Six Questions Your Auto Dealer Hopes You Can’t Answer

Navigating automobile financing can be one of the biggest financial headaches you’ll encounter. But, unless you want to walk everywhere, it’s something you’ll have to deal with. The biggest hurdle is figuring out the angles and understanding the entities that stand to profit from the transaction. Let’s go through some of the more challenging parts of automotive financing by addressing some of the questions about automobile financing your dealer hopes you won’t ask.

1) How do dealerships secure financing?

Car dealers usually have a department that is responsible for setting up financing and insurance (commonly referred to as “F&I”). These people take the estimated price of the car, the actual value of the car, and your credit history to a number of different credit providers. These include major national lenders, auto manufacturer financial departments, and depending on the dealership, some local lending institutions. These vendors each quote an interest rate and other fees.

Car dealers usually have longstanding business relationships with their lenders, which often include incentives for the dealer as a “reward” for financing a loan through that lender. Because the lenders are competing for the dealer’s business, not necessarily for yours, those incentives are for dealers and not consumers. While the dealer knows that lower interest rates make you more likely to buy a car, in this transaction, you’re not the customer. You’re the product. The dealer is trying to sell your business to a lending organization and usually makes a profit on the transaction.

2) When should I tell the dealership I already have financing?

Let’s be clear: Financing is profitable for dealerships in many ways. If they know they can’t turn a profit from financing, they’re more likely to push harder to find profit elsewhere. You’re almost always better off keeping the auto loan for the last part of your transaction with the dealership, particularly if you plan on securing outside financing. This doesn’t mean, though, that you don’t want to think about financing until that point in time. Discuss your plans with a representative at the credit union; including the type of vehicle you are planning to purchase. Figure out what kind of rates they can offer. By doing your research ahead of time and knowing what financing options are available to you, you can let the dealer think there’s still money to be made in the financing, which may strengthen your negotiating position on other parts of the transaction, like the price of the car or the value of the trade-in.

3) How do dealerships make money offering 0% financing?

If you’re shopping for a car because you’ve seen an advertisement for 0% financing, you’re not alone. Campaigns, like Toyota’s “Toyotathon,” offer manufacturer’s deals like 0% financing for 60 months and are incredibly popular for car buyers and dealers alike. If it were honestly a losing proposition for the manufacturer, they wouldn’t keep doing it. This might invite you to ask how they could possibly make money on the financing. The answer is two-fold: volume and selectivity.

The volume part of the money-making strategy is simple. 0% financing gets people on the lot and encourages them to think about buying a specific brand of car. The manufacturer and the dealer both make money on each car sold, so the 0% financing trades some profit per car in the hopes that they’ll make up for it in number of cars sold.

Selectivity is the other side of volume. Not everyone who comes to a 0% financing event will qualify for that rate. Because most people who get to the point of discussing financing have decided to purchase a car, they’ll settle for a non-zero rate when it’s presented to them. Between these two strategies, advertising 0% financing does pretty well for a car dealer.

4) Does my salesperson benefit from financing my car purchase?

This really depends on the dealership. Most of the time, your salesperson only benefits from the price of the car, the warranty, and some high-markup items, like undercarriage treatment, upgraded tires, and other products. The financing department – the people who are responsible for getting quotes and delivering them to the salesperson – is likely to be the folks who receive any kind of commission on the financing. In these instances, it’s also very likely that the salesperson with whom you’re dealing has little to no control over your financing. He or she might be able to go back to the financing department and ask them to attempt to negotiate a better rate, but this negotiation may not have much success. In any case, someone at the dealership profits from getting you a loan.

5) What is GAP insurance, and is it right for me?

“GAP” or guaranteed asset protection insurance is automobile insurance that covers the difference between the total amount of the loan and the value of the car. It provides protection against the worst-case scenario, that you total a car (or the vehicle is stolen) and you owe more than it is worth. Your comprehensive insurance coverage will only pay out the value of the car, leaving you on the hook for the remaining interest and finance charges. A dealer may require you to purchase GAP insurance as a condition of financing your purchase. The cost of the insurance is almost always paid up front as part of the financing charges.

GAP insurance is designed for long-term, high-interest, or low down-payment financing. If you are buying a car without putting a lot of money down, or if your credit history is not stellar, you should consider getting GAP insurance. But, like any other purchase, you should shop around. Because most financing arrangements require you to purchase GAP insurance, dealerships maintain institutional arrangements with insurance agencies, expecting you to purchase it without much thought. It’s one last effort to make money off your purchase, and they rely on you to not notice. You may be able to find better rates on GAP insurance from a broker or from another lending institution.

