Personal Loan - Should I take out more than I need?

[Anonymous]

If I need a personal loan (say for $5,000), would it be in my best interest (if I can afford the higher payments) to take out more than I need (say $10,000, assuming I would be approved for the higher ammount)?

My thinking behind this is to have the least negative impact on my credit score by taking out this new loan. I would take the extra $5,000 and put it immediately back on the loan making it look like I have paid the loan down by half. My understanding is that FICO take into account your balance compared to original loan ammount when figuring your score.

Anyone ever tried this or heard of anyone doing this?

Message Edited by JustinIND on 02-07-2010 11:06 PM

Message Edited by JustinIND on 02-07-2010 11:08 PM

[Anonymous]

Yes, if you have no prepayment penalty, this would take your account to 50% of original balance, which has some FICO consideration.  All things being equal (you have an inquiry and new account), if you can obtain the higher amount and then pay the excess back against the loan, the loan will have less negative impact at 50% $5000 balance than if it were 100% $5000.

IMO IME 

[Anonymous]

txjohn mentioned one issue - prepayment penality...

The other thing to keep in mind - most of these loans start adding interest IMMEDIATELY and even if you pay it off "right away", they will charge a 5-10 day "processing" time of interest.  So keep that "extra" cost in mind as well.

hope that helps your decision...either way, if you do that, please post the results so we can all learn!

[Anonymous]

If your loan is 10% APR, the extra $5000, if you keep it outstanding 30 days, will cost you about $41.67 in extra interest.  If you keep it 15 days, you can cut that in half.  So, is the benefit worth $20?  Granted, these numbers will vary based upon your APR.

Just make sure the loan has no prepayment penalty.  Calculate the extra cost in interest and then make an informed decision. 

[DI]

I've done that before.  Capital One offered me a $10,000 loan back in 2006.  I didn't need it, but I sure accepted the entire amount.  I put the $10k in a high interest savings account.  I made payments for a year to Capital One.  Got the balance down and paid the remaining balance from what I had in savings. 

Ever since then, Capital hasn't offered me anything.  I don't think they expected me to pay the balance in full within a year.  Although, I lost a few dollars paying interest for a year that wasn't offset from the saving account, my FICO score increased significantly.   

[Anonymous]

Thanks everyone for the input. Luckily I will be looking at my local credit union where I have my main checking and savings account with for this loan. No prepayment penalty and they will deposite the personal loan directly into my checking account. Since the two accounts (checking and loan) will be linked I will immediately make a transfer when I get home from the checking ot the loan. This should cut down on the interest I will be charged.

I will be looking at doing this in the next month or so and I will closely watch my score and post the results if I go through with this.