Have your loans work for you ... not vice versa

 You, me and EXXON


What  could you and I possible  have in common with huge companies  like EXXON or Verizon?  Nothing?  Not true.  Once thing we have in common with these guys  is that someday we are going to need  other peoples  money  in order to  reach our  goals.  They go to to money store ( banks) just like we do to borrow money.  The difference between them and us?  They plan ahead  long before  they need to borrow and a result get the best possible  rate (lowest interest).  So my philosophy is simple  lets  copy them...as a much as we can that is.

When is the best time to plan for a loan.

Yesterday, long before we need the  money.

Step 1 - Get working today on improving your FICO  score.  Since your FICO score  determines your rate of interest, the  higher your score  the lower  your interest rate.  Even if you don't have perfect credit improving your credit  sometimes  just a little  improvement will save you money.  The harder you work at it the more money you save in the long run.

Step 2- Open an account at a Credit Union.  Think of a credit union as a specialist,  they specialize in consumers like you and me.  Without us they don't exist.  By being a member you will have access to their loan programs. You may choose to borrow elsewhere but normally  you will find a fair  borrowing  rate at your Credit Union  and programs designed for you  and me as consumers.

Step 3 - Learn about the type of loan  you may need.   If you are planing to buy a car in 6 months  learn   all about car loans today.  When you are "rushed" into obtaining a loan you might not make the  best  choice

To paraphrase an old Direct TV  ad.. don't be like that  other SAC student who got a great deal on the price of a car  and then gave back all the savings on a higher interest rate loan from the dealer.


A Few facts about car loans 

Your car loans interest rate is  generally determined  by the following factors ..Who you borrow from ....the type of car you buy ( new /used/ clunker) .. the  term of your car loan  and your credit  rating.

The lender.. Our  last two (new) cars (2012 and 2013) we actually  financed  through the dealer's lender .  We were pre-approved however by School's First.  The dealer made us a better offer on the loan.    

Did you know that  your  loan cost can be lower if you have payments deducted directly form an account? As of today  it was 0.75% .  Every little savings helps.

Type of car  Interest rates are typically somewhat lower on new cars.  

Loan Term  -  Typically rates are about the same up to 60 months  but  jump up after that.  If you can't afford the payment  over  a maximum 60 months then the  car is probably too expensive for you.  Even then you are committed to this payment for 5 years  think about it.  

Credit Rating - Enough already said

Dealer zero % interest..  Historically only about 15% of consumers  qualify for dealers zero % interest programs.  However if you already have a great rate in hand from your lender take  the lenders  rate and the  dealers rebate and you win on both ends. 




Home  Loans
 Your weekly chapters section  has a good starter  article on the  cost of a home loans so  i won't repeat it here.  However I will cover  what most students find most confusing.... interest rate,  points, loan fees,   and APR 

Remember interest rate, points and fees vary widely by lender  shop around.

Interest  Rate -   The  interest rate quoted on the loan.

Points - Prepaid interest you  pay to the lender for the loan when it is made   above and a beyond the quoted interest rate.  Each  point is one percent of the amount you  borrow so  if you loan is for $300,000  with 1.5 points   that's $4500 you have to pay as part of your closing  costs.  If you want to pay less points you will probably have a higher interest rate  over the life of the loan.  

Simple calculation  example  cost   of points  $4500.    loan savings $43 a month ,  number of months to save  $4500 ( if you paid no  points)  4500/43= 104 or 8.7 years.

It's  not always the numbers its your situation.

When you are buying a  house there are a lot a expenses  so maybe a $50 a month  extra payment ( if you qualify) is better than  an outlay of $4500  now.  Then again it may be for 30 years  so maybe the one time fee is worth it.

Fees  Link to mortgage cost and fees  A quick primer on mortgage fees.  What to remember  all these fees can vary drastically by lender buyer beware... Differences between lenders can be in the  thousands of dollars. 


APR is a measure of the cost of credit that includes loan fees paid to the lender upfront, as well as the interest rate. The higher are the loan fees, the larger will be the APR relative to the rate. If there are no loan fees and the rate is fixed through the life of the loan, the APR will equal the rate.

What Is the Purpose of the APR? (source: mortgage professor)

To provide a single comprehensive measure of the cost of credit to the borrower, which they can use to compare loans of different types and features, and loans offered by different loan providers.

