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