6) What steps can I take to avoid being railroaded by last-minute financing changes?

Financing is among the easiest places for dealers to make money, because it’s almost always the last stop in the car-buying process, and they expect you to be both committed to purchasing a car and exhausted from making a series of decisions. High-pressure salespeople use this fact to their advantage. When it comes time to talk financing, frequently, the license plates are off your old car, and you’re sitting down with a sales manager. While it may seem counter-intuitive, this is the best time to walk away and get a second opinion on financing. If you have not already sought pre-approval from them, see if your credit union can offer you a better rate, lower fees, or a more flexible term. Ask them to commit as much as possible to a price on an offer sheet. Then, tell them you’d like to take some time to think about it. If you come back with a cashier’s check in hand, the sales manager may hem and haw a bit. But, at the end of the day, they’d rather make the sale than make a little extra on financing.

This is an especially important step if your history with credit is complicated. A giant lending corporation won’t see the steps you’ve taken to solidify your financial position. They don’t have the same relationship with you that your credit union does. They see you as a risk number and an interest rate they can justify, not as a member of a community institution. Always give your credit union the first chance to beat the dealer’s offer – your credit union works for you, not for a commission.

Ready to finance your next car? Still want to learn more?

If you’d like to discuss your auto financing options with a Auto Loan Specialist, call 301-249-1800, Ext 222.

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Best Ways To Save For A Home

Except for Veterans Administration loans, it still generally takes some cash up front to get into a home. How much cash you’ll be required to have up front depends on the type of mortgage (whether FHA or conventional) and your personal financial situation. The better your credit, though, the lower the down payment the lender will typically expect.

How much will you need to save? If you are applying for an FHA loan and your FICO score is between 500 and 579, plan on a 10 percent down payment or more. If your score is 580 or better, you may be able to qualify for a 3.5 percent down mortgage.

Conventional mortgages tend to have somewhat higher down-payment requirements. You begin to become competitive for a 5 percent down mortgage when you have a FICO score of around 660, though lenders vary widely in practice. However, to save on private mortgage insurance costs (PMI), you may want to go with a VA loan, if you qualify, or save up 20 percent.

So what’s the best way to go about saving that money? Here are the factors to keep in mind:

Safety. Unless you are planning to wait years to buy your home, you don’t want to take a lot of risk with this money. Hopefully, you will have your down payment saved up within a year or two. It doesn’t make sense to risk a large market loss and throw your dream of home ownership off schedule.

Liquidity. You don’t want to lock this money up for years. You want to be able to access your money quickly and cheaply.

Returns. You want to get a reasonable return, or yield, on your money. But don’t sacrifice safety for yield if it means risking your goal of home ownership.

A Guarantee. Investments carry risk. But some financial vehicles come with an in-writing guarantee. Examples include balances in checking and savings accounts and share savings certificates at credit unions, which come with a guarantee of up to $250,000 in the event the credit union becomes insolvent. Banks have a typical arrangement via the Federal Deposit Insurance Corporation.

Options

So where should you put your money? Here are some common options that have stood the test of time – along with the advantages and disadvantages of each.

Cash. You can stuff cash in a mattress or coffee can. This is convenient, but not very secure. Your money is subject to the hazards of theft, flood, fire or loss. It also generates no return whatsoever.

Checking or Savings Accounts. These generally produce a small return, but at least it’s something. They are, however, very convenient, if you are disciplined about not spending the money that’s earmarked for your down payment. If your savings is very small, it may make sense to keep it here instead of paying fees to maintain a low balance account. These are guaranteed against bank failures up to $250,000 per account holder, either from FDIC (for banks) or the National Credit Union Share Insurance Fund, or NCUSIF. Because credit unions are mutually-owned by depositors just like you, you can frequently get a better deal in the long run by using a credit union.

Certificates of Deposit (AKA “Share Savings Certificates” at Credit Unions). These typically pay a higher yield than checking or savings accounts, and also qualify for federal insurance coverage. However, they do require you to commit your money for a specific period of time. The penalty for early withdrawals is usually the equivalent of six months of interest.

Money markets. This is a type of mutual fund that’s made up of low-risk, short-term bonds and commercial paper designed to maintain a stable per-share price of $1 per day. By and large, they have been able to do so, historically, though there are no guarantees. They may offer higher yields than guaranteed accounts, and do not require a time commitment. However, there is a possibility that your money market will lose money. Some financial institutions do offer insured money markets.

