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Education Center – Teens & College Students

Buying a Vehicle
Paying for College
Credit 101
Career Quiz

 

Buying a Vehicle

Vehicle Affordability
Whether you choose to buy a new or used car or other vehicle, you want to determine how much of a car you can afford.

Buying a car means having to pay for it in one of several ways. You can pay cash, take out a loan or lease a vehicle. You may also trade in the vehicle you currently own to the auto dealer, who will assign a trade in value and apply it toward the purchase price of the replacement car. Generally, the dealer bases the trade-in value on the vehicle’s blue-book value.

Even if you trade in your vehicle, a dealer or other lender may still require you to make a cash down payment, depending on your credit history and their willingness to bargain.
Affording a car involves more than just paying to buy it. As the owner, you face insurance and registration expenses, as well as maintenance expenses to keep it running and pass any state emission tests. (As lessee, you generally don’t pay some of these operating costs.) These costs can easily exceed $1,000 or $2,000 a year. You’ll face other costs to operate the vehicle, including cleaning, fuel and parking.

Unless you use rail, bus or an alternative transit system, or simply choose to walk, owning a car is often a necessity in American society. Doing a cost-benefit analysis is useful when buying a car. Determining your affordability is a good first step in making that analysis.

Making Vehicle Payments
The size of your monthly payment depends on the loan amount and loan terms. To calculate your loan amount, subtract the net trade-in value of your current auto and any down payment from the purchase price.

If you receive a rebate, subtract that amount from the purchase price too.

For example, assume the purchase price of the vehicle is $20,000, including fees and taxes. The dealer gives you $5,000 on your trade-in vehicle and offers a $500 rebate. Your lender requires you to make a down payment of $1,000. Since you owe $2,000 on your current vehicle, the net trade-in value is $3,000. If you subtract $3,000, $1,000 and $500 from the $20,000 purchase price, your loan amount is $15,500.
Your calculated monthly loan payment should be less or equal to the amount that you think you can afford. Keep in mind, however, that additional costs of owning a car — insurance, registration and maintenance, for instance — are not included in calculating a monthly loan payment.

Buying a Vehicle Online
As the Internet became a household appliance in the late 1990s, consumers began to use it to seek the best interest rates for auto loans, best prices for autos, and other vital information about vehicles and their various options.

To meet this swell in public demand for information, auto dealers and auto-industry sites provided free search engines at their Web sites for selecting an auto, reviewing the specifications and obtaining a “haggle-free” quote.

Buying an auto online is difficult. You can’t touch, test-drive or even smell it. Perhaps it’s the excitement and heightened stimulus of touring a new-auto showroom that is the deal-clincher for many buyers. It’s unlikely that much more than a small fraction of the 16.5 million autos sold in the U.S. in 2006 were sold online.

However, the Web is loaded with sites aimed at information gathering and purchasing an auto. For starters, you may wish to browse the Web sites of makers whose autos interest you. All the major makers have search engines that allow you to browse, learn and — yes — purchase.

Online auto shoppers sometimes complain that a dealer’s price quoted on the Internet is different from the quote that is offered in person. If an auto dealer or maker quotes a price that is materially different from what it quoted online, ask for an explanation of the difference. If you aren’t given one and remain unsatisfied, you may decide to take your business elsewhere.

Vehicle Financing Costs
Vehicle-financing costs are the costs you incur when you buy an auto. If you buy an auto with cash, you don’t pay any direct financing costs. However, the money that you take out of savings or an investment to pay for the auto has an opportunity cost.

For example, if you take $20,000 out of an investment account that earns an average of 8% a year, the opportunity cost is almost $9,400 over five years. That’s the interest your money would have otherwise earned had you left it alone. Opportunity cost is even greater if you raid a tax-deferred account.

If you buy an auto, the major financing cost will be the interest expense and loan fees that you pay for the loan. (With a surge of zero-percent loan financing in the past few years, qualified consumers were able to obtain interest-free auto loans.) You also pay upfront costs to the lender when you close a loan. Keep in mind that sales tax, registration and other fees are added to the auto purchase price, boosting your financing costs.

If you lease an auto, the main difference from borrowing is that you don’t own the auto at the end of the lease term. Industry terms used in auto leasing are different but often match up to those used in auto lending.