The APR is a mandated disclosure under Truth in Lending. Mortgage shoppers confront it as soon as they search for interest rate quotes, because the law requires that any rate quote must also show the APR.

What is the difference between a home equity  loan and a home equity line of credit ?

A home equity loan is an additional (often called 2nd) loan again your home.  It is most often an installment loan.

Think of a home equity line of credit  in the same way you think of a secured credit card.   If you  don't use the credit card  you don't owe anything  and  don't have a monthly payment.   If you use the card ( the equity line) you  now have payments to  make .  Just like a credit card  you can choose how much to charge (borrow) up to the limit of your home equity credit line.

Remember the better educated you are about loans the more money you save. 

Prof K









 

The Credit Spider

spider spinning web

I am calling this blog The Credit Spider  because your credit history has many legs (it impacts many areas of your life )  and like a spider's bite,  bad credit hurts,  you can recover, but its painful along  Recovery Road.   


 We depend on a little, (some might say gigantic)  three digit  number for so many important things in life -- whether it's for a major purchase like a car or a house, or your student loan, a retail purchase, or finding an apartment      This three-digit number -- your credit score -- can determine whether you can do these things and even how much it will cost you.

dice with different credit scores

How can a simple number determine whether you can buy a house or car? Your credit report contains a history of how you've paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information to a three-digit number. Using the credit score, lenders can predict with some accuracy how likely you are to repay a loan and make payments on time. It's how retailers can offer instant credit.

This incredibly important number, which affects how much you pay for credit, insurance and other life necessities, used to be hidden from consumers. Until recently, only lenders and other businesses that used the score could access it. Now you can view your credit score -- for  free -- from credit reporting agencies and credit monitoring services and consumer credit web sites among other places.

sign road to good credit

If you  only choose take one action to get ahead  financially make that  improving your credit score.

What? Is this  better than saving for an emergency  or retirement?  If you improve your credit  score
you will

1.  Pay less (much less)  for credit....loans etc
2.  Have eliminated costs like late fees etc ( you are paying your bills on  time)
3. Probably have a lower credit card balance ( you are  managing it)
4. and more

The result is that you now have much more of your cash monthly available for what you want to do  save for retirement  take a vacation etc. Remember it's your credit  history  that  drives your score,  That's why this  week we focus on  understanding your credit  history . Your actions can change your credit history and when you see the results in front of you, on a screen  you are more likely to take action. 

No one is saying its easy  but every little change you make to improve your score starts putting money in to your pocket.  

flies escaping spider web

 When you proactively monitor your credit  history and  credit score

1. you have already created a mindset that  will allow you to think through decisions  you plan to make  and make the ones that are in your best financial interest.
2. help protect yourself from credit fraud and identity theft. 

Break free of the Spider's Web of Bad Credit !!!!

Low rates and High Fees

percentage sign

At  first look it is quite depressing bank interest rates on savings    How can you get your money to grow if by the rule of 72’s it will take 72 years for your money to double  at such low rates.

under 1%.

 

Typical  current savings  rates from Schools First  Credit Union  ( amount used under $20,000) might look like this.

cartoon man with psychiatrist

Earnings on Savings  0.10 to 0.15 APY (if you don’t know what APY  means check  PowerPoints  or google) On $1000 that’s only $1 to $1.50 a year

Earnings on Checking 0.05%

Even the best rate promotional share certificate has an APR of 0.90 % for 12 months.

Unfortunately these low rates often drive consumers to make  potentially risky  decisions with their money.

         Consumers don’t save because the rates are too low.  The risk they never increase their net worth because they are not savings.  And non saving becomes a habit rather than the habit of saving.

        Consumers take out long term CD’s to get a higher rate  – It’s a trade off,  if interest rates go up they  now have a lower  a interest rate than  the market rate.

 risk intersecting profit and loss

 Consumers choose to invest in a get rich quick alternative – gold,  stocks held to flip for profits, bit coins etc .  They risk loss of principle.  Although they could gain as well.  Can you afford to lose your initial investment?

Forgetting about other investments and only concentrating on “cash” investments  are there any benefits of these low rates?  Do consumers have alternatives …. The answer to both is yes.  

