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Financial Literacy Articles


0% Auto Loan Might Not Be the Best Deal

In seeking the best deal on your next car, you might've stumbled upon advertisements or offers to get a 0% interest auto loan. As great as this sounds, you may not save as much as you expect with this type of incentive.

Since auto loans can come through either a dealer or a lender, such as a bank or credit union, it's important to note that a 0% interest loan generally, if not always, is obtained through a dealer. Automakers offer them to attract buyers to certain car models, especially ones that aren't selling well. Here are a few things to consider about 0% financing and why it might not be in your best interest to use it.

You might be forfeiting a better deal

Typically, you can't receive both reduced rate financing and a cash rebate when you buy a car, so you may have to choose one. Manufacturers' cash rebates can range from a couple hundred to a few thousand dollars. The well-known auto research website Edmunds found that the cost of incentives that automakers pay to attract customers was around $2,300 per car industrywide, which includes cash rebates and cost of reduced financing.

While a 0% loan may sound appealing, a cash rebate might save you more money. If you buy a $20,000 car that has a $2,300 rebate, you are really paying $17,700 plus interest. If the interest rate for a five-year loan is 2.7%, which was the average rate at credit unions toward the end of 2015, then you would pay a total of $1,242 in interest. That would bring the cost of the car plus interest to $18,942, saving you $1,058 compared with what you'd pay with a 0% loan.

You may want to check the auto loan rates at local lenders too, since you might be able to get a low rate and pick up a rebate when you negotiate with the dealer.

Rate may not last as long as your loan

Some car models may have 0% financing for a limited term, such as five years, which could be less than the length of your auto loan. In the third quarter of 2015, the average loan term for a new car was five years and seven months, and the term for used cars was five years and three months, according to Experian's State of the Automotive Finance Market report. These are the longest average terms calculated since the firm began collecting data in 2006.
You may even receive a longer loan if you want lower monthly payments than you were offered initially. If your term is longer than the 0% financing deal, you generally pay interest on the remaining months or years.

This offer can be limited

A 0% rate might only be offered for a handful of models, especially newer cars, and less for used cars or older models. But even if this deal is available for the car you want, qualifying for it typically requires a high credit score. Check on the eligibility rules for getting this rate before stepping onto the dealer's lot if you can.

As you sift through car prices and incentives, remember that trade-offs are part of the process when buying a car. Although a 0% interest rate may save you money in some cases, you might also be letting a better savings opportunity pass you by.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved


Best Ways to Finance a New Car

So you've found your dream car, and now comes the hard part: paying for it. Most people don't have the means to pay cash for a new car.

That's why there are alternatives for financing. Here's a primer.

To buy or lease?

Leasing allows you to drive a nicer car without the hefty costs. You'll usually have lower monthly and down payments than with purchasing, as well as reduced repair costs since the average three-year lease expires before the vehicle's warranty does. You pay sales tax only on the portion of the car that you finance.

Here's the catch: You never really own the car. It's similar to renting a car for several years. At the end of the lease, you'll pay for wear and tear, as well as any miles that you drove over the limit, which is typically 12,000 to 15,000 a year. It can also be costly to terminate the lease early.

With a lease, you'll always have a payment. It's a great short-term option, especially if you like to buy and trade in cars regularly, but the costs add up over time. In contrast, when you buy, there will be — eventually and ideally — a period of several years when you aren't making a car payment.

If you tend to drive cars into the ground, buying is a better option financially. There is more flexibility in selling, you have no mileage charges, and you can save money in the long run.

There are advantages and drawbacks to both options, so consider your budget, lifestyle and driving needs before deciding.

Can you use a credit card?

Most dealers allow you to pay only a small portion of a car's price with a credit card. Dealers have to pay a credit card transaction fee, generally 1% to 3% of whatever was charged on the card. Since dealers typically have a profit margin of only a little over 2%, they aren't interested in sacrificing it to a card company.

So should you put at least part on a card? It depends. If you can get a 0% interest card and you'll be able to pay it down during that introductory term period, it may be worthwhile. Otherwise, it's probably best to stick with a traditional loan.

What other financing options exist?

Don't confine your financing search to just the dealership. Your local financial institution is more likely to offer lower rates, which means less interest paid over the life of the loan.

