Car loan strategy

[nycfico]

In January, I was approved for a car loan for $23,000 through Capital One at a somewhat reasonable rate of 8% (given that my scores were in the mid to high 500's, it wasn't bad).  I'm being extremely cautious about paying each and every month on time and while I understand it typically takes a year or two for this to really help my score, I'm about 6 months in now.

What I would like to do though is pay a lot of it down...it IS costing a fair amount in interest and also would like to improve my DTI ratio.  How does it work, though, if I pay most of it, say $17,000 off?  I don't want to end up paying it off too early and therefore not helping my scores, but would like to achieve my other goals as well.  Could I pay that much off and then refinance the balance across the same time frame and pay just a little each month while getting the benefit of a lengthening TL?  Or would the refinance reset the clock and end up costing me?

I don't think it's the case that I could pay a bunch off and then not make another payment for a long time....

[bettercreditguy1]

Yes, I understand you want to save interest. However, something you need to look at is this. If you pay a bunch on the loan, it really doesn't help your score, because an automobile loan is an installment loan, fixed payment every month.  Yes, it will lower DTI and shorten your term. Additionally, if you take out another loan, then you get hit for an additional or more credit inquiries and another new account ding which generaly keeps your score lower for about a year until the newness wears off. You may even get hit with opening too many new accounts in too short of a time frame.  In my opinion, sometimes, it is just best to pay a little bit of extra interest and not rock the boat if you really are concerned about your overall credit report and score. For the reasons mentioned, you will most likely hurt yourself more in the short term than you will gain. Remember about 65% of your score is payment history. Fico scoring does not care about interest rates or length of terms unless you have several installment/mortage accounts. I can assure you, as I just paid off one of my two automobile loans a year early and I got placed in a new bucket bracket. For my account, I now have a negative reporting of too much unpaid balance on my mortage and too much installment (cc) debt. My cc debt was less than 7% but it was spread out on six cards, two joint with my wife, and four of mine. On my mortage, I owe less than 50% of the original balance borrowed and My score dropped ten points! Re-bucketing is a necessary step sideways when improving your score. Consequently, the higher your score gets, the more the little details matter. Good luck, you sound conservative and goal minded. Keep dreaming and stay focused on reducing your overall debt. With time You Will Improve!

[nycfico]

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@bettercreditguy1 wrote:

Yes, I understand you want to save interest. However, something you need to look at is this. If you pay a bunch on the loan, it really doesn't help your score, because an automobile loan is an installment loan, fixed payment every month.  Yes, it will lower DTI and shorten your term. Additionally, if you take out another loan, then you get hit for an additional or more credit inquiries and another new account ding which generaly keeps your score lower for about a year until the newness wears off. You may even get hit with opening too many new accounts in too short of a time frame.  In my opinion, sometimes, it is just best to pay a little bit of extra interest and not rock the boat if you really are concerned about your overall credit report and score. For the reasons mentioned, you will most likely hurt yourself more in the short term than you will gain. Remember about 65% of your score is payment history. Fico scoring does not care about interest rates or length of terms unless you have several installment/mortage accounts. I can assure you, as I just paid off one of my two automobile loans a year early and I got placed in a new bucket bracket. For my account, I now have a negative reporting of too much unpaid balance on my mortage and too much installment (cc) debt. My cc debt was less than 7% but it was spread out on six cards, two joint with my wife, and four of mine. On my mortage, I owe less than 50% of the original balance borrowed and My score dropped ten points! Re-bucketing is a necessary step sideways when improving your score. Consequently, the higher your score gets, the more the little details matter. Good luck, you sound conservative and goal minded. Keep dreaming and stay focused on reducing your overall debt. With time You Will Improve!

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Thanks...so even if I pay a chunk down and then ask Cap One to keep the length the same but the payment per month very low, that's not going to work because it would be considered a new loan, correct?

