Finance Question (Loan)

[missed mallards]

Heres the rundown and I want to get some ideas from the good people.

I have no credit (couldn't finance toliet paper).

I want/need something for 5 dollars.
I have 10 in my bank.

The banker informed me I could borrow against myself at a very small % rate. Being my CD isn't getting much anyway, it's just a few points above it < 4%.

I can pay cash, just don't want to let go of the 5 dollars at this time. I can borrow against myself, build some credit, and get what I need well within my means of paying it off.

Anyone ever borrowed against themselves? Pro's/Con's?

I could pay cash, pay myself back, and be ok with it. I just have no credit and finding out, that ain't such a good thing as somethings I can't pay w/ cash.

[The Captain]

I do it all the time , I've got several CD"S that aren't drawing a high interest rate . I use them to get a low rate on used trucks,boats , atv's etc that would generally be financed at a higher rate .

[MudHog]

I borrow against my 401k and pay myself back interest. People frown on it as my 401k is not making as much "free" money as I hear it called, but I am using it while I am young and still have many work years ahead of me. Free money being money that doesn't cost me anything. When I pay myself back, I'm costing myself money out of my pocket to repay myself the interest.

With a CD, the CD would be used as collateral for the loan to make it secured. This would be the same as taking $5 and putting it in the bank and borrowing $5 with the $5 in the bank as collateral. Should the loan become past due, the $5 in the bank is used to pay out the loan. A CD as collateral is greater value than a physical item that can depreciate in value.


Your question brings up another scenario that I never agree with when people say pay cash only. Considering the person has credit to quality for 0% interest on a large purchase like an ATV. Why would a person want to pay for the ATV in cash when they can get a 0% loan and keep the money in the bank as long as possible? Even with a non-Kasasa saving earning 0.1%, that 0.1% return is still more than 0% by paying cash.

[ACEINTHEHOLE]

Why would a person want to pay for the ATV in cash when they can get a 0% loan and keep the money in the bank as long as possible? Even with a non-Kasasa saving earning 0.1%, that 0.1% return is still more than 0% by paying cash.

Because if you own it outright you dont have to worry about losing your job or something else to keep you from missing a payment. You never know what might happen.

[MudHog]

Why would a person want to pay for the ATV in cash when they can get a 0% loan and keep the money in the bank as long as possible? Even with a non-Kasasa saving earning 0.1%, that 0.1% return is still more than 0% by paying cash.

Because if you own it outright you dont have to worry about losing your job or something else to keep you from missing a payment. You never know what might happen.

I still don't agree.

Scenario: I have $6000 to go out and buy a new ATV and I can get a 0% financing. If I pay the ATV outright, I'm out of $6000 and have zero dollars in the bank. If I finance it, I still have say $5000 in the bank. A month after I get the ATV I lose my job. I still have $5000 in the bank to pay the note with all while the $5000 in the bank is building interest.

The biggest thing is discipline. Just because I financed the ATV, that wouldn't mean go out and blow the remaining $5000. If so, then that would equal to your statement, because I would be back at zero dollars in the bank. This is where I feel a CD comes in very handy, because you can borrow against it and you never "see" the money or have access to it to spend it.


The way I look at my money, is that I want to keep my money in my bank account as long as possible. Monthly bills get paid just before their due date. Why, because I'm making interest on my dollar as long as it is in my bank account and not someone else's. If I pay the bill as soon as I receive it in the mail, then I loose out on potential interest.

[Deltaquack]

I borrow against my 401k and pay myself back interest. People frown on it as my 401k is not making as much "free" money as I hear it called, but I am using it while I am young and still have many work years ahead of me. Free money being money that doesn't cost me anything. When I pay myself back, I'm costing myself money out of my pocket to repay myself the interest.

With a CD, the CD would be used as collateral for the loan to make it secured. This would be the same as taking $5 and putting it in the bank and borrowing $5 with the $5 in the bank as collateral. Should the loan become past due, the $5 in the bank is used to pay out the loan. A CD as collateral is greater value than a physical item that can depreciate in value.


Your question brings up another scenario that I never agree with when people say pay cash only. Considering the person has credit to quality for 0% interest on a large purchase like an ATV. Why would a person want to pay for the ATV in cash when they can get a 0% loan and keep the money in the bank as long as possible? Even with a non-Kasasa saving earning 0.1%, that 0.1% return is still more than 0% by paying cash.

You are 100% correct. My mother went to buy a gm vehicle a few years ago. She had the cash to pay for it.......but they had 0% going on. I had to talk her out of paying for it and leaving the cash in the bank drawing at least some interest......and in turn giving her more collateral. She still paid 15 or 20K down and did the rest at 0% just to make herself feel better. My financial advisors always want me to finance certain things no matter how much I have in the bank or retirement.

[jacksbuddy]

Just a note - If you use your money (the $5 in this case) in the bank to collateralize the $5 loan from the bank, make sure that you do actually make each of the ten $0.51 payments to the bank ON TIME.

