That's GREAT news! Exactly what I was hoping for.
Thanks, athensguy
Message Edited by Phoenix-rising on 08-25-2008 11:43 AM
Phoenix-rising wrote:DH & I just got a new auto loan at 8% interest. I'm considering refinancing some time in the future with the local credit union to get a better interest rate.Before we do that, I was wondering whether refinancing an auto loan is looked at negatively by FICO. I don't have a clue.
There is something called the ratio of outstanding balance to original loan amount for installment loans. It is similar in concept to "utilization" for revolving tradelines. Frequently an auto loan with more than 80% of the original amount still owed will negatively impact the FICO score. I personally will never pay a down payment for a car loan ever again for that reason. Any future purchases will be no money down and at least 20% of the original loan repaid the first month the loan is in force.
When you refinance your loan, if the outstanding balance is substantially less than 80% of the original amount, you would probably see a score drop at that time. You could save up some money so that you would have 20% extra to pay towards the new loan should you be able to get a lower rate loan in the future. If you decide not to refi in the future, you could use the extra money to pay down your existing loan and lower the "utilization" even further at that time.
One more thing worth considering. Paid off installment loans of less than two years duration do not help your FICO (Installment weighted) score.
The reason is as follows. If a person has no history of repaying installment loans,
how does FICO know the odds that the consumer will repay his first auto loan?
If a person borrowed $1000 (24 month installment loan ) and returned it to pay off the loan in the following month that certainly doesn't provide evidence that he can handle installment loans responsibly.
Would on time payments for three months and then paid off be a better indication? Not really. Six months? One year?
The correct answer seems to be Two Years.
It seems that having two paid installment loans with at least two years of on time payments each is the goal FICOwise. Subsequent installment loans (possibly including mortgages) should then be (somewhat) easier to obtain at favorable rates since (installment) FICO would be higher. Furthermore those subsequent loans should negatively impact FICO less since there is a robust history of installment loan repayment.
If a person wants to maximize FICO, he should consider carefully the downside to paying off installment loans early if he doesn't have a 2x2 prior history.
If you really want to maximize FICO, and you don't have any other installment loan history, I would save as much extra money as possible in an interest bearing account while paying down the auto loan on time for two years. I would then refi and use the extra money to pay down the new loan in the first month and continue paying the new loan for at least two years before paying it off.
Of course with your stated FICO scores I would just do whatever saved me the most money in interest and not be concerned with what happens to the scores. But you did ask a specific question and I gave you a specific answer. Then again if you were going for a mortgage in three or four years and don't have any installment history right now, my plan might just save you some money in the long run.
Message Edited by CreditAble on 08-25-2008 02:08 PM
Ok, question. I have two current Installment Loans, one has been active for over two years, and one (ATV - Motorcycle) has been active since March of this year. I plan to pay off the new loan in April of this upcoming year, my other installment will run its full-term (until Sep 2010). When I purchased my motorcycle, I was told that as long as you have it on your credit for 13+ months it will take the full effect on my credit score. It kinda makes sense...to me? Does this sound right to anyone else? If no one knows for sure, I will most likely pay it off and see what it does to my score. Then I will report.
Starting Scores: Low 500's 2/27/08
AyalaZero wrote:Ok, question. I have two current Installment Loans, one has been active for over two years, and one (ATV - Motorcycle) has been active since March of this year. I plan to pay off the new loan in April of this upcoming year, my other installment will run its full-term (until Sep 2010). When I purchased my motorcycle, I was told that as long as you have it on your credit for 13+ months it will take the full effect on my credit score. It kinda makes sense...to me? Does this sound right to anyone else?By the numbers.#1. With no installment loan history on a credit report there are points deducted by Fico.#2. With only one installment loan of two years minimum duration there are still points being deducted but possibly fewer points are deducted.#3. With one installment loan of two years minimum, and one installment with 13 months duration, there are still some points being deducted.#4. Two installment loans x 24 months...no points at all deducted for insufficient installment history.At least that is the way I understand it and the best way I can explain it.I have never heard anything about 13 months being significant. Thirteen months might be significant to a person who sold you the loan if he receives a commission based upon the amount of interest paid in the first year.
