Auto Loan Influences Overall Credit
Car payments are a fact of life for many people. The average auto loan is 5 years, 9 months with a $523.00 average payment. Average interest is 5.17%. Your auto loan credit is a vitally important part of your credit scoring picture. This type of loan like any loan with a fixed monthly payment is referred to as an installment loan. A good mix of credit requires at least one recent installment loan along with the revolving credit most people utilize through their credit cards.
Auto leases and loans are treated the same way for FICO scoring. The loan amount outstanding is debt either way. Properly handled over time, your auto loan credit will save you serious money. For a $20,000.00 auto loan of 60 months duration the difference between poor credit and good credit will amount to more than $5,000.00 over the life of the loan. A brand new car loses 11% of its value when it leaves the lot and an average of 19% after the first year.
Securing Auto Loan Credit
You will save money by securing your auto loan on your own from your own chosen bank or credit union. Auto dealers encourage buyers to use their own dealer’s financing partner. They then refer your credit application to their partner lender who tells them what interest rate they will accept for a given buyer. The dealer then adds a “dealer markup” to that rate. This is the rate he offers to you. The dealer markup extra added interest is then shared with the dealer’s partner lender. This practice was once regulated because it leads to frequent discrimination against minorities. The recent gutting of the Consumer Financial Protection Bureau’s powers has brought dealer markup abuse back in all its ugliness. The finance office is where many dealers make most of their money.
Going in with your our own pre-approved auto financing is your best protection against the hard sell on overpriced extended warranties, anti theft policies and paint protection policies. Question fees, get the “out-the-door” price and avoid talking about monthly payments as a gauge of how much you can afford. Don’t be tempted to extend the loan period past the car’s useful life in order to be able to afford it now.
Many dealer originated loans only report payments to one credit bureau. The consumer who thinks he is helping his credit score with his on time auto loan credit payments is actually accomplishing this with only one out of the major 3 credit reporting agencies. Credit reporting agencies do not share information. It can be advantageous to secure your own auto loan credit with your bank or credit union. They will tell you if they will report your good behavior to all 3 major credit reporting agencies.
Auto FICO Score
FICO has a separate scoring system for automobile loans. If you have no record of some type of auto installment loan history many auto dealers will tell you that a good FICO score is not enough. A higher than average down payment will cover a lot of sins. Most banks and credit unions offer a “credit builder” loan. These are installment loans secured with your own CD that will help you to satisfy the “mix of types” credit scoring factor at a very low cost since there is no risk to the bank.
The online site known as https://www.self.inc/ offers a nifty little deal where you make as little as a $25.00 contribution to an online savings account. They report these payments to the 3 major credit reporting agencies as installment loan payments! Definitely check this out.
Auto loan providers use FICO’s “Auto enhanced score”. The FICO auto enhanced score ranges from 250-900. FICO offers “a complete flexible risk scoring solution to the auto credit scoring industry”. Different factors are built into the structure of these credit scores. The extra components include specific information on how you have previously handled your credit for automobiles.
If you have been particularly scrupulous about your auto loans even if other things were a little less than perfect you can expect some latitude. If you have mismanaged auto loan credit in the past you will be held accountable. If you have made your auto payments on time even when you were late with credit cards you will get a break. Auto finance companies expect you to realize that you really need that car no matter how many other problems you may have. They have the threat of repossession to confront you with even though jumping through all the hoops required for repossession is the last thing they want to do.
Auto Repossessions
Auto repossessions require compliance with state and federal laws including the Uniform Commercial Code and various other federal and State laws. If you have an auto repossession on your credit report you can challenge the legality of the required legal notice of your right to redemption. This is the first notice telling you of your right to redeem before the sale. You can challenge the deficiency notice which informs you of how much is left after deducting the value received at auction. You can claim the sale was not commercially reasonable and the sale price was unreasonably low. The notice may have stated that you owed more than you really did. A repossession must be very thorough to meet the letter of the law.
Repossessions are ruinous to anyone’s credit picture. Even if the car is worth more than the balance of the loan a repossession is difficult to rebound from. By the time the fees for lawyers, auction, towing, storage and more are subtracted from a forced sale there is usually less than nothing left for the owner. The owner is liable for whatever balance is left over. If you have ever had a repossession your auto enhanced FICO score will be a lot lower for years to come.