Other Options

Permanent life insurance. If you own a permanent life insurance policy, such as a whole life policy, it accumulates cash value over time. Whole life and well-funded universal-life insurance policies can be effective tools for savers – especially since whole life insurance cash value receives a guaranteed crediting rating and is guaranteed never to decline in value as long as you pay premiums as scheduled.

Individual Retirement Arrangements. You can withdraw up to $10,000 from your IRA to put a down payment on a home with no penalty. For traditional IRAs, you will need to pay income taxes on any such withdrawals.

Thrift Savings Program. If you are a federal employee or member of the United States military, the Thrift Savings Program, or TSP, allows you to borrow money to make your down payment on a home on advantageous terms. For more information, visit www.tsp.gov.

401(k) Loans. Some employers allow you to borrow from your 401(k). Typically, you will need to repay the loan within five years or face taxes and penalties on any remaining balance. However, if you leave your employer, you will have to repay the loan immediately or face taxes and penalties on what you’ve withdrawn. This makes using 401(k) loans tricky for longer terms – especially where employment prospects are not certain.

Whatever vehicles you choose to utilize in accumulating your savings, your credit union is ready to assist. Come in and speak with one of our lending or financial services professionals for a no-obligation consultation, or simply some advice on how to get started. We want to be part of your home-ownership dream.

Ready to finance your next home? Still want to learn more?

If you’d like to discuss your home financing options with a Mortgage Loan Specialist, call 301-249-1800, Ext 207, or fill out this contact form.

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Financial Advice for Graduates

By definition, graduation is a state of transition and students no longer are students in the typical sense. It’s easy to make mistakes during this transition, and they can create serious problems later in life. Here are some of the common questions students face while in this transition and how to deal with them.

I’ve just graduated. What should my first financial priority be?

There are a lot of options for those first few paychecks. Some experts will tell you to invest in a retirement fund or to focus on paying your debts. You may have different ideas, too, like saving for a car, a wedding, or a house.

The number one cause of financial struggle is sudden and unexpected expenses. The easiest way to avoid these problems is to build an emergency fund. If you have a sudden windfall from graduation presents or tax refunds, use it to start a short-term savings account. This fund should be in an interest-bearing account such as a money-market or deposit account.

Making these investments should be your first priority. Make minimum payments on your other debts and keep saving until you have at least one month’s living expenses. This savings is how you avoid getting into more debt. Avoiding new debt is the biggest step toward getting out from under old debt and moving toward financial security.

Is more education worthwhile?

There’s a growing public controversy about whether college or graduate school is worthwhile. The question is much more complicated and depends upon the kind of education and its cost. Statistics about lifetime earnings aren’t reliable. They tend to survey only people who are employed and rely upon self-reported incomes. Instead, do research about the outlook in your field and the education most people have in that field.

Making this decision should be about the costs versus the expected rewards. Opportunities like community college and trade school have low costs and significant likely rewards. Other opportunities need more careful scrutiny. In any event, don’t view these opportunities as a way to escape the job market. Getting a job, even volunteer work or an internship, will help build a resume and get you closer to your financial destination.

When thinking about the costs and benefits, you need to think about more than the financial cost. There’s the money you will pay for tuition and living expenses, which you will likely have to finance with debt. There’s also the opportunity cost. Even working a low-wage job will earn you some money, which is more than making nothing while attending school.

Should I focus on eliminating debt or saving for retirement?

The answer to this question depends upon what your short-term goals are and what kind of debts you have. If you’re planning to buy a house or car, or start a small business, you need to lower your debt use percentage. This will get you a better credit score and ensure that you can get cheaper access to credit for these activities. If you plan to go to work and don’t mind putting off home-buying, then the paying off debt and investing are equal. This being the case, you need to think about the kind of debts you hold.

For subsidized student loans, the interest rates are no higher than 4%. You can likely earn a higher rate of return than that with an IRA or other long-term investment. For private loans, the interest rate will vary based upon when you took out the loan and the kind of loan. These may be closer to an 8% interest rate, which would be close to the return on an IRA. If you have credit card debt, the interest rate is in the 20% range. Paying down this debt is far more important to building long-term financial security.

Remember, in making this decision, that retirement savings is more about time in the market than principle. Starting your investment early is the best thing you can do to provide for your financial security. You may need to strike a balance between paying for your past and saving for your future.

What’s the biggest mistake to avoid?