If you use the thinking that it's your money anyway, so they can just take the money from the account to make the payments, you will lose. They will take all of the funds needed to pay off the loan at one time, principal and interest and all accumulated late fees, which could be more than you originally bargained for. Plus, it will go on your record that you defaulted on the easiest type of loan to repay, which will make it almost impossible for you to even borrow money at 'loan-shark' rates.

[stang67]

You are 100% correct. My mother went to buy a gm vehicle a few years ago. She had the cash to pay for it.......but they had 0% going on. I had to talk her out of paying for it and leaving the cash in the bank drawing at least some interest......and in turn giving her more collateral. She still paid 15 or 20K down and did the rest at 0% just to make herself feel better. My financial advisors always want me to finance certain things no matter how much I have in the bank or retirement.

Yeah, but in my experience with cars and atvs, you get a much lower price paying cash than using their super duper promotional int rates. For my Sierra, the price with 0% was nearly sticker or $10k less with cash. Easy.

[ScottyLee]

thats a personal secured loan. you can do this with cd's, vehicles, 4 wheelers, tractors etc... when dealing with cd's your loan rate is usually 2-3% higher than the cd rate, and the loan term is equal to or shorter than the length of the cd term. I do this for people all of the time. it really is as simple as it sounds. use Your stuff as colatteral at a low rate. IF you have no credit, this is a great way to start building credit. open up a 1000 dollar cd, and get you a 1000 dollar loan for 12 months, bank then places a lein on the cd, after the 12 months u then have 12 months of loan repayment history and it cost you very little in interest. If something goes south, you can still satisfy the loan with your cd. it's kind of hard to mess that loan up beig the borrower.

just my 2 cents

[curlytail]

I do it for customers all of the time. It is a great way to get your credit started. One thing though, if loan is set up for 12 months, do not pay it off after the 4th payment. Creditors like to see a history where payments are made on time for an extended period of time.

[matador1]

Why would a person want to pay for the ATV in cash when they can get a 0% loan and keep the money in the bank as long as possible? Even with a non-Kasasa saving earning 0.1%, that 0.1% return is still more than 0% by paying cash.

Because if you own it outright you dont have to worry about losing your job or something else to keep you from missing a payment. You never know what might happen.

I'm going to challenge you to think outside your conventional thinking. I think the same way you do but....

In the great depression had more people had their homes financed there would have been more cash (in theory) to circulate. What happened was everyone lived by "old school" standards. If you can't pay for it in cash, don't buy it. So their cash was tied up in a home that had A. lost significant value 2. no one could afford to buy. So they were stuck with a property that was paid for but had no "liquid value". Some people argue that had those properties been financed and the owners had savings they could have walked away form the note, leaving the bank to take the loss. The banks were already going out of business so another default wasn't going to hurt.
So if you apply those principals to the ATV scenario. Why put all your cash into it, lose your job and either not be able to sell it or have to take a loss on it. Or finance it, keep your cash, lose your job and have to sell it or let the bank repo it.

I know it's twisted and maybe even unethical but it's a unique concept. I had never thought of it until someone way smarter than me started explaining it to me one day.

And no, I don't support this thought process. I just like twisting things up a bit and seeing what others think.

As for borrowing against a CD, I think it is a good way to save your cash adn buid your credit. I advise clients with "immature" credit to do it all the time. It's just buying your credit score, nothing wrong with it.

[GrizwalD]

Mudhog is 100% correct as far as the 0% scenario ..... but if your going to end up paying interest if you borrow against yourself, but on the other hand you have the money like you are saying, then why would you borrow against yourself? Interest you pay is money you lost!!! .... a great way to build credit is to go apply for a credit card (the credit card may be minimal since you have never started your credit) use this card for all your purchases gas, food, etc. but be sure to pay it off each month maybe even twice i month before the interest hits the card .... do this for about a year and you will see a major change in your credit

[camlock]

what are the typical terms for borrowing from your 401k? I'm curious...

[MudHog]

what are the typical terms for borrowing from your 401k? I'm curious...

I can have one loan at a time and borrow up to 50% of my 401k value. Length is 6 years unless used for the purchase of a home and I can do 15 years.

Mudhog is 100% correct as far as the 0% scenario ..... but if your going to end up paying interest if you borrow against yourself, but on the other hand you have the money like you are saying, then why would you borrow against yourself? Interest you pay is money you lost!!! .... a great way to build credit is to go apply for a credit card (the credit card may be minimal since you have never started your credit) use this card for all your purchases gas, food, etc. but be sure to pay it off each month maybe even twice i month before the interest hits the card .... do this for about a year and you will see a major change in your credit

GD, I think you combined a couple different scenarios. The paying yourself interst was stated concerning the 401K loan and was not stated as part of the 0% interest scenario. All it really means is you are paying interest to yourself instead of paying it to someone else (making someone else money).

[matador1]

a great way to build credit is to go apply for a credit card (the credit card may be minimal since you have never started your credit) use this card for all your purchases gas, food, etc. but be sure to pay it off each month maybe even twice i month before the interest hits the card .... do this for about a year and you will see a major change in your credit

Good advice if you are disciplined enough to pay it off each month. But leave a small ($20) balnace on it. Credit scoring module picks it up better if there is a small balance