                            How do low rates benefit you?

car on a calculator

The answer is because the cost of borrowing is lower as well.  Car loan’s show as low as 1.59% interest for 5 years with good  credit.  You may not be earning much on my savings but correspondingly your cost of money is very low. 

House made of paper money

The APR (cost of money ) on a 30 year on a 30 year fixed home loan can be under 4% ( maybe even less if your shop around).  So  even if you aren’t making much on savings   when you are borrowing  money you might be borrowing a lot  say $240,000 for a home loan you lock in a low interest rate for 30 years. A great deal  .

The purpose of commenting on the above is getting you to focus on the spread between savings and borrowing.   The greater the spread the more your opportunity.

Examples (please be careful with these there are many factors to consider and these may not be right for you  they are here just to get you to think about your  options)

·        Let’s say you have 9  years to go on your student loan  with an interest rate of 6.5 %.  If you pay extra on your student loan instead of saving money  it is the same as earning 6.5% on your  money for until the student loan is paid off. 

·        Now look at your credit card interest rate. Is it 18% ?  maybe your better off putting that extra $10 per week you are now saving towards reducing your credit   card balance.  It’s the same as earning 18% a year on an investment,  a great rate.  Now this doesn’t work if you just run the balance back up but if you now have discipline  … then !!! 

 Food for thought.  

DO YOU HAVE MONEY TO BURN?

hands taking money form man's pocket

no fees

 Before you say  NO! let me ask the question a different way.   Do you pay fees  to your bank or credit card  company ?

ATM outside of network fees

                                        Account fees

                                                        Late payment fees

                                                                                           Overdrawn fees.

These little and larger fees add up  get rid of them.   Why pay for something that’s only good for banks?  

I just hate fees with a passion.   But its your money,   maybe you do have money to burn.

Until next week 

Prof K

Tax Planing Season

Man flying tax return to mail box

It's tax preparation season  ... and no I am not going to supply tax  saving tips here, but i do have some suggestions for you.  You still have time to  take action to  take advantage of  all benefits your earned for  2016  or  and  review and plan for 2017, without the pressure of getting your return in the mail.  Not yet anyway.

 1- Google " tax tips for college students" or  " income tax checklist" etc and see if there is anything that applies to you.

Also  try Googling mid year tax planning tips or similar.

 2-  Don't wait to the last minute to review  for a few reasons, but a big one is   if you  (or your preparer) are in a rush at April 15 you can forget something or make a mistake and it can cost you money. If you organize your records now you won't and there will be less stress in the future.  Plus  except  for depositing money in an IRA etc  there are not many things you can do in early 2017 that help your 2016 return.

3- It is a great time to think about what changes you should make for  the remainder 2017  and implement them now.

The other thing to be careful about is "tax advice" from your friends.  I usually answer most questions about tax with the comment  "it depends".   Example friend tells you that you should raise you exemptions on your withholding so you can keep more of your paycheck each week.  The answer is that your friend  is  technically correct"  but it might not be the correct decision for you.

Lady giving bank robber  tax advice

This  suggestion  is a timing issue... you  pay the tax now or pay the tax later when you file your return.

  1- Your friend doesn't really know all about  you.  Maybe you have other  income etc. on which there is  no withholding. 

2-  There is also such a thing as minimum required withholding during the year.  If you don't withhold enough you could face a tax penalty ( that's giving the govt money you should not have to)

There is also the personal side.

Lets say your are a person who  just can't seem to save.    Even though this  might not be the best  personal financial decision ( as an absolute)  it may work for you because getting that little bit back at tax time  has actually been a forced savings plan.

Even with taxes not everything is an absolute.

There is one absolute however.  Before  you make a big financial decision such as  buying  or selling a house, selling a stock etc. make sure you really understand the tax implications so that you are not surprised.  You just can't fix a mistake in the past and it can cost you money.

taxes looming large

On a personal example.  I sold a piece of rental property that I had owned for a long time.  Understanding  options in advance ( i got got tax advice) caused me to make smart decisions that saved me quite a bit of money by not paying unnecessary taxes. 

I hope that this  tax review will take some  of mystery out of taxes and result in you making good decisions that will save you money and get a few extra dollars back on your return.

Prof K