topic Re: What payment is better? in General Credit Topics

What payment is better?

Anonymous — Mon, 23 Jun 2008 14:15:18 GMT

Which type of payment would be more beneficial for my car loan a interest only payment or principal only payment. thank in advance to all those who answer

Re: What payment is better?

Anonymous — Mon, 23 Jun 2008 14:26:18 GMT

I don't understand the question.

If you want to pay down the loan more quickly, you need to pay off principal.

Re: What payment is better?

Anonymous — Mon, 23 Jun 2008 14:41:26 GMT

@Anonymous wrote:
I don't understand the question.
If you want to pay down the loan more quickly, you need to pay off principal.

just wanted to know because somebody told me that it be better if i pay the interest first ahead of time i really dont know what the person meant really

Re: What payment is better?

marty56 — Mon, 23 Jun 2008 16:15:31 GMT

For my auto loan (with a CU) any extra money goes to the principle. This will save you money from the interest. There is no FICO advantage to paying extra money on a auto loan.

Re: What payment is better?

Lel — Mon, 23 Jun 2008 17:10:51 GMT

@Anonymous wrote:
Which type of payment would be more beneficial for my car loan a interest only payment or principal only payment. thank in advance to all those who answer

I don't think it's possible to pay only principal, unless you make an extra "principal only" payment in addition to your regular monthly payment.

Because your loan balance is high at the beginning of a loan, you will already pay proportionally more interest compared to principal. As your principal balance goes down, the amount of interest accumulated each month goes down. Thus, a larger portion of your monthly payment goes to pay down principal.

You are always responsible for the accumulated interest (also known as "finance charges") each month, unless this is some sort of weird negative amortization car loan (which I'm pretty sure doesn't exist).

Re: What payment is better?

Anonymous — Mon, 23 Jun 2008 19:28:06 GMT

marty56

I tend to disagree with your statement that “There is no FICO advantage to paying extra money on an auto loan”.

My understand is that if you purchase an auto and financed $10,000.00 this amount will show on your credit report as a “High Balance” in the Installment category. Let’s say you paid $2,000.00 of this amount leaving you current balance at $8,000.00. The credit bureau will show that this installment account at 80% utilization. The more you pay the less your utilization will be.

The credit bureau will use these figures to show your overall debt to credit ratio. They will show all open accounts: Mortgage, Installment, Revolving, and Other accounts and add the total of all balances and credit limits to show your overall percentages of your debt to credit ratio which is used to obtain your credit score.

Please, anyone, correct me if I am incorrect.

As a side bar, never apply for an interest only loan on any item.

PS same theory is used with a mortgage

Message Edited by Cleanmachine on 06-23-2008 12:28 PM

Re: What payment is better?

Anonymous — Mon, 23 Jun 2008 19:56:01 GMT

Cleanmachine wrote:

marty56

I tend to disagree with your statement that “There is no FICO advantage to paying extra money on an auto loan”.

My understand is that if you purchase an auto and financed $10,000.00 this amount will show on your credit report as a “High Balance” in the Installment category. Let’s say you paid $2,000.00 of this amount leaving you current balance at $8,000.00. The credit bureau will show that this installment account at 80% utilization. The more you pay the less your utilization will be.

The credit bureau will use these figures to show your overall debt to credit ratio. They will show all open accounts: Mortgage, Installment, Revolving, and Other accounts and add the total of all balances and credit limits to show your overall percentages of your debt to credit ratio which is used to obtain your credit score.

Please, anyone, correct me if I am incorrect.

As a side bar, never apply for an interest only loan on any item.

That is not quite how it works. There is no "overall" utilization calculation for FICO purposes. Revolving and installment utilization both count, but they are calculated separately. At no time are the two figures combined into one.

Revolving utilization counts for a far, far greater part of one's score than does installment utilization, so much so that installment utilization is hardly even worth worrying about for FICO scoring purposes. So, while you are correct that 100% or 80% utilization on a single installment loan will affect FICO, the effect will really be miniscule, and will probably not even be noticeable among all the other "noise" that affects a score from day to day.

Message Edited by cheddar on 06-23-2008 12:56 PM

Re: What payment is better?

Lel — Mon, 23 Jun 2008 19:52:04 GMT

@Anonymous wrote:
marty56
I tend to disagree with your statement that “There is no FICO advantage to paying extra money on an auto loan”.
My understand is that if you purchase an auto and financed $10,000.00 this amount will show on your credit report as a “High Balance” in the Installment category. Let’s say you paid $2,000.00 of this amount leaving you current balance at $8,000.00. The credit bureau will show that this installment account at 80% utilization. The more you pay the less your utilization will be.
The credit bureau will use these figures to show your overall debt to credit ratio. They will show all open accounts: Mortgage, Installment, Revolving, and Other accounts and add the total of all balances and credit limits to show your overall percentages of your debt to credit ratio which is used to obtain your credit score.
Please, anyone, correct me if I am incorrect.
As a side bar, never apply for an interest only loan on any item.
PS same theory is used with a mortgage

Message Edited by Cleanmachine on 06-23-2008 12:28 PM

The most important things about installment loans are 1) that you have them, as it creates a good "mix of credit" profile, and 2) that you pay them on time. The "utilization" of an installment loan has, as cheddar already mention, very little effect on credit scores. That's a good thing, too, because homeowners with new mortgages would otherwise tank their scores and would have difficulty buying a new car or refinancing their loans.

Re: What payment is better?

Anonymous — Mon, 23 Jun 2008 21:32:13 GMT

cheddar

I will take your word for it.

I agree that the account utilization described above are calculated separately but differ with you when say “at no time are the two figures combined”. Each open account has its own proprietary category. They are all combined, along with other factors in your credit report to obtain a credit score.

Nothing personal, I just have a different outlook based on the information that I was provided.

Many thanks for your insight.

Re: What payment is better?

Anonymous — Tue, 24 Jun 2008 00:06:20 GMT

Cleanmachine wrote:

cheddar

I will take your word for it.

I agree that the account utilization described above are calculated separately but differ with you when say “at no time are the two figures combined”. Each open account has its own proprietary category. They are all combined, along with other factors in your credit report to obtain a credit score.

Nothing personal, I just have a different outlook based on the information that I was provided.

Many thanks for your insight.

Well ,yes, they both contribute to one's score. So I suppose in that sense they are "combined" to help calculate a score. They are not, however, combined into some type of all-encompassing utilization figure that contributes to one's score in and of itself. Each type of utilization counts separately, and each type is weighted differently.