Establishing your first installment payments

[Anonymous]

My son is 19 and a college freshman. He has managed his own checking and savings account for 2+ years. He has managed his own credit card ($1500 limit) for over a year. He has worked at the same part time job for 2 1/2 years. His current TU score is 711 although he has not installment history. He is going to purchase his first car in the next year and would like to purchase the car in his name.

Would it be a good idea for him to request a loan from our credit union, put the money in savings and make the monthly payments from this savings account? I know he will have to pay the interest in addition to the orginal loan amount so there would be out of pocket expense for this plan although he would create an installment history. If he decided to do this, how much would be the correct amount to borrow? Would $1,000 be enough to prove he knows how to make installment payments? What time frame should he repay the money? Is 12 months long enough to establish this type of credit history?

Thank you for any suggestions.

[llecs]

Per FICO scoring, installment loans are such a small part of scoring. If his goal is to improve his score, a loan isn't the best way to go. If he only has one CC, then another reporting would likely help his score.

Also, lenders will look at his DTI (which has no part in FICO scoring). If he opens a loan, then the loan payment would increase his DTI and because his job is PT, it would likely decrease his chances of getting a car loan.

Otherwise, it is a waiting game. He can easily hit the mid-700s with what he has. At app time, make sure the balance on his CC is close to $0 as possible, without letting it report $0. If he does add a 2nd CC, then get one of the two to report $0 at app time.

[Anonymous]

Thank you for the info. I had not thought about the DTI when considering this issue. When I talked to the car dealership about his qualifying for the loan on his own, they told me if he does not have any experience with an installment loan that he will not be approved. I don't know if this is universal but I was just trying to figure out a way to get him experience with an installment loan.

[Jazzzy]

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@Anonymous wrote:

Thank you for the info. I had not thought about the DTI when considering this issue. When I talked to the car dealership about his qualifying for the loan on his own, they told me if he does not have any experience with an installment loan that he will not be approved. I don't know if this is universal but I was just trying to figure out a way to get him experience with an installment loan.

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Does your son bank at the credit union now? That might be a good step for him to take.

I would ask the credit union about a future car loan and what they would like to see for credit experience and scores needed for approval. The car dealership may have been talking about auto company financing...they likely don't know what your credit union might do.

I'd get a 2nd opinion before you have him spend needless money on interest that he wouldn't have to pay.

[Anonymous]

Unless your son has a monthly gross income of over $1,800-provable with pay stubs, he will in all honest not be able to secure financing in his name only on a vehicle.

many young people have a very Nice score for no other reason then they have not had credit lines long enough to "mess them up."

A 21 y/o with a low 700s score is pretty standard. (750 and above, Ok banks notice that) 

[Anonymous]

Thank you for all the responses. I am going to have my son go talk to the credit union. This visit with the loan officer will be a good experience for him to understand what is required for a car loan. I will let you know what he finds out.

Again, thank you for all the information and suggestions.