The capitalized cost reduction is synonymous with a down payment on an auto. You will have to pay a security deposit, which is often refunded at the end of the lease term unless you violate the lease agreement. You’ll also have to pay taxes and registration fees for a lease. Leases require you to make the first monthly payment upfront.

Rebates & Special Financing
According to the National Automobile Dealers Association (NADA), Americans bought 16.5 million light vehicles (passenger autos, SUVs and pickup trucks) in 2006. Unit sales for the year were the eighth strongest ever.

A major reason for the strong sales year was automakers’ offering various incentives, including zero-percent financing. Zero-percent financing is essentially an interest-free loan over the entire loan term. During 2006, some makers were offering employee pricing or a choice between zero-percent loans and their historical practice of offering rebates to auto buyers.

You should “run the numbers” to see which is the better deal: low-interest-rate financing (or zero percent, if you can find and qualify for it) or a rebate offer. Both of these types of financing share the same goal of boosting sales for auto dealers and makers.
Zero-percent financing is tantalizing but it may also be limited to only those customers with the best credit histories. In that case, you may wish to ask a dealer or your lender about the availability of a low-interest-rate loan.

Vehicle Loan Shopping
Shopping for an auto loan is usually about price and loan terms — which lender is offering the lowest interest rates and best rebates, for example.

When you buy an auto from a dealer, it is likely to direct you to a lender, often one that specializes in making auto loans to buyers of a particular make of auto.

You can find online lenders on the Internet that focus on auto loans. Other lenders are aggregators, which act as a kind of wholesaler or broker to pull together the best loan rates and terms from a variety of lending institutions. In exchange for identifying potential customers, lenders pay a fee to aggregators. As a result, you should be skeptical if a loan aggregator seeks payment from you.

Buying an auto is a major financial deal. However, it has gotten easier as technology has improved the loan underwriting process and the auto industry has grown more aggressive in its sales tactics.

Applying for an auto loan online requires you to complete an online application and trust the lender or aggregator to use secure technology.. If you have an existing auto loan, you may want to check with your current lender, either through a visit to its Web site or a visit to a retail branch.

Your lender may be willing to negotiate a reduction in the loan rate if your payment history has been good. Your current lender is also most familiar with your credit history.

Cost of Vehicle Ownership
If you buy a vehicle, you will pay some financing costs upfront such as fees, registration and taxes. Unless you qualify to receive zero-percent financing, you will pay interest over the loan term if you borrow. Interest expense is usually the main financing cost of an auto loan. If you lease, the entire lease payment is a financing cost.

In addition to financing costs, vehicle ownership has other costs. These costs include insurance, operating costs and registration fees. Generally, vehicles with a record of high theft or involvement in accidents have higher base-level premiums.

Operating costs of a vehicle are perhaps the highest component of ownership costs. You need fuel and oil to run your vehicle, new tires, replacement bulbs and fuses, and other parts associated with the normal wear and tear of a vehicle. Yearly operating costs are related to how much you drive.

You will owe annual registration fees and have your vehicle inspected periodically to ensure it is compliant with pollution-emissions standards. Depending on the weight, age and condition of the vehicle, these costs can exceed $500 or $1,000 a year.

Finally, depreciation affects the value of your auto when you seek to resell it. An auto that “holds its value” depreciates at a slower rate. Thus, a slowly depreciating vehicle tends to have a higher blue-book value than a vehicle that depreciates more quickly.

 

Paying for College

Grants
Pell Grants are available to students who demonstrate financial need. Financial need is based on a formula that subtracts the expected family contribution from the cost of attending college. The maximum annual Pell grant award for 2008-2009 is $4,731.

You must reapply for a Pell grant each year. You can use an abbreviated form to reapply if you applied in the previous year. You also cannot receive more than one Pell grant in a year. Grants do not have to be repaid.

With Federal Supplemental Educational Opportunity Grants the university is responsible for disbursing the award and has final say over how much in funds are actually awarded.

Like Pell grants, FSEOGs are intended as financial aid for the neediest college students. Priority for FSEOGs goes to recipients of Pell grants. To be eligible for an FSEOG, an applicant must demonstrate financial need by completing a financial-aid application. The current annual maximum amount for an FSEOG is $4,000

Scholarships
A scholarship is an academic award to a student for outstanding academic, athletic or artistic talent. Like a grant, a scholarship does not have to be repaid.

A scholarship often requires the recipient to maintain a high standard of academic success or artistic accomplishment. If the recipient falls short of the minimum standards, he or she may lose a scholarship.

