Borrowing Basics

Loan Basics

Loans help finance some of our biggest goals in life. They can provide access to possibilities that we can’t afford upfront—possibilities like going to school, buying a home or starting a business (to name just a few). 

A loan is also one of the biggest financial commitments we make in our lifetime. Rushing into a loan without fully understanding how it will affect your budget can create a very stressful situation that can quickly spiral out of control. 

The good news is that you can avoid this stress entirely by choosing the loan that’s right for you: a loan you can afford, from a reputable lender, with a payment schedule that makes sense.

Not sure where to start? The five tips below will help you shop smarter for the loan that’s right for you.

#1: Take your time
Reading the fine print is not fun, researching loan options is not exactly exciting and asking financial questions can feel intimidating—but these all play an important part in helping you find the right loan product. The process is not easy, and if you’re tempted to rush through it, just remind yourself that being thorough now can save years of financial stress down the road. You should never feel pressured to sign anything on the spot. Remember: this is your loan and your future—you’re in control!

#2: Be honest about your budget
In order to choose the right loan, you need to have a clear idea of how much you can comfortably afford to borrow. Spend some quality time with your budget (if you don’t have one, now is a great time to make one). You’ll want to come up with a range, so calculate a few different scenarios:

  • If your income and expenses stay exactly the same as they are now, how much of a monthly payment could you afford?
  • If you suddenly lost your job, how many payments could you make before running out of cash? Do you have an emergency fund in place?
  • Is there an area of your budget where you can reduce spending to cover a planned (or unplanned) increase in your monthly payment?

Picturing your loan payment alongside your other budget items will give you a sense of what you can realistically afford so that you can confidently shop for a loan without worrying about the financial effect on your lifestyle. 

#3: Give yourself some credit
Your credit score plays a huge role in determining the loan rate you qualify for. Additionally, knowing your credit score before you go loan shopping will save you some time by making it easy to weed out offers you’re not eligible for. In the meantime, keep up those good credit habits: pay your bills in full and on time, and try to use only 10% of your available credit limit each month.

#4: Do some research
Start with brushing up on some basic loan terminology and then move on to learning about different types of loans (such as secured loans, unsecured loans, fixed-rate loans and variable-rate loans). Research loans online to get an idea of the interest rates for the products you’re interested in. When comparing various loans, look at more than just the Annual Percentage Rate (APR). Consider the fees, the payment schedules, the eligibility requirements, and the application and approval process. Also, check out the history and reputation of the various lenders—especially if you stumble upon offers that seem too good to be true.

#5: Check in with your credit union
Credit unions are known for offering competitive rates on loans. You may also qualify for discounts based on your existing membership or because you have other banking products with your credit union.

Comparing Cards

Think fast: what’s the most recent financial decision you made? You likely won’t have to think too far back.

It’s not the last account you opened, or the school loans you consolidated—it’s something much simpler that’s part of your daily routine. Think back to the last thing you purchased—your most recent financial decision was likely what form of payment to use for that transaction.

It’s a decision that comes into play for every bill you pay, every tank of gas you buy and every coffee you pick up on the way to class or work. Cash, check or card? Debit, credit or prepaid debit? You make this decision so many times a day that it might seem common and unimportant. After all, different forms of payment are just different ways to access funds, so what difference does it really make if you put your breakfast sandwich on credit instead of debit? 

Well, no payment method is automatically better or worse than any other; it comes down to when and how you use each payment type. Fully understanding each payment type allows you to make smarter decisions, and take advantage of the benefits of each payment type while avoiding any drawbacks. 

 
View our Comparing Cards infographic

Buying vs. Leasing a New Car

When it comes to buying a new car, you have three options: purchasing it with cash, purchasing it through a loan (also known as financing) or leasing it. For most shoppers, the decision comes down to buying or leasing.

On the surface, the differences between leasing and buying a vehicle seem fairly straightforward. Leasing a car means you’ll usually have access to a new set of wheels every few years; buying it likely means that you plan to drive the same car for a much longer period of time. Leasing usually includes a warranty that covers most of your repairs; buying means accepting larger repair costs, which are inevitable as the car ages. Leasing agreements can limit your mileage and your ability to customize your ride; buying means you can put as many miles as you want on the car and customize it however you’d like. 