[bettercreditguy1]

Yes, correct. Unless when you took out the loan is was like a line of credit, you can not usually change the terms, payments, or details without a new document. Assuming it is an installment auto loan, then your provider can use your advance payments to apply to the principal or future monthly payments. Be certain you are aware of their procedures or your wishes and their actions may have opposite endings.  

[nycfico]

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@bettercreditguy1 wrote:

Yes, correct. Unless when you took out the loan is was like a line of credit, you can not usually change the terms, payments, or details without a new document. Assuming it is an installment auto loan, then your provider can use your advance payments to apply to the principal or future monthly payments. Be certain you are aware of their procedures or your wishes and their actions may have opposite endings.  

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Okay....I'm going to leave well enough alone, then, and keep this as one of the 'cornerstones' of my recovery and not pay it off early.  Might not be able to resist the temptation to throw in an extra $20 or $30 in with each monthly payment just to slow down the finance charges, but still will bring me out to at least four years or so before it's paid off.

Thanks for the advice.

[HiLine]

Here's the thing.

8% on 23k amounts to almost 2k a year in interest.

How much of a return are you getting from your money? If you're not investing it, then the loan is costing you about 2k per year. There are ways to improve your credit without costing that much.

If you're investing your money and think you can make decent return, then don't worry about what I said.

[bettercreditguy1]

Here is another thought. As stated by the prior poster, IF you can get a larger return on your money, then invest it and continue to pay your loan as required. The flip side is this: If you have enough emergency savings/reserves to meet your future needs, then you can prepay. Paying the loan off early at any interest rate will save you out of pocket expense down the road. You will need to make the judgement call based on your risk, financial status, other bills/commitments, and posible unplanned expenses in the future.

Good luck!

[Anonymous]

Frankly, I don't think a better credit score is worth 8% in interest on that kind of amount. If I were you, I would pay off that loan pronto, and get a secured credit card instead. These cards require a deposit and often have an annual fee, but it'll certainly work out to be much cheaper than having a car loan (assuming you pay it off in full each month). Using and dutifully paying off the card will raise your credit score, plus if you don't have one right now you'll benefit from "credit mix" points for having experience with both installment and revolving credit. Once you get into the realm of average credit you can switch to a card with no annual fee and keep building credit that way.

[nycfico]

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@HiLine wrote:
Here's the thing.

8% on 23k amounts to almost 2k a year in interest.

How much of a return are you getting from your money? If you're not investing it, then the loan is costing you about 2k per year. There are ways to improve your credit without costing that much.

If you're investing your money and think you can make decent return, then don't worry about what I said.

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Yeah, and that's the dilemma.  

Put another way...if somebody told you that you could have a risk free, and tax free, return of 8%, you would invest every possible dollar you could into that investment.  Net of taxes, that is what the stock market returns long term and this is with no risk!

But the FICO scores range between 605 and 630 right now and I need every possible method to get them up.  I am on the right track, but still have an IRS tax lien that I'm paying $1425 a month towards.  Most of my credit card debt, which once totaled $180k (really) is gone now either through settlements or paid off.

I have no savings (because of my paying down all my debts) but make a good living at $175K a year at least.

[nycfico]

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@Anonymous wrote:
Frankly, I don't think a better credit score is worth 8% in interest on that kind of amount. If I were you, I would pay off that loan pronto, and get a secured credit card instead. These cards require a deposit and often have an annual fee, but it'll certainly work out to be much cheaper than having a car loan (assuming you pay it off in full each month). Using and dutifully paying off the card will raise your credit score, plus if you don't have one right now you'll benefit from "credit mix" points for having experience with both installment and revolving credit. Once you get into the realm of average credit you can switch to a card with no annual fee and keep building credit that way.

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I do have five cards now, all with pretty low limits ranging from $300 to $800 per and they're all between 6 months and two years old with mostly clean TL's (perfectly clean for 18 months now.  But if I pay the car loan off, my mix will be gone and I won't get any benefit from having it open and paid cleanly.