While the Internet is a great place to search for scholarships, it’s also important that you avoid scams. You can usually tell if an offer is a scam if it seeks a payment from you upfront.

A scholarship fund is the entity that pays and replenishes the scholarship. Colleges and universities, foundations, charities and corporations may sponsor a scholarship fund — there is really no restriction on the type of organization that offers a scholarship. Scholarship funds are often endowed and supported by contributions from individuals and organizations committed to such ideals as improving public education and the arts, developing future community and business leaders, and developing new technologies.

Contact the Credit Union for further details at 518-828-5216.

Stafford Loans
Unlike a grant or scholarship, you have to repay a student loan. Student loans can be issued to either you or your parents. A Stafford loan is a federal loan program that is made directly to the student. Stafford loans come in two types: subsidized and unsubsidized.

Stafford loans are loans guaranteed by the federal government that are disbursed by a bank or other private lender that participates in the Federal Family Education Loan Program. The government may disburse the loan directly through the Federal Direct Student Loan Program.

A subsidized loan is a loan whose interest is paid by the federal government. An unsubsidized loan is one where you pay the interest on the loan. Since a subsidized loan is clearly the better deal, eligibility rules for these loans are much stricter than for unsubsidized loans. In order to be eligible for either type of Stafford loan, you must complete a Free Application for Federal Student Aid (FAFSA).

For the 2008-2009 academic year, first-year students who are dependent on their parents’ support can borrow up to $3,500 in Stafford loans. If they are independent of their parents, they can borrow up to $7,500 in their first year. Second-year borrowing limits increase to $4,500 and $8,500, respectively. Third- through fourth-year borrowing limits increase to $5,500 and $10,500, respectively.

Perkins Loans
Perkins Loans are disbursed directly to the student by the college or university where the student is attending. Because of the school having control over the purse strings, Perkins loans are also considered a form of campus-based aid. Often, the school disburses the loan in two payments during an academic year.

Borrowing limits for the 2008-2009 academic year for undergraduates is $4,000 a year and $20,000 in aggregate. For graduates, borrowing limits are $6,000 and $40,000, respectively. The $40,000 borrowing limit includes any Perkins loans received for undergraduate study.

Like Pell grants, FSEOGs and Stafford loans, Perkins loans require the student to complete a Free Application for Federal Student Aid (FAFSA). However, Perkins loans are more competitive than Stafford loans because:

Relative scarcity of subsidies. The federal government subsidizes the interest on Perkins loans (and subsidized Stafford loans) while students are in school. Since the federal government’s budget is limited for these programs, the loan dollars are relatively scarce.

Interest-free loans until loan repayment begins. From the student’s or parent’s perspective, a subsidized Perkins loan is more attractive simply because it is a free loan. Students aren’t charged interest on a Perkins Loan until the loan repayment period begins.

PLUS Loans
A third federal college-loan program is the Parent Loan for Undergraduate Students (PLUS) loan program. Unlike Stafford and Perkins loans, PLUS loans are made to the parents of the college student.

The borrowing limit for a PLUS loan is not a fixed dollar amount. Rather, it is equal to the student’s total cost of college, less any other sources of financial aid. For example, if it costs your child $12,000 a year to attend a state college for all expenses, and he or she receives a grant of $2,000, you can borrow up to $10,000 a year.

In order for parents to be eligible for a PLUS loan, their child must be an undergraduate student and attending college on at least a half-time basis. If you are uncertain about the half-time status, you should check with the records office of your child’s college. In order for parents to be eligible for a PLUS loan, their child must be dependent on their financial assistance.

Since parents are the borrowers of a PLUS loan, the lender will check their credit report as part of the loan-approval process. In the event of bad credit, the parents may still be able to obtain a PLUS loan if they charged interest on a Perkins loan until the loan repayment period begins. Borrowers of unsubsidized Stafford loans owe interest from the beginning of the loan period (when the loan is disbursed).

Determining Eligibility
A third federal college-loan program is the Parent Loan for Undergraduate Students (PLUS) loan program. Unlike Stafford and Perkins loans, PLUS Loans are made to the parents of the college student.

The borrowing limit for a PLUS loan is not a fixed dollar amount. Rather, it is equal to the student’s total cost of college, less any other sources of financial aid. For example, if it costs your child $12,000 a year to attend a state college for all expenses, and he or she receives a grant of $2,000, you can borrow up to $10,000 a year.

