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10-07-2012 09:20 PM
A little over a year ago my new Toyota was financed by the company's own loan department. I would soon like to pay off most of the remaining principal, but wonder if the number of monthly payments left can be kept the same and any future monthly payment can be reduced accordingly rather than keeping each monthly payment the same and reducing the number of monthly payments left. My understanding is that once you finish paying off the loan, your score drops a few points.
10-14-2012 08:04 AM
Some Installment companies will reduce the next monthly payments, but on Auto loans they will tend to stay the same. Please call them and find out, maybe things will work out.
10-14-2012 10:50 AM - edited 10-14-2012 04:51 PM
You can't change the installment loan terms (without refinancing); however, what you can do is simply pay extra *not* straight to principal but just make a doubled-regular payment to test. Several well known lenders will simply push the "due date" out by an additional month, and some will allow you to push the due date waaaay out in advance. You won't get the full term of the loan as you won't accrue as much interest to be repaid; however, you can reduce your principal and therefore future interest substantially but keep the loan open for an extended period of time afterwards.
For details on how this works, simple installment loan payments (and I think *any* loan legally) have to be credited against the aggregate balance when received; however, while any interest is taken first via a regular payment, if you're paying extra in addition to the regular payment, the rest has to come off the principal as that's the only outstanding balance on the loan. If you make your payment such that it's exactly a multiple of your regular payment, many lender systems will simply credit that as a next payment... and some will even take any random amount and apply it to the next sequence of payments anyway. At the time I refinanced two months ago (and I got sloppy between jobs on making additional payments) I had something like $250 due, in 3/2013.
I forget the napkin math that I did on my subprime WFDS loan, but it looked like I could get around 3ish years on my 60 month tradeline if I went this route. If my interest rate had been lower to begin with, I probably could've gotten 4 years no problem but my payment at 19.35% was a non-trivial amount when applied directly to principal. I'm a little disappointed in my DCU refinance as they only allow 3 months to be paid in advance, which I probably missed in my loan agreement but whatever... 5.99% with my ugly file isn't to be passed up.
There are other options though especially in your credit strata. I think that the open-installment loan penalty is just around two installment loans, of which one should arguably be a mortgage these days (regardless if you need another house or not, 3.4ish% => rental property easily in many neighborhoods) and worst case you can do a silly secured (title loan against your car, or against a CD) and you can often choose a 5 or even 7 year term in some cases on this.
That's the strategy I'm using right now (USAA secured CD loan) for 36 months, and at that point I think I may just roll over that $2500 CD into one that's the maximum term allowed and simply do the exact same thing again just for FICO purposes. Effective interest rate of 2% just isn't a big deal to me, nor is having an extra $2500 laying around unless I do something incredibly stupid in the future anyway which should be personally avoidable if I'm not an idiot .
10-17-2012 12:16 PM
Thanks for the feedback. I happened to stop by the local dealership yesterday and talked with the finance person, who advised me about paying the loan halfway down in one shot. He said, much like you did, that while cutting each of the remaining monthly payments in half would require in a refinance, the extra payment could instead be applied towards the nearest half of the monthly payments, essentially paying them in advance, without changing the timing of the farthest half of those payments. My thought was to experiment with trimming the loan so that it would benefit my FICO scores the most and for the longest. It would be just a few points of course as installment loans don't count much, but in particular it could be educational to observe the impact of a principal suddenly dropping to a mere fraction.
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