No one wants to drive away in a dream car only to find that he's heading down a financial road with unwanted sacrifices waiting around every curve. More than one consumer has bought an expensive automobile or truck and then found to his dismay that he couldn't afford to put gas in its tank. The prudent consumer can avoid this pothole by reading and understanding the fine print of automobile purchases, and weighing the benefits and drawbacks of both purchasing and leasing a vehicle. Here are some issues for you to consider:
- Do you have the money for the down payment that's required by a purchase? If so, you might want to buy.
- Do you generally prefer lower monthly payments? If so, you might want to lease.
- Do you like the idea of owning something of value after making payments for years? If so, you might want to buy.
- Do you like driving a new vehicle - particularly a luxury model - every two or three years? If so, you might want to lease.
- Do you want to trade in an old vehicle? If so, you might want to buy.
- Do you hate the hassle of selling your old car every time you want to buy a new one? If so, you might want to lease.
- Do you like the idea of carefully maintaining your car, so that it runs perfectly for years and years? If so, you might want to buy.
- Do you put "hard" miles on your vehicle? If so, you might want to lease.
- Do you eventually want to be free of car payments? If so, you might want to buy.
- Do you like the idea of driving a vehicle for a few years before purchasing it? If so, you might want to lease.
- Do you drive tens of thousands of miles each year? If so, you might want to buy instead of paying a relatively large amount of money at the lease's end for exceeding the annual mileage cap, which is generally 12,000 to 15,000 miles.
If you decide to lease, you need to learn exactly what you're paying for in terms of interest rate (it should be close to the current automobile loan rate). You should negotiate the capitalized cost (the price the financial institution pays the dealer for the leased vehicle), the acquisition fee (which the consumer is charged for initiating the lease) and the disposition fee (which the consumer is charged at lease's end if he decides not to buy the vehicle.). Because of all of these factors, professionals advise that low monthly payments don't necessarily translate into a beneficial transaction for the consumer.
One way to help you understand your credit is to develop a budget of your finances. Creating and following a budget puts you in control of your money. To create a realistic budget for yourself, you need three fundamental criteria: knowledge, control and organization.
Knowledge: Study every expense you have and use this knowledge to gain insight into where your money goes. Try writing down all your expenses for one month (including everything from your morning coffee to your unforeseen plumbing problems). You may be surprised to see how all the small things add up. You'll soon learn that some expenses may be unnecessary, and once they're eliminated, you might not miss them at all.
Control: This is the source of your power. Set your mind to have control over your money, so your money won't have control over you. Tell your money that you're taking charge now. Go ahead - do it!
Organization: The best part of budgeting is that you'll save both time and money and you'll be better able to use those resources for the things that really matter to you. We have all the calculators you'll need to start. Just check out our calculators/resources section, and see how easy it is. View our article on credit and financial planning.
Loan Interest Rate
Because not all loans carry equal interest, Triple AlertSM wants you to understand exactly what you're paying for credit, particularly since uninformed decisions can lead to financial jeopardy. The first term is an annual percentage rate (APR).
A monthly interest rate of 1.5 percent for a loan may seem reasonable enough, but a consumer needs to know the APR before he or she can compare lenders. Some lenders promote introductory offers of loans at what are called "teaser" rates. These rates are relatively low, but are soon replaced with much higher rates.
When comparison shopping for a vehicle, house or a credit card, you should seek out the lowest APR possible and lock it in place if possible. In the case of credit cards, though, you need to add other factors into the equation such as length of grace period, fees, late payment penalties and potential increases in the interest rate with relatively little warning.
If your interest rate is tied to an economic index, as is the case with an adjusted-rate mortgage, then the rate can rise or dip. With a home loan, the ideal situation is for the lender to guarantee the best rate, so that you can avoid being locked into a relatively high rate at a time when rates are going down.
You may clarify terms with potential lenders so that comparisons are viable. Does the fixed rate hold true for the entire length of the loan? Or is the lender really talking about a fixed rate for just part of the loan period? Is there a relatively low interest rate period followed by a balloon payment?
Before purchasing a home, you'll want to understand how many points are involved in the transaction. One point represents one percent of the loan's face value. With any loan, you'll want to study tax laws to see if you can't deduct the interest.
Some loans such as certain home equity loans require interest-only payments. Although they're fine during times when a consumer might be trying to stave off bankruptcy or foreclosure, these payments never reduce the principal.
Repaying Your Debt
When it comes to a major purchase where financing is involved, there are a few options that can really save you money. In financing, there are two major elements to consider, time and interest. These combined elements are what determine the actual cost of your purchase. If you are paying 9% in interest for a $10,000 loan, the difference between paying the loan in 24 months vs. 48 months is a cost savings close to $1,000. Conversely, if you are paying that same loan off in 48 months with an 8% APR vs. 9%, you could save over $450 on that loan. But what if you already have a loan and can't negotiate how much you borrowed or how much interest you are paying? Good news, you still have time on your side. Save money by paying that loan off sooner.
Triple AlertSM offers calculators/resources such as the Credit Card Payoff, Mortgage Payoff or Auto Loan Early Payoff calculators to quickly and easily simulate new accelerated payment plans for your debt. These are powerful tools that can result in significant cost savings to you. Before you begin exploring your new payment plan, the first element to consider is your contract or loan agreement. You will want to verify if there are penalties to paying your loan off early. If a penalty is present, this does not mean that you should not consider repayment. It is just important to match that penalty to your new payment plan to make sure that there is still a cost savings. Additionally, and most importantly, keep your payments at a range that you can still afford. Make a list of your monthly expenses and verify that your new payment plan won't have you over-extended. Of course, before using any tool to change your financial picture, it would be wise to consult a financial advisor.