Take Out Installment Loan for Car Just to Improve FICO Score?

[Anonymous]

I need to buy a car this Spring.  I could pay cash (though, it would leave me with essentially 0 savings), but I wondered about taking out a loan primarily to have that on my credit records (it's the only thing listed as keeping my score down).  There's some chance I might want to buy a house in the next 7 years.

Would this make enough difference to make it worthwhile (i.e., make the interest cost worthwhile)???

Thx in advance.

J

[Sorry, just realized this is the wrong place for this--if a moderator could move it to the right forum, would appreciate it.]

[NRB525]

A better way is to use a Share Secured loan from a credit union. Aliant is popular here, though I have one through my local CU.

You deposit $500 to a savings account, which will earn some small amount of interest.

You open a $500 secured Term Loan with the CU, secured by that savings account.

You get a $500 check from the CU for opening the loan, so you aren't out any money from your checking account.

The term loan has a 60 month payment schedule, so it reports as a Term Loan (stay away from a line of credit, won't report as Term Loan).

You then pay the (in my case) $9 per month for the term loan, and you have a term loan reporting for 5 years.

I just let mine pay down according to the schedule, but other accelerate the loan to a low utilization to try to get extra points.

Either way, a whole lot cheaper than an auto loan, and no INQ for the Share Secured loan.

[Anonymous]

Yup, exactly what NRB said.  If you want a more detailed discussion of why that technique works the way it does, along with step-by-step instructions for Alliant, just read the first 2-3 posts in this thread:

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Adding-an-installment-loan-the-Share-Secu...

The Alliant approach is far better than the auto loan approach, considered solely as a means of boosting one's score.

[newhis]

Related question: the goal is a home in 7 years, for that type of loan, it will make any difference if you have a SSL or auto loan reported? Don't think so but I don't know.

[Anonymous]

Thanks so much for pointing out our OP's timeline, Newhis!

It sounds like our OP might buy a home anywhere between 2 and 7 years from now.  (Unlikely that it is coming up any sooner.)  The key thing is to have an open installment loan that is mostly but not entirely paid off at the time he begins shopping for the home, and then up through closing.  The best solution for our OP is to do the following:

(1) Execute the Share Secure Loan technique now.  That will give him exactly what he wants for the next five years (since he'll be taking out a 60 month loan).

(2) Exceute the technique again in 4.5 years from now (assuming he does not yet own a house).  That will give him an additional five years.

Of course, in 7 years from now, nobody can be certain how the scoring models that lenders use will work.  I am guessing that in a couple years (?) Fannie Mae will permit more recent scoring models than the ancient ones they standardized on a while ago.  That's actually good news for our OP, since the newer models (e.g. FICO 8) are more responsive to the installment loan trick than (for example) the EQ and TU mortage models.

Regardless, the two-step approach indicated above is what anybody should do who has no open installment loans.  Even if our OP could be certain that he wouldn't buy a house until year 6, he should still get an open but mostly paid off SS loan now.

[SouthJamaica]

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@Anonymous wrote:

I need to buy a car this Spring.  I could pay cash (though, it would leave me with essentially 0 savings), but I wondered about taking out a loan primarily to have that on my credit records (it's the only thing listed as keeping my score down).  There's some chance I might want to buy a house in the next 7 years.

Would this make enough difference to make it worthwhile (i.e., make the interest cost worthwhile)???

Thx in advance.

J

[Sorry, just realized this is the wrong place for this--if a moderator could move it to the right forum, would appreciate it.]

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I think it's fine, but only if you pay the loan down fast will it help your scores.

I don't think you need an installment loan to get good scores, but if you want to pick up some points you can do it with the share secured loan method mentioned by NRB & CGID: Join Alliant Credit Union, take out a $500+ savings account, take out a $500 share secured loan secured by the savings account with a 48 or 60 month term, decline or cancel autopay, transfer $455 from the savings account towards the loan balance bringing the balance down to $45.  Once the $45 balance reports the positive effects will be felt. Pay that off slowly over the balance of the term. On the downside, you will be getting a new account, which has a slightly negative effect on your scores. 

[Anonymous]

Thanks everyone for the great advice.  I actually already have accounts set up with Alliant (based on previous advice I got here), so I'm all set up with them to do the "trick" that's been recommended.  Great advice.