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Confused about Auto or Installment Loan Payments

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JJF
Contributor

Confused about Auto or Installment Loan Payments

Whenever possible, my loans have always been setup with a monthly automatic payment drafted from my checking account.  On a few occaisions I would send in an additional principle payment in order to help pay the loan off early.  When I did this the bank, credit union or finance company would "skip" the next payment due and not automatically draft the payment.  I have also made the opposite mistake and sent my credit card payment in to early and it was posted before the statement closed causing me to miss a payment and be 30 days late.  

 

Clearly, there are different rules for installment loans and revolving credit.  My problem is I don't understand the best way to pay off an installment loan in order to have the maximum benefit on your credit history and FICO score.

 

Based on other messages and their replies, the following may be true:

  1. A new loan usually requires a hard pull inquiry, creates a new account, and drops AAoA.  Installment loans for 12 months or less are a really bad idea.
  2. Optimal payment history is 24 months (because this is what is shown on your credit report.  I think whoever made this assumption was refering to the 24 month history shown on a 3 burea report.)
  3. In order to future due payments, it is better to send seperate checks for each payment/month.
  4. Any month were you prepaid the payment, make a $1 payment in order to update the date of last activity.
  5. Worst negative hits for utilization are 70% or greater and 50% or greater.
  6. Never pay an installment loan off early!

My credit union will structure the loan with whatever duration and amount that I request.

I want $4,000 and hope to repay the bulk of the loan in 12 to 18 months.

 

Do I borrow $6,000, then wait 30 days and repay $2,000 in order to drop the utilization below 70%?

Do I select a 48 duration, never quite paying it off so I only pay $1/month for the last 24 to 30 months?

 

The primary purpose for this loan is to create a credit mix on my EQ and EX credit reports.

 

Your comments and suggestions are appreciated. 

 

 

 

 

Message 1 of 7
6 REPLIES 6
moondog7324
Frequent Contributor

Re: Confused about Auto or Installment Loan Payments

MANAGE YOUR DEBT, NOT YOUR FICO.

 

 

If you create good long term habits your scores will improve. Paying a dollar a month for 30 months is the most ridiculous thing I've read in this forum.

Message 2 of 7
JJF
Contributor

Re: Confused about Auto or Installment Loan Payments


@moondog7324 wrote:

Paying a dollar a month for 30 months is the most ridiculous thing I've read in this forum.


I recognized that these forums are sponsored by the people that make big bucks every time someone gets a FICO score. Years ago I invested a significant portion of my life in online gaming paying a monthly subscription fee for 6 different accounts.  While I choose not to chase my FICO score, I will admit that at times these forums have a gaming like feel to them.  My toon did this and got rewarded with an increase of 3 hit points, err FICO points,  My toon did that and got walloped by the big bad monster for 50 hit points, err FICO points.

 

While I choose not to play the game, I still want to learn and understand as much as possible about the rules to the game. 

 

The longer an installment loan remains open with good standing, the longer it will remain on your credit report.

I admit paying $1/month seems pretty dumb to me, but with online BillPay allowing automatic recurring payments, it appears easy to do.

Message 3 of 7
moondog7324
Frequent Contributor

Re: Confused about Auto or Installment Loan Payments

I played the game too, the FICO score game, it gets addicting- applying for accounts, new credit lines, pulling the credit reports daily etc. etc. One day I just decided to kill all my junks (eventhough it dropped my scores)- kept all the good cards and never get to the point of being in debt over cards. I use then quite alot, but never pay interest. I set up my auto loan payment by automatic draft paying bi-weekly. The bi-weekly payments save me interest and time on the loan.  I know my scores are rising, but I don't obsess over it anymore.
Message Edited by moondog7324 on 04-06-2009 01:08 PM
Message 4 of 7
Anonymous
Not applicable

Re: Confused about Auto or Installment Loan Payments

Hey JJF -

 

If I understand your question, you are trying to determine how to get the maximum credit/FICO benefits of an auto installment loan.

 

First, let me address your observations on early and extra payments on installment and revolving accounts.  Some lenders will apply any additional amount you pay as an "early payment" and then indicate "nothing due" on the next statement, or possibly a reduced amount due if your extra payment did not cover an entire payment.  This happens in BOTH revolving and installment credit, depending on the lender.  Some lenders want to encourage payouts over the term, thus increasing the return to them.  Others do not and any payment made in a statement period will be applied to the balance and you will still have a minimum or installment payment due on the next billing cycle.  Be sure you know what the policy of the lender is so that you don't end up with a late or with an extra principle payment applied as an early installment.

 

Now for your "tweaking" questions.  I agree that it is best to make good financial decisions that your credit will positively affect.  However, if you have a hobby or like to tweak, there is nothing wrong with that and I don't think that you should be rediculed for that.

 

1.  Yes, new credit almost always results in a hard inquiry.  This may be on one or more CRA's.  Yes, your AAoA will be affected by the new account as will your debt ratios.

 

I don't necessarily agree that installments less than 12 months are bad.  A lender may prefer you to pay out longer in order to maximize interest received, but you don't want to maximize interest paid.  That is counter productive to your financial health.  If you have the finances to pay off your loan in 11 months, I suggest doing so and owning your vehicle.

 

With that said, yes, having an aged account with more history may benefit your credit when reviewed by other lenders down the road.  24 months is a good period of aging on an account.  Paying off a loan early will actually be a good credit reference.  A 5 year loan paid off in 3 years is a good sign of income and low debt to to income.

 

2.  When you mail in an extra payment, be sure to mark the check and attach a note/letter that states the payment is to be applied to principle.  If for some reason your lender skips an auto draft due to the extra payment, drop the auto draft and set up Bill Pay through your bank.  Keep track of your payments and make sure it has been applied correctly so that interest reduces.

 

3.  I don't know that the $1 deal really helps.  The age of your account continues to age whether it is paid off or being paid.  Like I said, if you pay off in 2-3 years and it is early.....GREAT!!! Smiley Happy  Use your CC's for month to month use, small balances and payments.  Only buy a car or have a car note if you need a car and don't have the money to pay for it....or the APR is so rediculously low that not borrowing is counter productive (like the manufacturer 0% APR's).

 

4.  Your best installment ratio kicks in at 65% of original balance.  This is the average paydown of "FICO high achievers" and FICO is a bucketing system, so averages are important.  After hitting 65%, just reducing debt is the factor.  The lower the debt, the better the ratio.  I don't think there really is a magic threshold after the 65%, just better debt ratio in general.

 

5.  ALWAYS pay off an installment loan early (unless it is 0% APR).  There is no value in extending debt, except the value paid to the lender in interest.

 

6.  If you wanted to maximize your FICO as much as possible, you would pay your down payment after the loan is secured.  You would not have to wait 30 days necessarily.  However, borrowing the full amount and then making your down toward the loan will mean your actual payments are higher because payments are calculated from original loan amount and term.

 

7.  Select the term that gives you the best rate and most flexibility.  For example:  If you can get 3.99% for 36 or 60 month terms....take the 60 month term, but pay it like a 36 month.  The value of this is that you will pay it off in 36 months, but if a financial problem hits, you have the ability to make a lower payment without hurting your credit.

 

Hope this helps Smiley Happy

Message 5 of 7
JJF
Contributor

Re: Confused about Auto or Installment Loan Payments

txjohn thanks for the detailed and informative reply.
Message 6 of 7
Anonymous
Not applicable

Re: Confused about Auto or Installment Loan Payments

Your very welcome.  Good luck on your efforts Smiley Happy
Message 7 of 7
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