car loan payment and credit score

Status
Not open for further replies.
T

taurus_sable

Joined
Feb 4, 2010
Messages
82
Location
Northeast
I have a 60month car loan of 30k at 4% APR. I want to pay as little interest as possible because the high APR while keeping the loan account open to benefit my credit score.

Is it a good idea to do this: Pay 25k in the first month and pay the 5k in the following 59 month?
 
IIRC the only way you'll pay less interest is to pay the loan off ahead of time. Please correct me if I'm wrong. Paying an auto loan off early is good for your credit.
 
This loan is going to cost you about $3,100 in interest. That seems like a big premium to pay for what? You don't need a car loan to have strong credit.

If you can pay it off quickly I would.
 
Originally Posted By: taurus_sable
I have a 60month car loan of 30k at 4% APR. I want to pay as little interest as possible because the high APR while keeping the loan account open to benefit my credit score.

Is it a good idea to do this: Pay 25k in the first month and pay the 5k in the following 59 month?



Yes that works to reduce interest.

What is the max you can pay while keeping the loan open for 60 months?

Do they allow what you're intending to do? Ie overpayment of principal?
 
Originally Posted By: demarpaint
IIRC the only way you'll pay less interest is to pay the loan off ahead of time.

And that's basically what he said he'll be doing. You only pay interest on the amount of the loan outstanding, so the less you have outstanding, the less interest accrues.

Quote:
Paying an auto loan off early is good for your credit.

What's good for your credit is your lending ability (line of credit extended) vs. actual amount remaining to be paid off. For a high credit score, you want to have a high line of credit, but only utilize a small portion of it. So I think the OP has the right idea to to pay most of it off, but leave some still remaining.

Once the loan is paid off, your line of credit with that institution disappears and therefore it does not help improve your credit score anymore.
 
Get a shorter term (like 24, 36, or 48 months) and the rate goes down, thereby dropping the total interest.

Also, try a credit union. Their rates are usually better than the big banks. My CU had 1.49% for 60 months for the last two years. That's basically free money since the APR is lower than the inflation rate.
 
Originally Posted By: demarpaint
IIRC the only way you'll pay less interest is to pay the loan off ahead of time. Please correct me if I'm wrong. Paying an auto loan off early is good for your credit.


I suppose the answer to that is it depends on the terms and how interest is compounded. Our loan is a daily calculation, I can pay our loan before the due date, advance the next payment and pay slightly lower interest since there will be less principal on a daily basis. Said slightly differently, I could make a payment today and a payment tomorrow, both would count as a payment, advance the next due date for me and tomorrows payment would only have 1 day worth of interest.

-----

OP - In the example you gave, AFAIK the account would show in good standing as long as it's paid on time, and it'll show up effectively as good standing, but there might be a notation that a payment was not due on a monthly payment tracker (when I used this tactic on student loans, that is how mine showed). If you pay 25K what is the responsibility on paying the remaining 5K - did you effectively advanced your payments for some number of months? If you make a partial payment, does it count towards the next payment or do you need to make a payment in full in order to advance the next payment? Any prepayment or early close penalties? Read the terms you got with the loan, to be sure as results may vary based on terms (for example, I have a early loan close penalty in the form of an incentive I was given upfront for taking the loan being clawed back in the first 18 months).

Also as an aside, not sure what that money is doing if it is not paying off the principal early, but keep that in mind (understood 4% is higher than desirable).
 
Originally Posted By: TrevorS
Originally Posted By: taurus_sable
I have a 60month car loan of 30k at 4% APR. I want to pay as little interest as possible because the high APR while keeping the loan account open to benefit my credit score.

Is it a good idea to do this: Pay 25k in the first month and pay the 5k in the following 59 month?



Yes that works to reduce interest.

What is the max you can pay while keeping the loan open for 60 months?

Do they allow what you're intending to do? Ie overpayment of principal?


good questions I think I'll have to find it out from bank.

the contract shows I can pay off the loan in 5months without penalty. But as I understand paying off loan this quick has no benefit or even detriment on my CC.

I regret I didn't insist paying cash. The finance manger talked me into financing...
 
Originally Posted By: hattaresguy
This loan is going to cost you about $3,100 in interest.

No. He said he'll pay off $25K of it immediately. That means he'll only be paying interest on the amount remaining which over 5 years will be around $525. Still, I'm not sure it's worth it. There are other free ways to improve your credit score.
 
I'd pay off the entire thing, you don't need a car loan to have strong credit.

Than take the $525 and treat the wife or GF to a nice gift or something, anything is better than paying a bank money you don't need to.

I have never had a car loan, and have no issues getting money from banks for real estate both commercial and residential, same with CC's and revolving supplier accounts.


Lastly paid off accounts stay on your report up to 10 years.
 