Looking only at the comparisons above, you might conclude that buying a car is a more practical and economical option than leasing a car—but if that’s really the case, why are monthly lease payments so much lower (often 40% lower!) than monthly loan payments? Why is leasing considered more expensive in the long term if you’re paying less on a month-to-month basis? To answer these questions, let’s take a look at the concept of depreciation.

Depreciation means a loss of value over time. New cars are a textbook example—you’ve likely heard that a car loses thousands of dollars in value the moment you drive it off the lot. That’s accurate, and that’s depreciation at work (and yes, it can be kind of depressing).

Demystifying Mortgages

View our Demystifying Mortgages infographic

Asking the right questions is an important part of every financial decision you make, and home ownership is no exception. If you’ve been thinking about buying a place, preliminary research will turn up a long checklist of questions for you to ask at every part of the process. There are questions for your financial institution, questions for your mortgage broker and questions for your real estate agent. But what about the questions you should be asking yourself?

Owning a home is likely the largest financial commitment you’ll make in your life, and it’s easy to get caught up in details pertaining to debt-to-income ratios, the real estate market, current interest rates and amortization schedules. But financials are only a part of the picture. In order to make a truly smart decision, you need to acknowledge and accommodate some personal factors along with the financial ones. Asking yourself the following four questions will help you determine whether or not you’re ready to own a home:

1. Why do you want to own a home? 
Seriously, why is owning a home important to you? (Don’t answer with what you think you should answer; be honest with yourself.) Are you looking to build equity? Does it just seem like something a “successful adult” needs to do? Do you see it as an investment? Do you think renting is somehow inferior to owning? Are you just fed up with your landlord? Do you see it as a symbol of your freedom and independence? Do you have a Pinterest board of home renovation ideas you’re dying to try? Do you think it’s something that all (insert age here)-year-olds should do? 

There’s no “right” answer to this question (even though some reasons might be more frivolous than others). By simply observing what surfaces when you ask yourself these questions, you’ll get some insight into why you’re contemplating buying a home in the first place. Are your motivations fueled by practicality or insecurity? Is it something you want, or simply something that everyone else seems to be doing? You’ll be able to tell if you’re in it for the right reasons.

2. Are you okay with staying put?
To make the most out of buying a home, you need to be in it for the long haul (which, in this case, usually means at least five to seven years). There’s a reason why short-term home ownership isn’t a thing outside of those real estate flipping TV shows—it’s a great way to lose a lot of money. Your home, like any investment, needs time in order for its value to grow (and that growth isn’t guaranteed, by the way). By selling your home after only a couple of years, you’re at the mercy of real estate market swings and your home may not have increased in value enough to break even—especially when you factor in closing costs and other additional expenses that go along with buying a home. If the thought of staying in one place for more than one year makes you feel panicky, then it might not be the right time for you to buy.

3. Are you happy?
Stability is key when it comes to buying a home, and so anything that threatens that stability could also potentially cause some major headaches once you’ve signed the mortgage papers. Do you love what you do for a living? Do you have job security? Do you enjoy living in your neck of the woods? Is your personal life stable? 

You don’t want to be in a situation where you purchase a home and then find yourself faced with the need to change things up. A career change, the start or end of a relationship or a sudden onset of wanderlust could all interrupt your plans to stay put and build equity. Of course, life can be unexpected even when you’re happy—but generally speaking, if you’re pleased with where you’re at, dramatic changes won’t be looming around the corner. 

4. Is your savings account up for the challenge?
Have you done your homework and figured out how much home you can afford, based not only on the monthly mortgage payments, but also on all of the other expenses, such as property taxes, insurance, homeowners association fees, and utilities, to name just a few? Regular monthly expenses aside, home ownership can serve up all sorts of expensive surprises, and you’ll want to make sure your savings account is up for the challenge. Save up for inevitable home repairs and maintenance—the financial responsibility of maintaining a household (appliances, heating, plumbing and landscaping) can take new homeowners by surprise. You’ll also want to beef up your emergency fund so that you have some flexibility and can continue paying your mortgage if you suddenly find yourself with health or job troubles. If your savings are healthy, you’ll also want to consider budgeting for moving expenses, furniture, and home upgrades before making the move.