Disputing Repossessions
Repossession claims on credit reports can be successfully disputed but the best solution is to head the repossession off with a voluntary surrender when you see it coming. Negotiate the deficiency balance with the title holder realistically. Insist that not reporting to the credit reporting agencies be part of the deal. You have some leverage at this stage because you can save them a lot of legal and other fees. If you have to turn in a leased vehicle early you can usually negotiate to reduce or eliminate your early termination liability.
It is a good idea to start your auto buying negotiations by asking the dealer what their minimum credit score requirement is if you know you have reason for concern. The auto score will not be that different from your other FICO scores for most people. If you are really concerned you can purchase your own auto enhanced score for a small fee at https://ficoscore.com/ Fico’s website. This will also protect you from underhanded tactics such as the dealer classifying you for higher interest rates than you really deserve.
Subprime Auto Loan Credit
Subprime auto loan credit make it possible for people with even very poor credit to buy a car. Many times these loans do not report to all 3 major credit reporting agencies.
New technology enables dealers to remotely disable ignitions when a payment is missed for ease in repossession. A “starter interrupt” device enables the lender to GPS track the disabled vehicle. Dealers claim that use of this device enables them to make loans they would not otherwise make. Those who find themselves forced into these loans by circumstances must really make an effort to stay current.
Lenders prefer newer cars for people who are risky borrowers. A 5 year loan for $10,000.00 on a 12 year old car is easy to walk away from if a major repair problem comes up. If the loan were for $15,000.00 on a 2 year old car there is much less chance of a major repair problem coming up at all. If it does it will almost certainly be worth fixing. Also if it turns out that the lender has made a poor decision and the vehicle must be repossessed there will be enough value remaining to recoup at least most of the money. Patience and sacrifice are eventually rewarded. The climb out of the subprime category requires time, determination and an honest review of how you got there. Only then can you make the changes that are necessary to turn things around.
Credit Score and Auto Insurance
Credit Score and Auto Insurance. Your car insurance rates are determined by your driving and claims record, age, marital status, mileage driven, where you live…and your credit score. Those with a very good auto loan credit score of 760 or above will pay considerably less for their car insurance than those with subprime credit scores under 680. FICO has a “Safe Driving Score” for fleets, seniors, teens and trucking companies which use a process called “Telematics” to measure a driver’s use of acceleration, braking, cornering, speed and evidence of distraction through sensors. Some insurance companies will give a potential discount to those willing to submit to this system.
Insurance companies want to know your credit score for more reasons than just to determine if you will pay your insurance premium as it comes due. People with low credit scores are seen as people who need money. The thinking is this may make them more likely to file a phony claim or exaggerate any damages sustained as a result of an accident. But there is another reason. There is a pervasive attitude in the insurance business that your credit score is a barometer of your moral character.
Many fine people have low credit scores for a variety of reasons including bad luck, illness or generosity. These are the people who are the backbone of society. I’m reasonably sure that swindler extraordinaire Bernie Madoff had a fine credit score.
There will never be a shortage of mean spirited people to enjoy and profit from kicking those who are down. It is accepted in business to react against a person who needs money by charging them even more money. Insurance companies are very creative about finding new ways to get into your pockets. A low auto loan credit score is the flimsiest of excuses to charge people higher insurance rates. Some States, notably California, Hawaii, Michigan and Massachusetts, forbid this practice. Efforts to forbid insurance premium discrimination against people with low credit scores federally have failed.
Insurance Credit Scores
Insurance companies calculate the insurance credit score a little differently than the FICO score that is used for most purposes by lenders. Extra negative weight is given to past bankruptcies and maxed out credit cards. When it comes to insurance, it’s very expensive to be poor.
You are now up to speed on how to help yourself get great results in increasing your credit score. I hope these essays have helped you to better understand the credit scoring system. Knowledge is the key to making the credit scoring rules work for you. It can be enjoyable to take charge of your financial life by getting acquainted with these rules. You are now ready to get into a more sophisticated analysis of credit related topics in depth. This will help you on this learning journey that never really ends. There is always something new to learn. When you think you are on top of everything rules, laws and policies may be amended.
We are about to enter Section III…your more advanced course in how things work in credit scoring. We will take a deep dive into FICO scoring rules and regulations, special rules regarding Student Loans, Medical debt and the Tri Merge credit reports required for mortgages. Finally we end with 10 award winning bonus Essays on other advanced credit improvement topics that will surely interest you.
