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$10,000 Loan to Build Credit?

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    $10,000 Loan to Build Credit?

    I've got a coworker, a really great guy, but almost no financial literacy about himself. He and his wife have recently found out that the house they are living in, rent free, is being foreclosed on and by this time next year they will need to find a new home.

    Yesterday he came in excited because he had just opened a savings account at a local credit union. This by itself is a great thing so he will no longer have to cash his pay checks at the local gas station.

    He then went on to explain he had also take out a $10,000 personal loan at the credit union, put that money into the savings account, and the credit union has it set up to draft the payment from that account each month automatically. The purpose of this? To build his credit.

    I asked if he wanted my opinion on this, and he said absolutely. I told him I thought it was not a good path to take.

    My primary concern is this money is just too much of a temptation setting out there. Sooner or later, the car will break down, or one of their kids will break a leg and that will put a big dent into it. Or a new video game is released or the wife wants a new pair of shoes or the mother-in-law needs a new set of teeth. And in each of these cases "the money is just setting there, so why not?". He said they were not going to touch it.

    The second concern was the interest he'll pay on the loan. I didn't ask for the details, interest rate & duration. With a few assumptions on my part, I figure he'll pay $500 to $1,000 in interest as a minimum.

    The third concern is that in a year's time when he is ready to purchase a house, having an outstanding personal loan (again depending on the details), will not help the house buying process.

    Fourth, the discussion sounded an awful lot like the bank said this is what he needed to do to build his credit, which to me, asking a bank rep for a loan is like asking a dog if they want food.

    Lastly they have never had any debt. A few months ago he did open a credit card which he says he is paying off in full each month. He's credit is already established and increasing.

    And one last thought is that as much as I like the idea of building credit, I had no credit when I purchased my home, and went through manual underwriting with the loan officer.

    He wasn't convinced, and felt confident the banker had his best interest in mind.

    Do people do this regularly? Is his plan a viable option for increasing credit to purchase a house within 12 months? Does the risk not outweigh the reward?

    #2
    Seems like an expensive way to build credit which he already has, especially since he's also losing the opportunity of using the money by just letting it sit there. Something like a car loan would have been a way better way to go, since most people usually need a car anyway and rates are lower than personal loans. *IF he has to have a loan, for whatever reason. And yes, that loan will probably need to be closed out before he applies to buy a house unless it's inline with the ratios needed to secure the loan.

    Banks do not have their customer's best interests in mind. They have their own interests in mind. There's no money in paying their members interest; they want people to borrow from them because they borrow their money for practically free.

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      #3
      Originally posted by ua_guy View Post
      Banks do not have their customer's best interests in mind. They have their own interests in mind.
      This is really the feeling I got from the conversation, that the bank led him to take the loan for building credit. And of course, at age 30, he is 100% responsible for his personal financial decisions, but it really felt like the bank is taking advantage of his ignorance.

      Even as great as I thought the loan officer I worked with for my mortgage was, she still insisted on giving me a sales pitch for an interest only loan to make sure I was aware of all of the "options" they offered.

      Later (I think i posted about this a long while back) I got burned when the bank switched my savings account from their silver to platinum plan, which had a $10,000 minimum and a $20 fee if you were under, but they waved the fee so long as you had a mortgage. I remember them calling to offer the plan, to which I said "No". Two years later, about six months after I paid the mortgage off, with around $8,000 in the account, I realized I was being hit for $20 a month. They agreed to refund 4 months, and argued I was a "bad customer" for not catching the problem sooner. And when I demanded to see where I signed for this account change to platinum, they stated the change had needed a verbal consent only.

      While I think banks are an absolute necessity that everyone should use, educate yourself, and don't rely on them with blind faith to be looking out for you.

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        #4
        He'd be better off building up a healthy downpayment.
        That will probably go further towards getting a home loan than a history of paying back a $10k loan.

        Comment


          #5
          Is the money in the savings account securing the loan? If yes, it probably isn't costing him all that much. However, there's no real benefit, so you're paying "not much" for nothing.

          Comment


            #6
            Originally posted by Petunia 100 View Post
            Is the money in the savings account securing the loan? If yes, it probably isn't costing him all that much. However, there's no real benefit, so you're paying "not much" for nothing.
            He mentioned it again to me yesterday and I asked for a few additional details. It's a 36 month loan at > > 18% < < ?!

            He said he and his wife checked the total interest they'd have to pay and it was $2,000. When I do the math, I am getting $3,000!!

            On the bright side, I think he is starting to see the true cost of this method of building credit and said we was going to close the loan out immediately.

            I am far less upset by his ignorance and far more upset by the bank's willingness to do this under the guise of building credit.

            Comment


              #7
              Originally posted by myrdale View Post

              He mentioned it again to me yesterday and I asked for a few additional details. It's a 36 month loan at > > 18% < < ?!

              He said he and his wife checked the total interest they'd have to pay and it was $2,000. When I do the math, I am getting $3,000!!

              On the bright side, I think he is starting to see the true cost of this method of building credit and said we was going to close the loan out immediately.

              I am far less upset by his ignorance and far more upset by the bank's willingness to do this under the guise of building credit.
              Holy cow. Hopefully, this experience was educational for him and he will make better choices going forward.

              I agree that this loan seems predatory.

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