 60 months your payment is about = $360... when you then make your $10k payment that brings your loan balance down to $10k but you will still owe $360 payments for probably 3 years or so.

VS if you just finacned $10k to begin with at 36 months be like $290 or 48 months be like $220.

AND by financing 60 months to begin with vs. 24,36, or even 48 you are probably not getting the best possible interest rate you can.... many banks and credit unions have lower rates for the shorter terms.

id rather just put the $10k down and take out a short 24 month loan.... the loan itself is what is factored into your credit mix score not original balance once it's paid off.

[Ragelog]

I don't think your strategy is bad. I would use down payment needed to secure the best rate you can. So say they require 20% to get you a lower rate than with 0 down but 30% would make no diffence on your interest rate/term. Then use the rest to make a large first payment on the vehicle so you get the benefit of a lower rate but have the initial balance on the loan as high as possible. Make sure they have no penalties for early payoff most loans don't. Your minimum monthly payment will be higher than if you paid it all upfront but you will end up paying it off faster than 1/2 the time as long as you make the original minimum payments. 

Here is a basic example with 5 percent interest and for this example lets say you had to put 0 down so 20k loan at 5%. First payment would be due in September 2014 last payment August 2019. So those terms would give you a monthly payment of $377.42 for 60 months and you would be scheduled to pay 2645.48 in interest if you pay the normal amount monthly. Now your first payment you make it 10k here is how the numbers change. First payment would be Sept 2014 last payment Feb 2017 (reduction of 30 months in payments) assuming every payment after is the 377.42. The interest you would pay is $712.47 over the entire loan.

If you just get a 10k loan at 5 k and did 30 months $355.29 would be the monthly amount and interest of 658.81 the number should be close as long as no early pay penalty but it would show a higher starting loan balance on your CR which at a minimum wouldn't hurt and could help in the future worst case does nothing. I think having a loan paid off early would look better than having a smaller amount loan where you paid just the minimum and finish timely as it would should you easily paid it off so in theory should be able to handle a higher loan amount if that time comes.

The difference in the numbers is due to the calculator assumes you accrue interest until 30 days from loan origination so its the interest on the first loan prior to your large payment if you paid it ASAP it would be less than the 10k loan since you would be paying higher monthly payments. The other thing I wasn't sure about was would payment 1 be 10k total or 10k + the payment amount.

Either way the numbers would be similar but I could see a benefit on the CR side assuming you get the same exact rate doing both. If the rate is higher due to little or no down then I think not worth it.

[dman23]

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@Creditaddict wrote:

1. the only real advantage is later if you need another auto loan it shows that you can handle at least $20k loan but probably not really much of a factor until you get into super high loan amounts.

2. THE BIGGIE is that if you take out said loan at $20k for 60 months your payment is about = $360... when you then make your $10k payment that brings your loan balance down to $10k but you will still owe $360 payments for probably 3 years or so.

VS if you just finacned $10k to begin with at 36 months be like $290 or 48 months be like $220.

AND by financing 60 months to begin with vs. 24,36, or even 48 you are probably not getting the best possible interest rate you can.... many banks and credit unions have lower rates for the shorter terms.

id rather just put the $10k down and take out a short 24 month loan.... the loan itself is what is factored into your credit mix score not original balance once it's paid off.

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Thanks for your reply addict.

I know my payments would be higher going this route but that wasn't a concern. But if there is no real advantage then I like your idea of putting $10k down and getting a 24 month loan.

Was just thinking about this:

Your FICO® Score weighs the balances of your mortgage and non-mortgage installment loans (such as auto loan or student loans) against the original loan amounts. In general, when you first obtain an installment loan your balance is high, and as you pay this loan down, the balance decreases.

Additionally, the FICO® Score considers how far you have paid down your mortgage and non-mortgage installment loans.

I guess it doesn't matter in the long run. Like you said it's the loan itself...

 Thanks

[dman23]

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@Ragelog wrote:

I don't think your strategy is bad. I would use down payment needed to secure the best rate you can. So say they require 20% to get you a lower rate than with 0 down but 30% would make no diffence on your interest rate/term. Then use the rest to make a large first payment on the vehicle so you get the benefit of a lower rate but have the initial balance on the loan as high as possible. Make sure they have no penalties for early payoff most loans don't. Your minimum monthly payment will be higher than if you paid it all upfront but you will end up paying it off faster than 1/2 the time as long as you make the original minimum payments. 

Thanks for your reply Rage. That's a great idea. I think that's how I will handle it.

Here is a basic example with 5 percent interest and for this example lets say you had to put 0 down so 20k loan at 5%. First payment would be due in September 2014 last payment August 2019. So those terms would give you a monthly payment of $377.42 for 60 months and you would be scheduled to pay 2645.48 in interest if you pay the normal amount monthly. Now your first payment you make it 10k here is how the numbers change. First payment would be Sept 2014 last payment Feb 2017 (reduction of 30 months in payments) assuming every payment after is the 377.42. The interest you would pay is $712.47 over the entire loan.

If you just get a 10k loan at 5 k and did 30 months $355.29 would be the monthly amount and interest of 658.81 the number should be close as long as no early pay penalty but it would show a higher starting loan balance on your CR which at a minimum wouldn't hurt and could help in the future worst case does nothing. I think having a loan paid off early would look better than having a smaller amount loan where you paid just the minimum and finish timely as it would should you easily paid it off so in theory should be able to handle a higher loan amount if that time comes.

The difference in the numbers is due to the calculator assumes you accrue interest until 30 days from loan origination so its the interest on the first loan prior to your large payment if you paid it ASAP it would be less than the 10k loan since you would be paying higher monthly payments. The other thing I wasn't sure about was would payment 1 be 10k total or 10k + the payment amount.

Either way the numbers would be similar but I could see a benefit on the CR side assuming you get the same exact rate doing both. If the rate is higher due to little or no down then I think not worth it.

I'm an accountant so I do understand your examples and thanks for doing it. I'll be doing what you did and evaluating different scenarios. Thanks again.

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[kittywitty]

 i like your scnerio i was thinking of a similar one except i would rather have the lower payment so it is easier to pay on time. the 4 yr loan seems to be a good idea if the interest is less. my suggestion is get your score up as high as possible or you'll lose all the money down in extra interest comapred to someone with good credit. i'm open for suggestions on this topic too.

[dman23]

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@kittywitty wrote:

 i like your scnerio i was thinking of a similar one except i would rather have the lower payment so it is easier to pay on time. the 4 yr loan seems to be a good idea if the interest is less. my suggestion is get your score up as high as possible or you'll lose all the money down in extra interest comapred to someone with good credit. i'm open for suggestions on this topic too.

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Thanks for your reply. My scores are between 700-727 which is good so I was pretty confident I would get decent terms. My car cost $21,000. I wound up putting $3,000 down Terms would have been same with zero down) and financing $18,000 at 2.9% for 4 years. Payments about $400/month. I could have done 5 years, of course, but I'm comfortable at $400/month plus I plan on paying this off in a 2 years.

From what I've read lenders have been pretty losse when it comes auto loans so it shouldn't be too difficult to get financing even with below average credit.

What are you looking to do?