An installment loan typically calls for periodic payments, comprised of principal reductions and interest, until the entire loan balance is paid in full. Typical examples are car loans or student loans.
When buying a car you typically make a down payment with money from your savings and finance, or borrow the rest from a bank, credit union or auto finance company. If the car cost $10,000 and you only have $2,000 for a down payment, you will then try to borrow $8,000 from somebody and make equal sized monthly payments until the balance is paid in full, or you sell the car and must pay off the balance at that time to release the lien on the title of the car.
For our purposes as newbies, getting a car loan, without a credit file is difficult. Here is what I want you to try:
A CD or Certificate of Deposit Secured Loan.
Not all banks offer them. My daughter Shannon procrastinated with this suggestion last year and now that she wants to buy a car, her credit file is so new (only the credit card I was able to get her). She was denied for a car loan. Take a chunk of your savings into your bank and ask if they will grant you an installment loan secured with a Certificate of Deposit. Not all banks will do this. When you find a bank that will, be sure to ask them if your loan will be reported to the three major credit reporting agencies. If not, don’t bother, move on to another bank. You will pledge your cash as collateral for the loan. If you miss a payment they can collect their money as your CD is held by the bank. If you have to withdraw the money you pledged as security for an emergency, you will pay a penalty and your CD loan must be paid off. Let’s hope there are no emergencies during the term of your CD loan.
Example: Take $2000 of your savings and place it in a CD. Ask the bank to grant you a loan of $1000 secured by your CD. You put $2000 in, tied up with the bank for the term of the CD, and take back $1000 in the form of a loan. Put the $1000 in your checking account and use it to make monthly payments as required by your CD loan. This technique will cost you money as you will be paying interest on the loan, but you will also be earning interest on your CD. You’ll find that the interest rate you pay will be higher than the interest you are earning. Welcome to the world of banking. That is how they make a profit. Giving you a small amount of interest for your deposit and charging you more interest for your loan. With interest rates as low as they are now, and the small amount of money you are borrowing, your interest costs will be minimal. But this is an important step in establishing a credit file.
You’ll see your credit score take a jump up when your loan balance is less than 50% of the original loan amount.
If you followed yesterday’s tip and follow with this one as well your file will be on its way. You will have an open account and installment account on your credit report. In six months or less, you’ll have an improving credit score, which is the “Keys to the Kingdom”. A good credit score and credit history.
Always pay on time. “Your credit is one of your most important assets”
No mistakes and no excuses. If you don’t have the discipline to follow these steps, don’t do it. You are better off paying cash and never having a credit file, than ever being late with a payment.
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