Welcome back to Money March. If you haven’t caught up yet, check out the following posts: HOW TO TRACK EXPENSES, WHY YOU SHOULD TRACK EXPENSES, HOW TO START SAVING MONEY, SINKING FUNDS, MONEY PERSONALITY, and CREDIT CARD DEBT. Make sure to click on the links and look for your FREE PRINTABLES, also!
Last week, we started looking at credit card debt and studied the pros and cons of using credit cards. Credit card debt is only one type of debt we can accrue, and only one type of debt that is used to establish our CREDIT SCORE (click the link to learn more). Other debts usually come in the form of LOANS. Loans are funds borrowed from a banking institution that generally require some sort of collateral, or insurance that you will pay the money back. Loans typically have their interest rates figured into them and do not change once the loan is established, so your monthly payment will reflect interest and principal (the original amount borrowed). There are a few typical loans that most Americans have and those will be the ones I cover this week.
LOANS
AUTO LOANS:
Auto loans are usually one of the first types of loans we will get. We all need a car, usually, and the easiest way to get one is cash, of course, but if you want a reliable car and you are just starting out, you will probably establish an auto loan. There are different types of auto loans, some dealers will offer loans through their dealership, while others will search for the best interest rates through several banks for you. (Caution, if you are just starting out, you may need a cosigner). Let’s go over the pros and cons of auto loans.
PROS:
- There are many options available to you. Dealers will look for loans that will meet your needs. If you need a longer amount of time to pay, you may get a 60 month loan with higher interest rates. If you are searching for lower interest rates, you have the option of less amount of time with lower interest rates and higher payments. If you have a good credit score, you will be able to find the best deal for you financial situation.
- Access to nicer vehicles. If you have $1000.00 cash and look for a car for that amount of money, you will find yourself with a clunker that will hopefully get you where you need to be. If you take that $1000.00 and use is as a down payment for a newer car, you will be able to get a nicer car that probably comes with a standard warranty and will last longer.
- Build credit. As with all debts, you can build your credit score by purchasing a vehicle with an auto loan and making all your payments on time.
CONS:
- Higher insurance rates. All auto loans require you to have full coverage insurance, while cars that are owned outright are able to get by with liability only. Full coverage is nice to have if you total your car and you still owe money, so this is a way for them to protect you and the bank. However, full coverage is costlier.
- Budget mishaps. So, you used that $1000.00 as a down payment and were able to get a nice loan! Congrats, but are you sure you can afford the new car payment. It may not seem like much when you are signing those paper, but will your budget be able to handle the payment, the extra insurance, the maintenance, and any repairs along the way? Buying a car comes with a lot of financial responsibilities to be aware of.
STUDENT LOANS:
We hear in a lot about student loans and how much trouble people get into with them, yet we are still forced to take them out if we want an education. College prices are constantly on the rise and even if your parents put away some money when you were little, unless they were investment wizards, chances are you are going to have to pay a percentage out of pocket. There is an expectation from some people these days that if you can’t afford the student loan, then you shouldn’t go to college BUT…at 18, do you know what the downside to student loans are? Or are you just excited to be college bound? Most 18 year olds are not even psychologically capable of understanding the enormousness of the responsibility (and that is not a put down!). Going to a university to become a low paid teacher costs just as much as going to school for a pre-med major. And in order to get a better paying job, you need even more education, meaning even more loans for Master’s and Doctorate degrees…and that does NOT guarantee you a job! It isn’t fair that some people think that only the privileged few deserve to go to college and the rest just aren’t working hard enough, but I know from experience that, for example, right now, I could be working my full time job and 2 other minimum wage jobs and not be able to make my full monthly student loan payment. While most people are politicizing this issue right now, all I can do is offer the facts about student loans so that you can make thoughtful, deliberate choices about your life BEFORE you are stuck with debt for the rest of your life.
PROS:
- Allows you to attend the school you want. Even if you make the (probably bad) choice to leave the state (which costs SO much more) or go to a private University, student loans will help you get there. I would suggest that you research other, more affordable options no matter your major or your financial options, just because, unless it is an Ivy league school, most employers don’t care which university you went to.
- Can be used for more than just tuition. Housing, meal plans, books, and spending money are just some of the other things you can use your student loan for. Once your tuition and fees are paid, you will receive a refund of the money you borrowed. If you don’t desperately need this money for your other college expenses, it would be a good idea to pay it back or put it in an interest bearing savings account and pay it back when you graduate.
- Building credit. Once you start paying your student loans, 6 months after graduation, you will start building your credit.
CONS:
- It is expensive! While you do have limits to what you can borrow, there are several different types of loans you can take out at one time, and this adds up! Tack on the interest rate and you are looking at owing a lot of money once it is time to start paying them. You are only given 10 years to pay them back, so your monthly payment is going up every time you take out a loan.
- Starting out with debt. For many, this might be the first major debt in your adult life. You are just leaving college, getting an entry level job, and you have probably at least $400 a month in student debt. This may make it difficult to get your own apartment or do the adult things you have been dreaming of your whole life.
- Defaulting! Defaulting is when you don’t make your payments, and this will lead to lowering your credit score.
A word of advice: There are many options if you can’t make your student loan payments, so don’t stress if it is too late to make different choices. You can ask for deferments, forbearances, and income based payment plans. You can consolidate your loans with better options for making payments. Never let your student loans default! Contact your loan company if you are having trouble and make arrangements. Because it is government owned, the banks can take away assets, wages, and tax refunds to cover the costs when you default. DO NOT LET THIS HAPPEN!
Most Americans have these types of loans and just act like it is a necessary part of life, but please do not think that it is! There are options, and saving money for the important things is the best way to stay out of debt. If you do have to incur debt, be informed of what choices you are making and make a plan to pay things off in a timely manner while building your credit score.
Check back for our next post to continue the debt discussion and learn about the pros and cons of personal loans and home loans. Follow Being Grown Up on Facebook, Instagram, and Pinterest and look for podcasts on Anchor.fm/kim-stamler and make sure to leave me a comment and a like! Take care XOXO
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