Auto loan finance for building credit

Question

I recently moved to the USA and I have no credit history. I want to buy a car that costs $18,300. My down payment will be $12,000 and I will finance the balance at 15.4% (extremely high!) over 36 months to build my credit. With no credit, I don't have many of options since I have no credit.

If I borrow $6,300, a loan calculator says that the total amount of the loan will be $7,900 which will mean a monthly payment of $220. The cost of the loan will be $1,600.

What would the loan cost be if I paid it all off after 1 year of payments? Would it be equal to $1,600/3? Would the total loan cost be $550+- for the first year?

Answer 1

i dont have alot of options since I have no credit.

You have a fantastic option. You can buy lots of cars for less than $12,000. Save up $220 a month for five years, then buy another $12,000 car.

What would be the loan cost if I pay it all after 1 year, pay the 220 for the first year, build some credit, and then pay the lien. Would it be equal to 1600/3? Would the total loan cost 550+- for the first year?

To answer the question, though, you can roughly calculate the interest paid in 1 year by just multiplying the loan balance by the interest rate. In your case multiplying the interest rate by the loan balance would be $970. In reality it will be less, since you will be paying down principal each month, reducing the interest paid.

You can also get a more accurate number by calculating an amortization schedule. In your case, after one year you'd have paid $850 in interest (note that HALF of the interest is paid in the first year), $1,800 in principal, and have $4,500 left. If you paid off the loan at that point, your total cost would be $7,150.

All that aside, I would NOT buy a car from any dealer that charged you such a high interest rate. Not only is the interest too high, but many of these dealers will trick you into signing bad deals like "interest first" loans, where all of your payments go to interest first or charging high prepayment penalties (essentially preventing you from paying the loan off early and taking away their interest income).

Just buy a good car with cash, continue to build up credit in other ways if you are set on borrowing money. You can just use credit cards moderately, pay off the balance each month, and you will build credit without spending a DIME in interest.

Answer 2

from comment you made on another answer:

I can pay everything, but i want to build good credit fast. I want to buy a house in 10 month from now, and i need good credit for [that].

I assume that that $12,000 is in a bank account somewhere, and the money for the down payment for the house is also in a bank account.

If you believe that you must get an auto loan to establish a credit file, or to boost your credit score then I would start with the bank for an auto loan. They can see you have money in the bank. They will probably have loans with rates way below 15%. Of course only a lender can determine if you qualify.

Another way to help your credit score is to get a credit card. That same bank may also offer a credit card. The good news is that card usage to help your credit score doesn't require a card with a fee, or paying interest, it just requires smart usage of the card.

Look on the bank website for a calculator that will allow you to see the monthly payments for an auto loan and how much is interest. You can then see how much interest you will pay under different payment scenarios.

Some advice: - to minimize interest pay the maximum down payment you can afford. - If you are going to pay off the loan quickly the longest loan without increasing the rate will minimize the required monthly payment. But it can cost you more money because the decrease in payment size is due to longer length of the loan, so the interest portion deceases more slowly.

Answer 3

Conventional wisdom says to avoid paying interest when possible, don't spend money just to build credit, and purposely paying over 15% interest is absurd. But your situation is somewhat unconventional since you have the money in the bank to back up the loan, and you're choosing to pay interest in order to build credit. The big unknowns are how much will your credit score increase if you do this, and how much will you save on the mortgage by having a higher credit score? It's impossible to answer that exactly without much more information, however, I think it's safe to say that if your mortgage interest rate is even slightly lower as a result, then you can likely save thousands. (Read the "Interesting Side Note" in this answer.) So, as much as it pains me to say it, taking an unneeded car loan seems like it could be a good investment for you. But there are certainly some things to look out for and potential savings to be had:

1. Try to avoid auto loans with origination fees and early pay off fees.
2. As stated, you would be on track to pay $847 in the first year. Since you have the money in the bank, you could over pay the loan enough that it would be paid off in 12 months. This would lower your overall interest paid.
3. Similarly, if you lower the loan amount your overall interest will be lower. Or, you could make a $3000 payment in month one to have a similar effect.
4. Can you get an auto loan from another bank with a much lower rate? Approval might be easy if you deposit your extra money in a savings account which could essentially cover the loan.
5. Origination and early payoff fees avoided, you could refinance the auto loan shortly after obtaining it. Sometimes banks are more willing to refi than to originate loans.
6. It may not be necessary to have the auto loan be active when applying for the mortgage. Even if you pay off the loan after, say, just 6 months it will still provide positive history compared to if you just paid cash for the car.