Troy

If the bank was aware of your $14,000 401k loan, it may have affected their loan offer to you because they take many factors into consideration when making loan offers, including credit history, payment history, number of lines of credit, types of credit, credit utilization (percentage of available credit used), and more. In this case, your 401k loan may skew your credit utilization or otherwise affect the loan offer. But it’s impossible to be certain – we simply don’t have enough information to go on.

That said – you can still work to improve your credit score by following the methods outlined in this article. It takes time, but can save you thousands of dollars in interest payments over the years, or in the case of the house you are looking for, potentially hundreds of thousands of dollars. My recommendation is to try and delay any major purchases if possible, so you can save a larger down payment and improve your credit score, the former will reduce the amount of money you need to borrow and the latter of will give you a lower interest payment. Both will save you a lot of money in the long run.

The fact that I borrowed from myself for the down payment is irrelevant in discussing risk to the bank providing the auto loan. So to simplify things I won’t go into that anymore here. Although I would have been financing the entire $17,000, they would have had $14,000 of hard cash on the table in the form of a down payment, leaving roughly a $3,000 balance as discussed to make payments on. Under this scenario – they should have been practically begging me to take the loan even at a 5% rate. Had I defaulted on the loan, without even making payment #1, they would have been in a position to pocket the $14k while repossessing and selling the car off at an auction to cover the balance of $3,000 and whatever other costs and fees that would undoubtedly end up getting piled on. The vehicle’s value at such an auction would have obviously been much less than the purchasing price, but shouldn’t have any trouble auctioning off for at least $6 to $8k under worst case scenario.

The loan was virtually a win/win for them regardless of my credit history. That they view poor credit as a risk does not in fact mean that risk would have existed for them with that loan. It was to their detriment that they were unable to look past the credit history issue and perhaps try to work with a potential customer who was willing to fork over 3/4 of the loan upon signing on the dotted line – while they held the title of the car as collateral.

I would suggest that all consumers use due diligence before buying into the entitlement mentality that many financial institutions appear to have in the wake of the financial crisis. Credit can be a good thing if built carefully with the proper loans and payment history, but it can also be quite crippling to the unsuspecting buyer.

Thanks again for the feedback Ryan. Lets hope things improve for the economy in general for both consumers and lenders alike.

Regardless of whether you borrow $1,000 or $10,000 or $100,000, banks see no credit history or poor credit history as risk. If you need to improve your credit score, then I recommend starting small – perhaps with a smaller loan, or with a secured credit card, as you mentioned. You will find it much easier to make large purchases, such as a house, with an improved credit history and a better credit score. I wish you the best.