Auto Loans – 4 Surprising Myths and the Truth

Auto loans are the loans provided by vendors for buying a new or used vehicle by pledging the vehicle itself as collateral. When a borrower is about to secure a loan or pay off their debts, they come to face enough myths regarding auto loans. Though some myths that are spread among people are harmless, some fake information can affect users in building their credit scores. This article will speak about the most common myths about auto loans and let you understand what is the truth as well. 

What Are Auto Loans

Auto loans are otherwise known as car loans or automobile loans. Auto loans are secured loans provided by lenders for the purchase of any new or used vehicle. Here the borrower pledges the vehicle itself as collateral security and agrees to pay off the loan and interest in monthly installments. 

4 Myths on Auto Loans

Spreading fake information is growing common these days. Investing and spending on stuff believing these myths or rumors will put people in trouble. People must ensure the authenticity of the things they hear.  Here is a list of common myths about auto loans.

100% Loan Financing

Some financial sectors say that they provide 100% loan financing to purchase a new vehicle. The idea of borrowing the entire cost from your bank might sound attractive and easy, but this might put you in higher interest debts. The reasonable range is to borrow 70% to 80% of your vehicle cost from the bank. 

Pay Upfront

People say the borrowers have to pay a huge amount as a down payment. Dow payment is a part of the purchase cost, that you can pay during the purchase. So that you can borrow loans to pay off the remaining cost. Though paying a large amount as a downpayment will help you, it is not necessary to pay an upfront amount. So people do not have to worry if they don’t have enough money to make a big down payment. 

Not for Used Cars

Another popular myth is that some used to believe, that there are no options to secure loans for the used cars. If people are about to purchase a used car, they can still ask for loans from the vendors by submitting the vehicle as collateral.

Paying off Auto Loans

A frustrating credit myth that stubbornly refuses to die is the false idea that paying off whatever loans you have will build good credit scores. The truth, however, is quite the opposite, regardless of the advice you may have read in that new post which showed up in your favorite online newsfeed. Paying down and ultimately eliminating your debt is the real action that will benefit your credit scores the most significantly.

Truth About Paying Auto Loans?

Auto loans, like mortgages and personal loans, are referred to as installment debt. Credit scoring models treat your installment debt very differently than they treat your credit card (aka revolving) debt. An installment debt is generally low-risk debt that is often secured by an asset. Therefore installment debt is not considered as heavily by credit scoring models. Balances can certainly matter in the calculation of your credit scores, but even installment debt with high balances tends to have very little negative score impact. 

As a result of the low impact which installment debt has upon your credit scores in the first place, paying off an installment loan early typically will not net you much improvement in the credit score department. It may certainly save you money in interest fees to pay off an auto loan early (depending upon your loan terms and conditions), but that auto loan payoff probably will do little to nothing to boost your credit scores.

What about Revolving Debt?

High-risk credit card debt will generally hurt your credit scores and the higher the amount of the credit card debt you carry the worse that impact will be. FICO’s credit scoring models are designed so that 30% of your credit scores are largely based upon your credit card debt or, more specifically, your credit card debt to limit ratios.

As you charge up more of your credit card balances concerning your account limits your credit scores will progressively decline. For this reason, when you finally begin to pay down that outstanding credit card debt the positive credit score impact you see will be much more significant.

Frequently Asked Questions

What are auto loans?

Auto loans are the loans for purchasing automobiles like new cars or used cars. The borrowers can secure auto loans by securing the loans with the vehicle itself as collateral. 

Will paying off all the loans help you boost your credit?

Paying off loans will help you to boost your credits. But, preferences matter. Not all loans are considered similar in the view of credit scores. Analyze which loans are capable of affecting your credit scores more and pay them first. This will bring a huge positive impact on your credit score. 

Which loan will affect the credit score more – Installment Loan or Revolving Loans?

Revolving debts like credit cards, and credit card loans affect the credit score more while investment loans like home loans or car loans affect them less.

Conclusion

Credit card debt is another story entirely from a credit scoring perspective. If you want to get the biggest credit score to benefit possible by paying down debt then you should start by making a plan to tackle your revolving debt first. Before paying off any auto loans, destroy the credit card debt! Questions? Contact Us – 800-411-3050