In order for parents to be eligible for a PLUS loan, their child must be an undergraduate student and attending college on at least a half-time basis. If you are uncertain about the half-time status, you should check with the records office of your child’s college. In order for parents to be eligible for a PLUS loan, their child must be dependent on their financial assistance.

Since parents are the borrowers of a PLUS loan, the lender will check their credit report as part of the loan-approval process. In the event of bad credit, the parents may still be able to obtain a PLUS loan if they charged interest on a Perkins loan until the loan repayment period begins. Borrowers of unsubsidized Stafford loans owe interest from the beginning of the loan period (when the loan is disbursed).

For information about Student Loans, visit www.glhec.org.

Student Loan Repayment
Armed with a college diploma and plans to find your first job, it will soon be time to face another reality — paying back your student loans.

Student loans usually have a grace period of six to nine months. Student lenders offer a variety of loan repayment plans limited only by lenders’ marketing prowess. A standard repayment plan requires you to make regular monthly payments. At first, most of your payment — perhaps all of it — will go to repay any accrued interest.

The repayment period for most student loans is 10 years. If you make smaller-than-required monthly payments, your loan term will increase and you will pay more interest. If you make larger-than-expected monthly payments, your loan term will decrease and you will pay less interest. You may be able to deduct up to $2,500 of your interest expense on student loans on your federal income tax return. As a result, you will pay a lower after-tax interest rate.

You may also wish to consolidate your student loans using a federal consolidated loan. Sallie Mae and other lenders offer these loans as a means of combining all of your student loans into one loan with a single payment. The interest rate ceiling on a federal consolidation loan is currently 8.25%.

Whatever you do, don’t suddenly stop making payments on your student loans. If you do, you will become delinquent and damage your credit history.

 

Credit 101

Credit Card Basics
Some basic rules of interest rates on credit-card debt include:

Interest rates are variable. Credit card rates are set by adding a spread, or margin to a base rate. Your base rate is often a widely used index, which is almost always a rate that changes periodically.

The spread that is added to calculate your rate depends on your credit history. If you pay your bills consistently and on time, the spread may be as few as 2 or 3 percentage points. If your credit history reveals that you make late payments, or have too much debt, the spread may be 5 or 6 percentage points or more.

Rates are higher than those for secured loans. Credit card rates are higher than those on home equity loans, in part, because they do not have collateral.

The stated rate is not your actual interest rate. The advertised rate on a credit card is often the card’s simple interest rate. The effective interest rate, however, is your true cost of borrowing. It should include annual fees you pay to use the card. The compounded interest rate is a better barometer of your effective interest rate. For example, if your card has a rate of 12%, your monthly rate would be 1%. Because credit card interest is compounded monthly, the effective annual interest rate on a 12% simple-rate card is 12.68%.

Interest rates have a ceiling. Credit cards generally have a maximum interest rate, or ceiling. If you are delinquent in making payments, your card company may seek to automatically impose the ceiling rate, which can be devastating if you have thousands of dollars in card balances that are affected. Be sure to read the agreement with your card company to see what your ceiling rate is (often, it is 21%), and what terms may result in you having to pay the ceiling rate

Using Your Credit Report
Your credit report is an electronic record of your credit activities. These activities range from borrowing to buy a car or a home to applying for a loan or credit card. That’s right — every time you apply for a credit card or other loan, it registers as an inquiry on your credit report.

More importantly, a credit report is a record of how you use credit and how much of it you have available. If you’re late in making a monthly payment, that too shows up on your credit report.

Obtaining a credit report
You are legally entitled to obtain your credit report from a credit reporting agency. This includes receiving a list of everyone that has requested your report.

If you are denied credit based on information in your credit report (the creditor must provide a reason for denial), you have 60 days from the day you receive a denial notice to receive a free copy of the credit report.

Starting in 2004, the law also entitles you to receive a free credit report every 12 months. Of course, you can also pay to obtain a credit report anytime. The three major credit reporting agencies, or credit bureaus, are Equifax, Experian and Trans Union (Dun & Bradstreet Credit Services provides credit reports of businesses):

Equifax
(800) 685-1111
Basic fee: $10

Experian
(888) 397-3742
Basic fee: $10

TransUnion
(877) 322-8228
Basic fee: $10

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