The biggest danger facing new graduates is “lifestyle inflation.” Every product that’s advertised becomes the solution to all life’s troubles. A 60′ television would make your evenings more enjoyable, which is how you justify spending $1,000 on it. It does provide a measure of happiness for a few weeks, but you get used to it in a short period of time. Then, a new reclining couch or a sports car becomes the answer. Spending experts call this the “hedonistic treadmill.” It most often happens right after getting a new job that brings a bigger paycheck.

The best way to avoid it is to make a budget and include some room for luxury expenses. You can spend it every month on dinners out, concerts, or other items. You can also save it in a short-term savings instrument for a bigger splurge. Building space into your budget for this kind of spending can help keep you from feeling “entitled” to expensive luxuries and overspending.

Work or Summer School: You Decide

Whether you choose to take summer school to get ahead in college or find a summer job, it’s a personal decision. It’s nice to get required classes out of the way quickly, but many students use the summer to earn spending money for the coming school year. Take these concerns into account as you research and make the decision that’s right for you.

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  • If you’re attending college away from home, where will you live during summer school? Some dorms allow summer residents, so check with your college.
  • Consider your family situation. If you have family across the state or country who you would like to visit, staying at school might not be the most realistic option.
  • If you’re receiving financial aid, you likely will need to fill out a separate application for summer school. Most colleges have deadlines for this, so check to make sure yours hasn’t passed.
  • Summer classes are condensed, meaning they cover the same material in a much shorter time period. Are you up for the challenge?
  • Does your school offer online coursework? This will allow you to go home, take classes, and maybe even work part-time.
  • Underclassmen might benefit from attending a local community college to get required English or math courses out of the way. Check to make sure the classes will transfer to your university before registering for them.
  • Have a vacation planned? Summer jobs are typically more flexible than rigorous summer curriculums.

Summer is a great time to rest, relax and rejuvenate from a tough year of college. But it’s also the perfect time to earn some extra cash or get some classes out of the way. The decision is yours to make. But make that decision based upon what’s best for you and your situation. Be sure to weigh the pros and cons of each before making your choice.

How common — and how dangerous — is living hand-to-mouth?

If the news describes someone as living paycheck to paycheck, you might have a pretty good idea of what their life looks like. You might imagine them struggling to get by just to cover all of their bills. You might picture them as constantly juggling those bills and relying on revolving credit card debt. Yet, a new report out of Princeton University suggests that this may not be an accurate vision of this group of people.

The report describes the habits of a group it calls the “wealthy hand-to-mouth.” 25 million of the 38 million Americans who live hand-to-mouth, that’s a staggering 65%, have a median income of $41,000, which is close to the national average of $43,000. This group includes a fair number of people in your community. You might even see a little of your own habits here.

These individuals tend to be somewhat older, with a peak age of 40. Their spending habits tend to expand in accord with their income levels. For instance, if they get a raise, they increase their discretionary spending. They might eat more meals out or take on another monthly payment. If they get a windfall, like a tax return or an inheritance, they splurge on a big-ticket item. They pay all their bills on time and don’t carry a tremendous debt load. They likely own a home and are building equity by paying down a mortgage. These folks are also more likely to be investing in a retirement account, like a 401k or IRA.

Make no mistake: these are important savings strategies. What they don’t offer, though, is flexibility. In a volatile labor market, anyone can lose their job at any time. Illnesses and accidents can strike without warning and lead to huge bills. Even inclement weather could result in home or car damage, requiring extensive repairs. If an emergency happens to someone in this group, they may be in for serious trouble.

The money in their home and retirement account is inaccessible. They might curtail their spending, but that won’t help if they need a large quantity of money in short order. They will have three options: sell their home, cash in retirement accounts, or take on significant debt. None of these options offer much hope of a brighter future. One foul stroke of luck is all it would take to move them from “wealthy hand-to-mouth” to just plain struggling.

These kinds of misfortunes happen to everyone sooner or later. That’s why the factor most strongly correlated with financial security is regular savings. A “rainy day” fund separates a short-term financial problem from a life-changing tragedy. The “wealthy hand-to-mouth” think retirement funds and home equity will ensure their financial security. The tumultuous early 2000s showed us, though, that making it to that point is no sure thing.

Credit union members have a variety of tools that are available to them to help provide this measure of security. Among the most popular is the vacation club account. This is an interest-bearing savings account that allows for unlimited deposits and discourages frequent withdrawals. Consider the money you put into this account to be a way of paying yourself. You pay your bills, your house note, and your other obligations on time. Putting money into your savings account is paying off the future trouble you don’t want to deal with when it happens. You can set up direct withdrawals from your paycheck or put in a specific amount each month. You and your partner could also put any unexpected windfalls, like bonuses or refunds, into this account.

