5 Tips Every College
Student should know about Car Loans
A recent study by education tech company EverFi found that the average U.S. college student can answer only about a third of basic financial questions correctly. By learning the basics of finances early on, young adults can be set up to succeed when it comes to credit cards, loans, retirement and more. Here are the five things all college students should know about finances.
1. Pay attention to the terms on an auto loan.
When shopping for a new car, many people can become overwhelmed with excitement and fail to fully understand the terms of their auto loan. Too often, consumers rigorously research the vehicles they are contemplating, but don’t apply the same scrutiny to their loan options. While obtaining a low monthly payment may be a number one priority, neglecting to consider all the terms of the loan is a common mistake which can cost thousands of dollars over the course of the loan.
Small changes in interest rates can make a big difference. Borrow $25,000 for five years at 3 percent, and your total interest would be $1,953. Keep in mind, 3 percent is a low interest rate, and the higher it is, the more you’ll be paying in the end. In addition, more consumers are choosing longer loan terms despite the financial drawbacks. For example, a four-year, $25,000 loan at 4.2 percent will cost $2,202 in interest. Yes, this can help decrease your monthly payment, but it will eventually cost you more money. Some people are even choosing six to seven-year loans! Faced with so many options, it may seem tempting to use the low monthly payment as a shortcut.
According to the Consumer Financial Protection Bureau, only half of car buyers report shopping around for the best deal on a loan. Borrowers often accept the rate offered by the car dealership, without ever learning what rates are available from banks or credit unions. By obtaining an auto loan through a bank or a credit union, you can potentially get the best interest rate, which will save you thousands of dollars.
2. Credit cards can harm your future if used incorrectly.
Credit can be a tricky thing that not many people are formally trained on. Some behaviors are obviously harmful to your credit, like missing payments or maxing out your cards. But, some mistakes aren’t well-known at all, and in fact some actions that might seem beneficial can actually have a negative impact on your credit.
Closing credit card accounts. Because a credit score favors a long credit history, the length of your credit history makes up about 15% of a FICO score. Consumers with a short credit history tend to be seen as more risky borrowers.
Missing payments. While this may be obvious, keep in mind that credit scores look at your credit history to see how you’ve done with your current and past credit obligations. This is an effort to gauge how likely you are to miss payments in the future. The most accurate predictor of future late payments is having missed payments in the past.
Settling with your lender on a past due account. Settling means accepting less than the amount you owe on an account. This may seem like a good idea, but the lender will report that remaining amount to the credit bureaus as a negative item. Known as a deficiency balance, it’s considered just as negative as missed payments.
Having high balances on your credit cards. This will cause your credit scores to go down. Use your cards sparingly and pay them off each month.
If credit cards aren’t something you want to dive into yet, consider a GO Card. Load only what you can spend onto the card directly from your checking account.
3. You need emergency savings.
A recent study found that only 1 in 3 millennials has enough money saved for unexpected expenses, which doesn’t include bills, rent or food in case of a job loss. If you leave yourself with no cushion, you could find yourself in debt with one unanticipated curve ball. Try to have enough savings to cover between three and six months worth of living expenses.
By opening a savings account, you can start giving yourself the cushion you need.
4. Managing an IRA can be simple.
There’s no better time than now to start thinking about an IRA. A traditional IRA is a way to save for retirement that gives you tax advantages. Your money can grow tax-deferred, but you’ll pay ordinary income tax on your withdrawals, and you must withdrawal after age 70½.
With a Roth IRA, there are income limitations in order to open an account. If you’re a student who has a work study program, or even just a part-time job, contributions to a Roth IRA may be more appropriate for you. The money you invest towards retirement using a Roth IRA is already taxed so it is allowed to grow tax-free until retirement. When you make a withdrawal, the amount will generally not be taxed.
Within a Roth IRA account, you can also maintain stocks, bonds, mutual funds, certificates of deposits, and real estate investments as you progress in your investing experience. After college, eligibility and deposit limits will be based on your marital status and your earned income status.
Open an IRA today to start saving for your retirement.
5. Kids are expensive.
Life is expensive, but when you add a child to the mix, you should be prepared financially to the best of your ability. In addition to savings accounts, emergency funds and retirement preparation, your child’s financial future is likely on your radar too.
Luckily, you can rest easy with certificates of deposit (CD). A CD is a type of savings tool that can offer a higher return on your money than most standard savings accounts. You generally accrue interest at a higher rate, and it's also low-risk. Your deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum amount allowed by law.
With a CD, you can secure a certain rate and know exactly what you can expect to have earned. They are offered for a set time period, called a term. Generally, the longer the term, the higher the rate. So you can start a CD for your child's future needs, watch it grow to maturity as your child grows and renew or re-deposit the money into new CDs until you're ready to hand the balance over to your child.
We all deal with money everyday which is why it’s so important to know the answers financial-related questions. By avoiding mistakes and preparing for the future now, you can set yourself up to succeed.