Paying off car loan in May and worried about score drop

[Anonymous]

Asking for help from all of you that know! I'm confused. 

I will pay off my 5 year car loan in May and I'm worried that my score will drop because I will not have any kind of installment loan. I would like to go without a car payment for at least 7 months, if possible. Should I get a personal loan? I've read about the SSL loan and am totally confused by it. What if I just got a small personal loan and paid on schedule? Would that work? I'm a member of NFCU and Penfed. 

Thanks for any help! I'm really worried because I would like purchase a house at the end of the year and don't want my score dropping!

[HeavenOhio]

The lack of an open installment loan doesn't affect the scores used for mortgages anywhere near as much as it does FICO 8.

The other thing to consider is that a new account will decrease your AoYA (age of youngest account) to zero. And your AAoA (average age of accounts) will decrease. Ideally, when your apply for a mortgage, your youngest account should be a year old as there's a nice point gain for that.

At some point, probably when the auto loan reports as closed, I think you should grab your myFICO 3B report and scores. That way, you'll know of your mortgage scores will need any "help."

[Anonymous]

Yes, I definitely don't need another HP or drop in AAoA. I guess it's the lesser of 2 evils. Nice to know it doesn't hurt the mortgage score as much when you don't have an installment loan. 

I will grab my scores once the car loan is paid off. Hope I don't have a heart attack! I've worked so hard to rebuild my credit and don't want to mess it up!

Thanks so much for your help!

[Trudy]

Not sure of the terminology but  there are auto loans that push your due date if you pay more.  I chose a 7 year loan to secure a lower monthly payment (just in case) knowing I would pay it off sooner because I planned and have paid more than the monthly payment which my loan terms has allowed me to push "next payment date" without penalty other than interest which I know some consider a penalty.  To date I'm ahead of schedule and technically don't owe another payment until 4/2021 (2+ years ahead).  So I will continue to pay more until it's less than 8.9% and milk it as long as I need to to keep that auto loan active.  My interest rate is 1.49% so letting interest hit is not a big deal in my case and I think serves me better to keep that installment loan active for now.  I'm already paying less interest due to the outstanding balance which is less than it is scheduled to be at this time due to th over/extra payments.  So, if your interest rate is not too high on your auto loan, than unless a SSL has a better interest rate compared to the original loan amount and remaining balance than that may be an option.  There may be other variables in play and I'm sure someone will chime in.  But for me, this will serve as my "SSL" in retaining that installment loan, although I do have a MTG which may mean I don't need to do that.  Although I purchased a used car to have a 2nd car in 2014 on a 4 year loan but paid it off in a year. (Sold the primary paid car and bought another in l2016) I can't recall the hit I took but I did lose some points when I paid that off while having a MTG.   I'll figure that out once I get below 8.9%. in the next few months.

[SouthJamaica]

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@Anonymous wrote:

Asking for help from all of you that know! I'm confused. 

I will pay off my 5 year car loan in May and I'm worried that my score will drop because I will not have any kind of installment loan. I would like to go without a car payment for at least 7 months, if possible. Should I get a personal loan? I've read about the SSL loan and am totally confused by it. What if I just got a small personal loan and paid on schedule? Would that work? I'm a member of NFCU and Penfed. 

Thanks for any help! I'm really worried because I would like purchase a house at the end of the year and don't want my score dropping!

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Since you're in NFCU you're in luck.

1. Deposit $3050 in savings.

2. Take out a "share secured loan" for $3025 secured by the savings account -- no hard pull -- with a 60 month payout.

3. When you get the loan $3025 will be deposited in your savings account.

4. Then transfer $2760 from the savings account to the loan, bringing the loan balance down to $265.

5. Then pay the loan very slowly over the next 60 months.

[HeavenOhio]

Great info from SJ. NFCU is the best source available if a replacement loan is needed.

The trick will be to decide if the loan is desirable. @Anonymous will need to weigh the potential points gained from the loan vs. missing out on the AoYA benefit.

That's where pulling scores comes in. If they're in good shape, I'd leave well enough alone and garden. If not, the next step would be to post here before making any decision.

@Anonymous, how old is your youngest account?

[Anonymous]

OP, when did you last open an account?  The answer to this gives us the value of your AoYA.  If was more than a few months ago, taking the AoYA drop to 0 months and having it still be < 12 months at the time you go for a mortgage later this year would not be a smart move.  On your mortgage scores having AoYA sitting at > 12 months is "worth" more than having an open installment loan with your AoYA being < 12 months. 

[Anonymous]

Great advice from both SouthJ and BBS -- even though it might seem like they are coming at this from different angles.

The overriding question always in guiding a person on credit decisions is understanding what his credit and financial needs are over the next two years.  And within that top (somewhat general) priority is the very specific question Are you trying to buy a house and if so when.

If there is any way you can have your youngest account (loan or card, closed or open) to be 13 months old or more at the time of mortgage pre-approval, that is something you totally need to work toward.  The benefit there would be much higher for a mortgage app than would the SSL technique.

There are also other things even more important that you can do to improve your mortgage scores.  We can help you with that.  To help you best. we'd need to know....

*  Have you recently pulled all three of your reports?  (Reports are different from scores.)  If you have not, we can help you do that.

*  How many open cards do you have on your reports?  Especially helpful would be for us to see a list of them with their balances and credit limits, like this:

Card 1.  Balance = ____   Limit = ____

Card 2.  Balance = ____   Limit = ____

Card 3.  Balance = ____   Limit = ____

etc.

By "card" we'd be including charge cards, credit cards, and any other revolving account (e.g. a "line of credit").

*  Go over your reports and look very carefully to see if there are any "derogs" or "negatives."  These are things like lates, collections, chargeoffs, liens, judgments, public records, or bankruptcy.  Even a 30-day late from six years ago could have a big effect on your mortgage score, so knowing what these are is important.  Review your reports line by line and tell us if you have any derogs.