If a disaster strikes, and you need the money, it’s there. You won’t need to worry about selling your house, cashing in your retirement fund, or taking on expensive debts. A vacation club account is an inexpensive form of self-insurance. If nothing bad happens and you don’t use the money before you retire, it’ll still be there. You can use it to take your dream vacation, to buy an RV or a vacation house, or just to throw one heck of a retirement party. All the money you’ve saved will be gaining interest, and it will be a wonderful supplement to your retirement fund.

Your parents or grandparents may have kept their rainy day fund in a jar on top of the refrigerator. You don’t have to be that low tech. You can protect your financial future, insure against accidents, and gain some peace of mind along the way.

Credit Card Debt: How It Hurts And How You Can Escape

Credit Card Debt

Total up the credit card debt of all the people in America, and it gives each household a staggering balance of $7,115 according to the Federal Reserve. Among just those who have debt, the average balance in $15,252. About half of households regularly carry a credit card balance. With high rates of unemployment, circumstances often force people to use credit cards to finance their lifestyles. This “strategy” leads to significant levels of indebtedness and low chances for repayment.

Yes, this debt level is staggering. It can be the biggest enemy of people who are trying to build wealth. Let’s look at some of the costs of credit card debt and what you can do about it.

The financing costs are high

In February 2014, the average APR on a credit card was about 15%. That means, before considering potential late fees and other expenses, the “debt service” cost on the average household’s debt is $2,287. That’s the amount the debt will grow assuming that no other spending on the cards takes place. If you have a complicated credit history, your interest rate could be as high as 22%. Your debt service then grows to $3,355.

As your credit card statement is legally required to inform you, the debt service costs exceed the minimum payment. This cost will continue to grow forever, even if you never spend again. Interest rates, though, are only the tip of the iceberg.

Credit card companies also stack late fees, collection fees, and other miscellaneous charges on top of these fees. These fees then contribute to the debt load and are charged interest at the same rate. Carrying long-term and high amounts of credit card debt is among the worst things you can do for your personal financial health.

The hidden costs are high

One of the biggest factors in determining your credit score is a figure called your “debt utilization ratio.” This is the percentage of your available credit that you’re currently using. Say you have a credit limit of $5,000 and you carry a balance of $2,500. That means your debt utilization ratio is 50%. Anything higher than 7% can negatively impact your credit score, making it more difficult to get other kinds of credit (such as an auto loan or home mortgage).

It doesn’t stop there, though. That lower credit score also translates into higher interest for unsecured loans, like credit cards. This increase in cost eats up your credit limit faster, driving your credit score down, and contributing to even more debt.

Not only does it hurt you financially, but many employers now use credit checking as a way to assess the trustworthiness and long-term planning of a potential employee. Having a low credit score could cost you a chance at your dream job.

The investment opportunity is tremendous

Savvy investors always like to talk about “ROI” (or return on investment). That’s the percentage of the money they invest that they get back and the rate at which they get it. Warren Buffett, perhaps the shrewdest investor of our time, gets an average return on investment of 17% for his investment company. This is the best work that the best investors in America can hope to achieve. They have to hunt long and hard for places to earn that kind of return.

The interest rates on your credit card debt are right around 17%. Getting rid of your credit card debt can achieve those kinds of returns by saving you an extra 17% on every dollar you pay down. It’s the smartest investment decision you can make.

Your credit union can help

Most habitual credit card users fall into a trap. They charge a great deal to one card then sign up for another to take advantage of low interest rates on balance transfers. They carry this huge ball of revolving debt with them and don’t see much of a way out.

Fortunately, NASA Federal Credit Union is there to help you get out of the crushing cycle of revolving credit card debt. You can get a debt consolidation loan that will help repair your credit score, consolidate your monthly bills into one payment and make that debt cheaper with a lower interest rate. Here’s how they work. You agree to a term of repayment, usually 60 months, and an interest rate. Your credit union issues you a loan for your credit card balance. You then pay them the same fee every month for that 5 years until your debt is repaid. You walk away with an improved financial history and no debt. Congratulations, you are now ready to start saving and investing in your financial future.

Debt consolidation loans aren’t the silver bullet to your financial problems. They work in conjunction with credit counseling, financial education, and budgeting help to get you on the path to financial well-being. It’s time to get control over your financial future. Learn more about debt consolidation.