On the surface, home ownership can seem like a smart and appealing option, especially if your mortgage payments work out to be lower than what you would be paying to rent. However, rushing into a mortgage can set you up for a ton of stress (financial and otherwise). Before you buy, check in with yourself to make sure that you’re well prepared, that the timing is right and that you’re doing it for the right reasons.

 Student Loans 101

 5 Ways to Lower the Cost of Tuition Before Considering a Student Loan

If you’re considering financing your college education with the help of a student loan, the smartest thing you can do for yourself is to only borrow what you truly need. (This advice applies to pretty much all loan products, by the way.) Pursuing post-secondary education should be an exciting time in your life. You’re making decisions and opening up possibilities that will shape your future—a future that is adventurous and fulfilling and that decidedly does not include years and years of crippling debt.

For many young adults, student loans serve as the first real experience with borrowing a large amount of money. It’s a steep learning curve for someone just starting out, and not understanding financial concepts like interest rates, loan terms and repayment schedules can quickly snowball into a very stressful and costly post-graduation experience.

Although there are things you can do during your time as a student to soften the sting of student loan repayment (working part-time while in school and sharpening those budgeting skills are two solid strategies), why not get the process started even sooner? The following tips will take a bite out of your total education costs and reduce your dependence on outside financing—and they can all be put into action long before Orientation Day rolls around.

1) Do the Two-Step

(No, we’re not referring to the dance.) The college two-step means splitting your studies between two schools. You start by attending a more affordable institution for your general education courses, and then transfer to your school of choice to complete your degree (one example of this in practice is earning an associate’s degree at a community college and then transferring into a bachelor’s degree program at a university). This way, you save some money on introductory-level courses and reserve the big bucks for the specialized instruction that comes in the latter half of your academic career.

2) Go for Extra Credit

Find out if there are any opportunities to earn college credits while still in high school. Beyond reducing college tuition costs, advanced college credit programs are an excellent way to explore your interests more seriously and to get a sneak preview of what your college workload will look like. If you’re already out of high school, find out if any colleges or universities in your area offer summer courses at reduced tuition—that could be an alternative way to score some credits before September.

3) Seek Out Scholarships

Apply for every form of scholarship, grant and tuition waiver that you’re eligible for. It’s never too early to start your scholarship search—reach out to your high school guidance counselor or the financial aid coordinator at the college you wish to attend. Visit scholarship search engines and online resources. Reach out to your current employer and your family members—you never know, there may be some form of tuition subsidy or grant opportunity available to you through an employer or alumni network. Be exhaustive in your search and approach each application with the same level of enthusiasm and optimism—even the smallest awards and prizes will add up. It’s free money, and it’s there for the taking.

4) Location Scout

Geography can play a significant role in determining your total education costs. A single school may have different tuition rates for in-state, out-of-state and international students. Generally speaking, staying in-state is usually the most affordable option—in addition to saving on tuition, you can also sidestep some of the larger expenses associated with studying abroad (like travel costs, meal plans and living in residence). Of course, there are plenty of non-financial incentives for studying abroad, but it’s important to understand just how much the location of your school will affect your bottom line.

5) Double Down

Some schools offer accelerated programs that enable you to complete a four-year degree in just three years. This is a great option to consider—that’s one less year of tuition to pay!—but bear in mind that you’ll be squeezing more classes into a shorter period of time. The intensive schedule might make it difficult to accommodate a job while you’re in school, for example, so weigh your options carefully before committing to a more ambitious schedule. 

The tips outlined above represent thousands of dollars of potential savings. Whether you’re a first-time student or a returning student, it’s in your absolute best interest to whittle down your education costs as much as possible before considering a student loan or alternative financing option. Your future self will thank you.

