Hi all, I have an idea that I want to run by you all. My score is at worst in the low 500's (Equafax) and at best 580 (Experian). I have a CD with several thousand dollars in it. I have also done business with my credit union (formally John Deere Community, now Veridian) for many years. I'm thinking about using that CD or my life insurance as collateral to try to get a secured loan to pay off my car and some other bills. Sound like a good plan? Any suggestions?
What is your objective or goal is taking out the secured loan? This approach will not help your credit score (in the near term), and you run the risk of being turned down for the loan due to your current credit scores. Most banks will still follow their lending guidelines and treat the loan as if it were unsecured. You could end up with a hard inquiry on your credit reports, and no loan. Your credit scores will also take a dip to start, as you are adding a "new" account to your credit report. Just be aware of this impact. The scenario makes sense if you are trying to reduce the interest rates on the loans/bills you currently have. But, I would highly recommend NOT using the CD for security. Basic financial wisdom entails having an emergency fund of some sort. Too much happens in life, and you do not want to get caught being unable to pay this loan, or your other bills.
My interest rate on my car is 17%. The credit union can give me a 5% interest on a secured loan. Plus I have several other bills that I would like to consolidate. I am aware that this will hurt my scores in the near future, but it will help in the long term as I would be adding another good account to my CRs. I also have a life insurance policy that I may be able to borrow against. Would that be a better plan than the CD? Another choice is to take out a student loan for this purpose. My college is already paid for so I don't need a loan for that.
Overall it is a good plan to try and get out of the 17% loan rate. Before you do anything, read your auto loan document in full, and call and ask what the payoff amount is. Sometimes these higher rate loans have a clause which prevents early payoff, or include a penalty. Just make sure you can get out of the loan cleanly. If you can take out a student loan, that is probably the best interest rate you will find. Make sure you can pay it off though. Do not let it stretch out beyond the expected life of the auto. It sounds like you've thought this through, and have done some homework, so it makes sense financially. And yes, with another loan, (with a good payment history) it will benefit your credit reports down the road.