With financing in hand, you can focus solely on getting the best deal and turning your dream car into your real ride.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved


10 Terms Every Homebuyer Should Know

Buying a home is a common undertaking for many Americans, but it's also one of the most complicated — not to mention costly — purchases adults will ever make. It's important to understand these 10 essential terms so you're ready to make smart decisions with your money.

  • Adjustable-rate mortgage (ARM): A mortgage with an interest rate that can change over time. It typically has a low, fixed initial interest rate and then may adjust regularly either up or down depending on market conditions. It can't exceed a set rate cap.
  • Closing costs: Fees from buying a house from both the lender and third parties like inspectors, attorneys, surveyors and title insurance companies. These typically add up to 3%-6% of the total home price, though some of these charges are negotiable.
  • Down payment: When you're buying a home and financing it with a mortgage, most lenders require you to put down a certain amount of cash upfront, usually 5% to 20% of the total price. Your mortgage covers the amount remaining after the down payment.
  • Escrow: A neutral, third-party account that protects the money of both buyers and sellers until real estate transactions are finalized. For example, if you choose to make a deposit with an offer on a home, it would go into an escrow account first rather than directly to the seller. Once you've bought a home, escrow accounts are also typically used to hold money for homeowners insurance and property taxes until payment is due.
  • FHA loan: A mortgage offered through the Federal Housing Administration that has less strict credit and down payment requirements compared with conventional loans. It's ideal for people with less-than-stellar credit who aren't able to qualify for conventional financing. The tradeoff: Along with paying monthly mortgage insurance fees, you'll also pay a hefty upfront premium.
  • Fixed-rate loan: A mortgage with an interest rate that won't change over the course of the loan. The rate may be higher than an ARM, but you'll never have to worry about it increasing.
  • Interest: Money your lender charges you for cash you borrow, indicated by an annual percentage rate, or APR (for example, 4%). Your interest rate will depend on your credit history and how much you can afford for a down payment.
  • Principal: The amount of money you borrow. Note that you end up paying significantly more than this amount because of interest.
  • Private mortgage insurance (PMI): If you don't put 20% of the home's price in a down payment, some lenders require this insurance to lessen their risk. It's typically paid with a  monthly fee added to mortgage payments. You can often cancel it once you have a certain amount of equity in the home.
  • VA loan: Mortgages for qualified current or former members of the U.S. military. These typically offer more favorable interest rates and require low to no down payment. They're offered by financial institutions but backed by the Department of Veterans Affairs.

Home buying can be confusing, but knowing this important lingo will make it easier to navigate the process.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved


7 Banking Tips for Young Millennials

Once you start receiving your first paychecks after graduation, knowing how to spend or save your money wisely can be tough. While you may be able to do your banking with just a few taps on your phone, managing money well is much more complicated. Here are a few tips to help you get started.

1. Budget using apps

Tracking how much you spend weekly and monthly shows you where your money goes and how you can save more. You can use a budgeting app that tracks your cash automatically, such as Mint, or one where you enter information manually, like Spending Tracker. Choose an app that lets you spend as little or as much time on budgeting as you want. From there, you can identify your total fixed expenses, such as rent and car payments, and more flexible costs such as shopping and dining out.

2. Set up automatic transfers to savings

When you have a rough idea of how much you can save regularly, create a recurring transfer from your checking account to a savings account. By making savings automatic, you can get used to spending “below your means” and never have to worry about remembering to transfer.

3. Avoid overdrawing your checking account

Before you pay rent or spend any other big chunk of money, take a look at your checking account's available balance. This can prevent you from spending more than you have in your account. If you overdraw, you may be charged a fee.

4. Establish credit

Student loans and credit cards can help you build good credit — as long as you stay current on monthly payments and don't overuse your cards. Your credit score, which shows how responsible you are with credit, is an important factor that lenders check before approving car loans and mortgages. The better your score, the lower the interest rate you may be eligible for.

5. Repay debts strategically

If you have debts from multiple credit cards and student loans, pay the minimum on each and then contribute more to your higher-interest debts. By making those a priority, you can reduce how much interest you're paying faster than by treating all debts the same.