Last edited:
Originally Posted By: Quattro Pete
Once the loan is paid off, your line of credit with that institution disappears and therefore it does not help improve your credit score anymore.


Pretty sure, he'll continue to get the benefit for a while (7 to 10 years) as it'll continue to show as an account loan paid in full and presumably always in good standing/on time.
 
ReFi with a PenFed loan (or similar that is under 2%) Then make your monthly payments, while putting the larger chunk of $ into a balanced mutual fund or CD (although you just missed out on PenFed 3% 5yr CDs, so I'd suggest a conservative fund).
Inflation will eat away at the interest cost of a loan overtime (tomorrow's dollars will be worth less than today's, but your loan payment stays the same size), while you can try and beat that return via investing.

I'm sure I explained that horribly wrong, but basically if you get a low enough APR, you shouldn't need to pay off a loan early to come out ahead.
 
Look at a loan amortization schedule. At the end of 48 months you've probably already paid about 95%(?) of the interest on the loan. So by the last year you've almost paid all the interest on the loan. If you do make a lump sum payment make SURE you designate all the money to go towards the principal. After the lump sum payment is made your normal car payment amount will be due the next month. Every month thereafter the full payment will be due until the balance is paid. May seem like common sense to some but you'd be surprised.

Also if you do a lump sum payment of $25k the balance will be paid off in about 9-10 months instead of the 59 months you mentioned.
 
Last edited:
Originally Posted By: taurus_sable
the contract shows I can pay off the loan in 5months without penalty. But as I understand paying off loan this quick has no benefit or even detriment on my CC.

I regret I didn't insist paying cash. The finance manger talked me into financing...


In that case just pay it off completely.

4% is not a great rate and it's not proven that this is good for your credit. You don't sound like someone who needs to borrow money so why worry if your credit score is better by 10 points or so?
 
Originally Posted By: hattaresguy
I'd pay off the entire thing, you don't need a car loan to have strong credit.

Than take the $525 and treat the wife or GF to a nice gift or something, anything is better than paying a bank money you don't need to.

I have never had a car loan, and have no issues getting money from banks for real estate both commercial and residential, same with CC's and revolving supplier accounts.




+1000000 the banks and money changers sold the OP the story to maximize THEIR profit and he took it hook, line and sinker. Sad.
 
Originally Posted By: satinsilver
Look at a loan amortization schedule. At the end of 48 months you've probably already paid about 95%(?) of the interest on the loan. So by the last year you've almost paid all the interest on the loan. If you do make a lump sum payment make SURE you designate all the money to go towards the principal. After the lump sum payment is made your normal car payment amount will be due the next month. Every month thereafter the full payment will be due until the balance is paid. May seem like common sense to some but you'd be surprised.


That might not be true, OP should certainly check the terms. I can't say 100% for mine, but I can say for me the way around that would be making multiple payments which would indeed advance the date and avoid interest.
 
If there's a prepayment penalty the refi will trigger that too.

If a person can pay 25k on a whim I don't see what's so great about a credit score. (I also don't see what's fantastic about trying to game the system.) I'd wait until the 5 months are up and just pay it off. You can gain some satisfaction that the bank will be upset with the dealer or maybe even the dealer will get shafted on commission somehow.

Note, during either my mortgage or one of my refis I got to see m credit report. There is something to it, having a "good ratio". I had a $5k limit card with $1k on it that I got dinged for, even though I paid it off in full every month. I was in it for the 1% rewards.
laugh.gif


So, for a better credit score, pay your card off (online etc) right BEFORE the statement date, so it shows a statement balance of $50 or whatever.
 
This is good advice. If you don't need a loan, why worry about your credit score? The only reason I can think of is for insurance. Apparently insurance premiums are lower for people with high credit scores.

Originally Posted By: TrevorS
Originally Posted By: taurus_sable
the contract shows I can pay off the loan in 5months without penalty. But as I understand paying off loan this quick has no benefit or even detriment on my CC.

I regret I didn't insist paying cash. The finance manger talked me into financing...


In that case just pay it off completely.

4% is not a great rate and it's not proven that this is good for your credit. You don't sound like someone who needs to borrow money so why worry if your credit score is better by 10 points or so?
 
my score is 740 I am 29. But I need to buy a house in 2/3 years and 740 is not a great score for mortgage purpose..
 
Last edited:
Status
Not open for further replies.

Similar threads

Boomer
Toyota Credit Gets a Black Eye
Replies
11
Views
937
Rand
GON
Received notification my credit score just dropped 40 points.
5 6 7
Replies
136
Views
6K
John105
dogememe
Switching Banks
2
Replies
27
Views
2K
dogememe
GON
Many passionate American CEO's in office today like Lee Iacocca?
2 3 4
Replies
75
Views
2K
John105
eljefino
How to buy a car on Facebook Marketplace
Replies
16
Views
997
Elkins45
Back
Top