Predatory Lending

Beware of Fast Cash

Like local car dealerships and personal injury law firms, short-term and payday lenders tend to have the most annoying commercials on TV. They’re often tacky and annoying, and tend to air during daytime talk shows or very late at night. Their promises of “fast cash!”, “guaranteed approval!” and no “credit check required!” are enough to make you change the channel—and yet, if you ever find yourself in a situation where you need to get your hands on some extra money fast, those commercials might start making sense to you. If your car breaks down or you are short for this month’s rent payment and you have no emergency funds set aside, going to a payday lender or a pawnbroker may seem like your only options. However, the loans that they offer can be outrageously expensive and targeted at people who are clearly in a tight spot to begin with, which makes those businesses prime examples of predatory lending. 

Before jumping at that fast-cash offer, take a moment to educate yourself about predatory lending. Then breathe, understand that you have alternatives, and make an action plan.

What is predatory lending?

According to Debt.org, predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford. By definition, predatory lending benefits the lender, and ignores or hinders the borrower’s ability to repay the debt. These lending tactics often try to take advantage of a borrower’s lack of understanding about loans, terms or finances.

Predatory lenders typically target minorities, the poor, the elderly and the less educated. They also prey on people who need immediate cash for emergencies such as paying medical bills, covering a home repair or making a car payment. These lenders also target borrowers with credit problems or people who have recently lost their jobs. While the practices of predatory lenders may not always be illegal, they can leave victims with ruined credit, burdened with unmanageable debt, or homeless. 

Predatory lenders go by a number of names

  •  Pawnbrokers are individuals or businesses that offer secured loans to people, with items of personal property used as collateral. The word pawn is likely derived from the 15th century French word pan, meaning pledge or security, and the items pawned to the broker are themselves called pledges or pawns, or simply the collateral.
  • Payday lenders offer payday loans (also called payday advances, salary loans, payroll loans, small dollar loans, short-term loans or cash advance loans). These are small short-term unsecured loans, regardless of whether repayment is linked to a borrower’s payday.
  • Prepaid debit cards are typically not considered predatory; however, some of these cards have been criticized for their higher-than-average fees (such as a flat fee added onto every purchase made with the card).
  • Loan sharks are individuals or groups who offer loans at extremely high interest rates. The term usually refers to illegal activity, but may also refer to predatory lending activities like payday or title loans. Loan sharks sometimes enforce repayment by blackmail or threats of violence.

Predatory lending can also take the form of car loans, sub-prime loans, home equity loans, tax refund anticipation loans or any type of consumer debt. Common predatory lending practices include a failure to disclose information, disclosing false information, risk-based pricing, and inflated charges and fees. These practices, either individually or when combined, create a cycle of debt that causes severe financial hardship for families and individuals.

You have alternatives

If you are facing debt problems, you may feel that these types of lenders are your only option. Not true—you have a number of alternatives to taking out a high-cost loan:

  • Payment plan with creditors—The best alternative to payday loans is to deal directly with your debt. Working out an extended payment plan with your creditors may allow you to pay off your unpaid bills over a longer period of time.
  • Advance from your employer—Your employer may be able to grant you a paycheck advance in an emergency situation. Because this is a true advance and not a loan, there will be no interest.
  • Credit union loan—Credit unions typically offer affordable small short-term loans to members. Unlike payday loans, these loans give you a real chance to repay with longer payback periods, lower interest rates, and installment payments.
  • Consumer credit counseling—There are numerous consumer credit counseling agencies throughout the United States that can help you work out a debt repayment plan with creditors and develop a budget. These services are available at little or no cost. The National Foundation for Credit Counseling (nfcc.org) is a nonprofit organization that can help you find a reputable certified consumer credit counselor in your area.
  • Emergency Assistance Programs—Many community organizations and faith-based groups provide emergency assistance, either directly or through social services programs for weather-related emergencies.
  • Cash advance on your credit card—Credit card cash advances, which are usually offered at an annual percentage rate (APR) of 30% or less, are much cheaper than getting a payday loan. Some credit card companies specialize in consumers with financial problems or poor credit histories. You should shop around, and don’t assume that you do not qualify for a credit card.

Ultimately, you should know that you are in control, even if you find yourself in financial difficulties. There are plenty of alternatives to avoid high-cost borrowing from predatory lenders. Take time to explore your options.

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