$10,000 Loan to Build Credit?

[myrdale]

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?

[ua_guy]

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.

[myrdale]

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.

[Fishindude77]

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.

[Petunia 100]

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.

[myrdale]

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 he 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.

[Petunia 100]

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.

[Drake3287]

I'm guessing this friend of yours will also be taking the free $100. for getting the vaccination shot! Like I said in another post, this country has millions of people like your friend when it comes to finances. At least he has you to help guide him.

[myrdale]

He brought the loan up again to me yesterday in passing, and confirmed they had canceled the loan.

Over the weekend, heard an financial decisions I thought I'd share.

In this case, it's a friend who has been in the market for a new car for a while. Her requirements was it had to be "fast and loud". Without getting into her personal finances (which are a mess) this car loan blew my mind.

She found a used Mustang for $13,000. Relatively speaking that should fit into her budget.

She is discussing her payment with a mutual friend. She claims the payment is $700 per month and it is a 72 month loan. This just sounded absurd. Just calculating that payment schedule, the total amount she is going to pay is $50,400 for a used car. If I am doing my math right, it is around 50% interest rate.

In her case, she can be fickle about things, so if she didn't directly ask my opinion I am not going to give it to her, but oh my god. Is this actually "normal". She'd be better off buying the car on a credit card.

In a second case an acquaintance on facebook who over the weekend was lamenting because she had purchased a used car from a buy here pay here lot. She had been paying monthly instead of biweekly as had been arranged in her contract, and the car lot had a kill switch installed on her car which they shut off remotely.

The more I listen to those around me, the more I am just absolutely boggled by the cost of bad financial decisions, which for the most part were completely avoidable.

[bjl584]

He brought the loan up again to me yesterday in passing, and confirmed they had canceled the loan.

Over the weekend, heard an financial decisions I thought I'd share.

In this case, it's a friend who has been in the market for a new car for a while. Her requirements was it had to be "fast and loud". Without getting into her personal finances (which are a mess) this car loan blew my mind.

She found a used Mustang for $13,000. Relatively speaking that should fit into her budget.

She is discussing her payment with a mutual friend. She claims the payment is $700 per month and it is a 72 month loan. This just sounded absurd. Just calculating that payment schedule, the total amount she is going to pay is $50,400 for a used car. If I am doing my math right, it is around 50% interest rate.

In her case, she can be fickle about things, so if she didn't directly ask my opinion I am not going to give it to her, but oh my god. Is this actually "normal". She'd be better off buying the car on a credit card.

In a second case an acquaintance on facebook who over the weekend was lamenting because she had purchased a used car from a buy here pay here lot. She had been paying monthly instead of biweekly as had been arranged in her contract, and the car lot had a kill switch installed on her car which they shut off remotely.

The more I listen to those around me, the more I am just absolutely boggled by the cost of bad financial decisions, which for the most part were completely avoidable.

the math doesn't add up on that. I'm guessing that she is financing way more than $13K.
maybe the car costs $13K, then there are taxes, fees, upside down equity, etc.
back in my dumber days I financed a truck for twice that amount and my payment was half.
either way, sounds like she made a bad financial move. I hope things work out for her.

[ryan_themoneyguy]

According to Experian data, personal loans were the fastest-growing debt category in 2019, with a 12% increase from 2018. In 2020, however, personal loans only increased by 1% year-over-year, making it the slowest growing form of debt. With that said, almost one-quarter of American adults have a personal loan, so I wouldn’t say people take out personal loans to build credit regularly. It can be an option, but in most cases you want to already have a solid credit history. If he only recently opened a credit card, even though he pays it off in full each month, that means he’s opened two lines of credit in pretty quick succession, which can have a negative effect on your credit. Not to mention, if his credit history is limited, he probably did not get a very good rate on the personal loan. Then add the fact that he’s looking to buy a house in the next 12 months, and it seems like a very tricky situation. In this case, the risk does seem to outweigh the reward.

[myrdale]

If he only recently opened a credit card, even though he pays it off in full each month, that means he’s opened two lines of credit in pretty quick succession, which can have a negative effect on your credit. Not to mention, if his credit history is limited, he probably did not get a very good rate on the personal loan. Then add the fact that he’s looking to buy a house in the next 12 months, and it seems like a very tricky situation. In this case, the risk does seem to outweigh the reward.

That was my thought exactly. In his case though, it's simply one self inflicted financial decision after another. Over the past week he has come in bragging about buying a pair of new iphones after his and his wife's were stolen while on their third vacation in the past two months and yesterday about a new $1200 mattress purchase (when they are about to be kicked out of their current house).

[myrdale]

This whole situation really looks just like an opportunity to make more money on an ignorant client. As one user already said above, the bank pursues only its own interests. He is only interested in increasing his own profit.
I think you should definitely advise him to contact another bank. I had a similar story when the bank almost used my acute need for money. My friend saved me only, who advised another bank, which had more lenient and transparent conditions - vakuudettomat lainat.
That is why I believe that it is necessary to increase the level of financial literacy.

He did close the loan out.

The next moral dilemma is I found out it is a bank that I work with personally, and do I really want to do business with a bank that does something as shady as this? I never saw his paperwork, I only know what he told me, so I have to assume it true. And I suspect that every bank, as large as they are, will have someone who has done something shady at one point or another.

[Petunia 100]

You should help your friend because if he does as he should, he risks being in debt for the rest of his life. It amazes me that in the 21st century, there are people who know nothing about financial literacy. It's not just about your friend, I see a lot of people like that. I know a guy who often loses all his money at the casino, and then he borrows money through <advertising link which I will NOT click on> and pays it back. After that, he saves the money and loses it again at the casino. He has created his own cycle.

It sounded to me as though mrdale did help his friend, to the extent it is possible to enlighten a fellow adult who is free to make their own decisions.

[myrdale]

The fact that they didn't know about the house arrest makes your friend an illiterate person in financial matters and shows the dishonesty of those who gave them a loan for a house or those who sold this house to them.

I am not sure if it is a language barrier or if I misrepresented the situation that badly. I am assuming you mean foreclosure by house arrest.

You are correct my friend is financially illiterate, this is true.

The loan from the bank was intended to provide a means for him to "build his credit". I think this was underhanded on the credit unions part. I've another friend who has a car loan through this same credit union that I think is a raw deal.

The house belongs to his wife's grandparents. The grandparents had borrowed $70,000 against the house and it was some type of balloon mortgage which was coming due soon. The grandparents were going to let the bank take it.

My friend and his wife were living there rent free. I can't blame him for not knowing what his grandparents in law have done.

The grandparents did end up refinancing the house.

In the mean time, my friend has found an apartment ($850 / month) and they are moving into it this week.