6. Start an emergency fund

Being financially prepared in case of health emergencies or unexpected unemployment can save you from going into debt. Have a separate savings account just for this purpose — don't mix it up with your regular savings. A good rule of thumb is to save enough to pay three to six months' worth of living expenses.

7. Set long-term savings goals

Consider saving for retirement in an employer-sponsored 401(k) plan or individual retirement account. When you start saving early, you take advantage of compounded returns to make more money off your contributions overall.

From smart budgeting to setting goals, make good money choices now. Since time is on your side, you can benefit from building credit and saving early to be ready for big financial decisions in the future.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved


first job

First Job? Here’s How to Set Your Finances Up for Life

Landing that first job means having a regular influx of cash, but steady work alone doesn’t guarantee financial health. Here’s how to build the foundation for lifetime financial security.

Get on budget

It truly doesn’t pay to wing it. Budgeting is the most effective way to get and keep finances on track. Just add up your monthly income and subtract expenses such as student loans, rent, clothing and entertainment. This gives you a basic financial snapshot. If the numbers look shaky, adjust by cutting unnecessary expenses or adding extra work hours. Using a mobile budget app such as Mint or Level Money can make this process almost effortless.

Establish goals

Financial goals act as a road map toward your dreams. Maybe you’d like your own home or apartment, an exciting vacation or a new car. Highly effective goals are often referred to as “S.M.A.R.T.”: They should be specific, measurable, achievable, rewarding and time-framed.

Build solid credit

Even if you don’t need to borrow right now, having excellent credit history can reward you with the best picks for jobs, apartments and vacation deals as well as with lower insurance premiums and preferred rates when you’re ready for a mortgage or other financing. To begin building credit:

  • Apply for a credit card.
  • Pay your credit card bill and all other bills on time.
  • Use your card regularly, but keep your balances to 30% of your credit limit or less. Also, don’t apply for more credit than you need.
  • Monitor credit reports to clear errors, delinquencies or fraud immediately.

Expect the unexpected

With an emergency fund, unexpected challenges such as a job loss or medical issues don’t have to wipe you out financially. Aim to save a minimum of three to six months’ worth of living expenses, and keep that money in a separate savings or money market account that can be accessed quickly during emergencies.

Prepare for retirement

When you first start working, retirement probably is the last thing on your mind. But the hard truth is that the average retirement lasts 20 years, and it will take a massive bundle to support yourself all that time. Social Security won’t cover this alone; you’ll likely need 70% to 90% of your final income annually for a comfortable retirement. It’s never too early to start preparing. Make the maximum employer-matched contribution to any work-sponsored retirement plan, and deposit whatever you can afford into your own private retirement account, which should include traditional and/or Roth IRAs.

Become a saver

Even if you don’t have much extra cash, small amounts saved consistently really grow over time because of compound interest. Commit a set amount to save monthly and make a habit of paying yourself first, before any other bills. Setting up an automatic savings plan that regularly transfers funds from checking to a savings account or deposits a portion of your pay directly to savings can make growing a nest egg a no-brainer.

Personal finance doesn’t have to cramp your style. With a minimum of planning and discipline, your smart choices will help you live well today and achieve your most exciting dreams in years to come.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved


Pay Day Loans: Beware

A payday loan is a short-term loan, generally for $500 or less, that is typically due on your next payday. Payday loans generally have three features:

  1. The loans are for small amounts.
  2. The loans typically come due your next payday.
  3. You must give lenders access to your checking account or write a check for the full balance in advance that the lender has an option of depositing when the loan comes due.

Some ways that lenders might give you the loan funds include: providing cash or a check, loading the funds onto a prepaid debit card, or electronically depositing the money into your checking account.

The cost of the loan (finance charge) may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. Yikes!

Don't fall into the Payday Trap

Don’t fall into the trap of borrowing time and again with never ending interest rates. You usually pay back double the amount you borrowed, if not more! Payday lenders usually bait you with “FAST CASH” gimmicks, but that convenience is often accompanied by outlandish high interest rates and fees. Borrowers who cannot repay their loan within two weeks are often forced to roll over the loan, and can get trapped in the cycle of borrowing over and over! Contact us and see how we can help.


 

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