Pledge loan questions

[ficomeup]

Hi guys. I have a couple of questions on pledge loans. I've found answers by trawling through old threads, but they are often inconsistent and never asked asked/answered at the same time.

1. Is there a benefit in having a larger pledge loan other than unlocking certain term lengths? E.g. a common pledge loan seems to be $3k with NFCU over 60 months - $3k needed to have a 60 month loan. But would it improve my credit standing to have a $50k 60 month loan, rather than a $3k 60 month loan? A YouTube video suggested that $50k would be "baller" and possibly be seen more positively by someone reviewing my credit file (e.g. for a mortgage) - so maybe there are benefits beyond only FICO score increases?

2. Can I repay a higher % of the loan? A lot of guidance says "get it below 8.9%" or "repay 90%". But why wouldn't I repay (for example) 95% (or more) to reduce the remaining loan amount on which interest is calculated? I.e. reduce the interest cost.

Is the answer that if you repay too much, they might close the loan? Why is 8.9% the most common answer?

3. Is it better to repay the c.90% in a single very large installment, or multiple large installments? I see some people repay the c.90% part in a single large installment, and others repay in $500 increments (on for example a $3k loan) until they hit c.90% repaid. What is the better approach? My view is that it would be simpler to just do a single payment and then have NFCU recalculate the monthly payments.

4. Should I wait 30-45 days after taking out the loan before paying down the large portion of it? A YouTube video suggests leaving it for 30-45 days so that the original loan amount is reported as the total loan value for all time. The logic goes that if you pay off c.90% of it immediately, the credit bureaus may miss the original loan amount and think that the remaining 10% is the "total loan value" (rather than the original 100% amount).

Thanks!

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Edit: One more...

5. Would it be better to get a loan for longer than 60 months? I see people using PenFed to go up to 141 months (!). Is it possible to do that with NFCU? I think it might be possible, but the interest rate would be 3% rather than 2%... would the extra cost be worth it?

[coldfusion]

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@ficomeup wrote:

Hi guys. I have a couple of questions on pledge loans. I've found answers by trawling through old threads, but they are often inconsistent and never asked asked/answered at the same time.

1. Is there a benefit in having a larger pledge loan other than unlocking certain term lengths? E.g. a common pledge loan seems to be $3k with NFCU over 60 months - $3k needed to have a 60 month loan. But would it improve my credit standing to have a $50k 60 month loan, rather than a $3k 60 month loan? A YouTube video suggested that $50k would be "baller" and possibly be seen more positively by someone reviewing my credit file (e.g. for a mortgage) - so maybe there are benefits beyond only FICO score increases?

The rationale behind the share secured i.e. "pledge" loan is that having an installment loan in good standing contributes to having a positive impact on ones' FICO scores.    In that aspect a $500 4 year loan, which Alliant FCU used to offer, is as effective as a $3,000 5 year loan but NFCU (IIRC) doesn't offer a 5 year share secured loan for less than $3000.  A related point is that insofar as how scoring is impacted there is no benefit to having multiple installment loans.  If you have an auto loan in good standing also having a share secured loan wouldn't have much if any positive scoring impact.

2. Can I repay a higher % of the loan? A lot of guidance says "get it below 8.9%" or "repay 90%". But why wouldn't I repay (for example) 95% (or more) to reduce the remaining loan amount on which interest is calculated? I.e. reduce the interest cost.

The 8.9% figure is based on FICO scoring; as certain utilization thresholds are crossed the positive impact on your FICO scores can increase.   FICO does not publish their scoring models so we don't know exactly what this particular threshold is, only that based on data points it's close to 8.9%.      That is the last threshold before a loan is entirely paid down so from a scoring perspective there generally wouldn't be much scoring impact in an immediate paydown to 5% instead of the "under 8.9%" figure, but you'd be free to do so.

Is the answer that if you repay too much, they might close the loan? Why is 8.9% the most common answer?

See above, it's one of the major thresholds (approx 88.9%/68.9%/48.9%/28.9%/8.9%) in loan utilization that when crossed tends to be a positive impact on scoring models. 

3. Is it better to repay the c.90% in a single very large installment, or multiple large installments? I see some people repay the c.90% part in a single large installment, and others repay in $500 increments (on for example a $3k loan) until they hit c.90% repaid. What is the better approach? My view is that it would be simpler to just do a single payment and then have NFCU recalculate the monthly payments.

The reason for the single bulk payment is that the actual end result is you reclaim that amount of pledged asset back to you instead of being held as equity against the loan, but for a short while you've tied up that additional money until the payment is processed and all the bookkeeping catches up.  Not everyone can or is willing to make a single large bulk payment but instead would make several smaller payments over a realtively short period of time to draw down the balance.   

4. Should I wait 30-45 days after taking out the loan before paying down the large portion of it? A YouTube video suggests leaving it for 30-45 days so that the original loan amount is reported as the total loan value for all time. The logic goes that if you pay off c.90% of it immediately, the credit bureaus may miss the original loan amount and think that the remaining 10% is the "total loan value" (rather than the original 100% amount).

Thanks!

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Edit: One more...

5. Would it be better to get a loan for longer than 60 months? I see people using PenFed to go up to 141 months (!). Is it possible to do that with NFCU? I think it might be possible, but the interest rate would be 3% rather than 2%... would the extra cost be worth it?

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Comments added in-line. 

[ficomeup]

Thanks a lot! I guess I will just keep things simple and do a $3k 60 month loan instead of trying to get fancier with a higher amount (I was considering $20k).

Paying back in multiple chunks still seems a little strange though - since you by definition have the cash available (you've just given it to them, they've given it back, and then you do the reverse). Good to know that there is no penalty / benefit from either approach.

Looking forward to taking out the loan. I'm going to be different and pay back 95% to reduce interest payments + also be within the "under 8.9%" threshold.

Thanks again!