Installment loan to pay off or not???? Help....

[chucky1234]

Hello Everyone,

I have two installments loans on my credit reports. One with a balance of $1,100 and another with $25k. Both are auto loans.

I am wanting to pay off the small balance installment loan which has excellent payment history of 5yrs. Should I pay off early or not? Will it affect my fico scores?

[Anonymous]

Paying your loans down so their remaining balance is LESS than 8.9% of the original balance boosts your scores maximum power mode.

Paying all your loans down to $0 with no other loans reporting can LOWER your FICO score.

You always want at least one installment loan open, with a balance between $1 and 8.9% of the original balance borrowed.

My opinion is that you will probably get a better FICO boost by paying down the loan that has the highest utilization, bringing down your overall installment utilization portion.  But if you're in-between breakpoints, it may have zero effect, too.

[Anonymous]

Paying off the smaller balance loan will hurt your FICO 8 score.  I am basing that on the fact that they are auto loans, and therefore I am guessing each loan was for a lot of money initially.  Maybe 30k say.

The scoring factor involved here is something we might call "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

Thus if you pay off the low balance loan, it will cause your installment utilization to go up, because the only open loan you have left will be the car loan on which you owe a lot.  Remember, closed accounts are ignored by this calculation.

So the bottom line is, if your primary concern is your score (and it doesn't have to be) try to keep both loans open as long as you can and put any extra cash toward paying down the bigger of the two balances.

You probably will be forced to pay off the smaller balance loan at some point, in which case you will take a score hit, but it will go away as you pay the remaining loan down.

[chucky1234]

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@Anonymous wrote:

Paying off the smaller balance loan will hurt your FICO 8 score.  I am basing that on the fact that they are auto loans, and therefore I am guessing each loan was for a lot of money initially.  Maybe 30k say.

The scoring factor involved here is something we might call "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

Thus if you pay off the low balance loan, it will cause your installment utilization to go up, because the only open loan you have left will be the car loan on which you owe a lot.  Remember, closed accounts are ignored by this calculation.

So the bottom line is, if your primary concern is your score (and it doesn't have to be) try to keep both loans open as long as you can and put any extra cash toward paying down the bigger of the two balances.

You probably will be forced to pay off the smaller balance loan at some point, in which case you will take a score hit, but it will go away as you pay the remaining loan down.

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A quick question do you think paying off my auto loan early affect my mortgage scores? I do plan to purchasing a home in 4 months.

[Anonymous]

We used to have a clear answer, which was that it would not affect your TU and EQ scores and would hurt your EX score.  SouthJ did some testing which seemed to suggest something different, however.

What are your three mortgage scores now?  And do you have all of your cards at a $0 balance, with the remaining card reporting a small positive balance?  That is one of the best things you can do to prep for your mortgage.

[SouthJamaica]

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@chucky1234 wrote:

Hello Everyone,

I have two installments loans on my credit reports. One with a balance of $1,100 and another with $25k. Both are auto loans.

I am wanting to pay off the small balance installment loan which has excellent payment history of 5yrs. Should I pay off early or not? Will it affect my fico scores?

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It will affect your FICO 8 score, & might have slight effect on other scores, because the overall installment utilization will no longer be including the smaller loan in the denominator.

[SouthJamaica]

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@chucky1234 wrote:

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@Anonymous wrote:

Paying off the smaller balance loan will hurt your FICO 8 score.  I am basing that on the fact that they are auto loans, and therefore I am guessing each loan was for a lot of money initially.  Maybe 30k say.

The scoring factor involved here is something we might call "installment utilization" -- for a lack of a better phrase.  It is a lot like credit card utilization, but it applies solely to installment debt, rather than revolving debt.

That factor measures how much of your existing open installment debt you have paid off.  Here's how that factor works.  You take all your current open installment loans (only the open ones -- ignoring all closed loans).  You then add up all the amount you currently owe.  Call that CURRENT.  Then you add up the amounts that the loans were originally for.  Call that ORIGINAL.  Then you divide CURRENT by ORIGINAL and you get a percent.  (Do you see how that is a lot like the credit card utilization calculation?)  When that % is close to 100, or if you don't have any open loans at all, then you get no FICO points from this factor.  But when the % is very low (say 1-9%) then you get most or all of the points from this factor.

Thus if you pay off the low balance loan, it will cause your installment utilization to go up, because the only open loan you have left will be the car loan on which you owe a lot.  Remember, closed accounts are ignored by this calculation.

So the bottom line is, if your primary concern is your score (and it doesn't have to be) try to keep both loans open as long as you can and put any extra cash toward paying down the bigger of the two balances.

You probably will be forced to pay off the smaller balance loan at some point, in which case you will take a score hit, but it will go away as you pay the remaining loan down.

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A quick question do you think paying off my auto loan early affect my mortgage scores? I do plan to purchasing a home in 4 months.

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Yes it would have some negative effect on your mortgage scores, but it's debatable which scores & how much.

Revelate was of the opinion that TU FICO 4 wouldn't budge and EX FICO 2 would budge slightly; my experience was the exact opposite. TU did react to installment utilization, but not as severely as FICO 8 did.  I never got to test EQ because the change never reported there.

[Anonymous]

Hey Chucky.  Circle back with us and tell us what your three mortgage scores are, as well as how your CC balances are reporting.

That's a better approach than trying to speculate what will happen if you pay off that loan, since the current evidence is mixed. 

Have you scoped out what your DTI would be with and without that monthly loan payment?  Another thing worth doing is to figure out the life of the loan, based on the monthly payment and the current balance.  If you will be forced to pay it off before you close on a house, simply due to the schedule of payments, then this whole question is moot -- you simply have to pay it off and that's all there is to say about it.

[jamie123]

As long as you will still have one open installment loan, paying off the smaller one won't affect your scores as much if even at all. The more important aspect is the positive effect that it will have on your DTI. (Debt to Income Ratio) It will make qualifying for a mortgage that much easier.

[Anonymous]

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@jamie123 wrote:

As long as you will still have one open installment loan, paying off the smaller one won't affect your scores as much if even at all. The more important aspect is the positive effect that it will have on your DTI. (Debt to Income Ratio) It will make qualifying for a mortgage that much easier.

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Hi Jamie.  That's more than we can know.  What we do know is that both are auto loans.  That means each was for a lot of money.  One is almost entirely paid off -- the other the OP likely owes most of the amount still.  So the installment utilization will probably go from 50% to something over 90%.  That's guesswork but its reasonable -- we can make far better guesses if the OP tells us the original amount of each loan.

We also don't know that the OP has borderline DTI.  That's possible (and it definitely occurred to me as well) but we don't know that which is why I asked the OP about it.

We also don't know what the OP's CC balances are.  Nor do we know what the OP's current mortgage scores are.

Right now it's hard to advise the OP well without more information.  Hopefully the OP will circle back with that.