Ready to make a big purchase? Let’s see if things add up!
Are you going to finance it?
You wouldn’t believe the amount of money that is paid in interest each year. That’s how banks make money, by lending you other peoples money. Sometimes there’s no way around it, and sometimes there is. The average person, like us, does not have a couple hundred thousand dollars laying around to purchase a home. That would be nice though… But the rest of us have to get a mortgage if we want to do such a thing.
Buy with cash if you can, and be mindful of what it will cost you if you can’t
So getting a mortgage, or financing something is not necessarily a bad thing. It allows us to buy something and pay for it over time, as opposed to having to fork out a large lump sum that we do not have. Financing is actually a really good thing when its used properly. You are basically paying a fee to use someone else’s money to buy something you can not afford to purchase outright. So whether you plan on buying a house, car, boat, motorcycle, or a TV, I hope this post will help you make a better financial decision, and at least be more informed about what exactly you are getting into.
Better credit = better interest rate
First things first, the better your credit, the better your interest rate, the less interest you pay. It’s simple, so if your credit is not excellent, your not alone, just keep working at it. Make payments on time, make at least the minimum payments each month, and pay down balances. A late payment on a credit card by 2 days might not go against your credit but might end up getting you a $35 late payment fee added on to your balance. And those balances are much harder to pay off when they keep increasing. I will write a more detailed post in the near future about improving your credit, but in the meantime here are a few tips to get you started.
1. If possible, stop accruing more dept. You’re never going to get out of debt if you keep adding to it. So unless you’ve fallen on hard times and have no other choice, try to not make any new unnecessary purchases. (I used to leave my credit cards at home when I had no reason to be using them).
2. Make payments on time. Late payments equate into late fees and marks against your credit. A late payment could impact one or both of these, don’t leave it to chance and make your payments on time.
3. Pay down balances. The lower your debt to income ratio gets, the better your credit score gets. Credit scores are a combination of many different factors, so you will have to work on everything to get to a better place with your credit.
Next, I want to talk about what’s the most important thing to me. Simple math, I know it sounds basic, but when your about to finance something many people don’t think about this at all, and end up overpaying. So always do the simple math and see how much this purchase is really costing you. You won’t be able to estimate this on a credit card type purchase, but it works on a fixed loan. With a credit card, you pay interest on the balance each month till the total amount is paid off. A fixed loan is something where your payments and loan term is a “fixed” amount and are not going to change during the loan, a perfect example of this is financing a car.
Example: (These are rough figures here) You are buying a car that is listed for $10,000. You finance that car for $400 a month for 36 months. $400×36 = $14,400. Is that $10,000 car worth you paying $14,400 for it? If not, you might be able to negotiate a better price on the car. What if in that same scenario, the terms were $400 a month for 48 months? $400×48 = $19,200. Is that $10K car worth paying almost double for? Probably not, and the reason for this is the interest rate. This example is not realistic, but depending on your situation, the interest rate could impact your monthly payment $50 to $100 a month, times that by the loan term and it comes out to a lot of money you could be saving or wasting.
So if you have perfect credit, do a google search and see what the current interest rates are for the type of purchase you are about to make, you should have no problem getting the best rate. If your credit is not the best, shopping around might help you get a better rate, and save you thousands of dollars during the life of the loan.
If you don’t know what type of interest rate to expect, get a preapproval from your bank, a credit union, or even a site like LendingTree.com where you can have multiple offers. Some lenders undercut their competitor’s rates to earn your business, and this turns into huge savings for you. Just be careful not to get too many pre-approvals, these are inquiring into your credit and will drop your score. You can go to a dealership with a pre-approval amount that you’re comfortable with, and if they can’t match or beat that rate, you use your own financing.
I hope you found this information to be helpful, and feel free to reach out to me with any questions you might have. It’s easy for someone to get taken advantage of during these situations, and it’s expected. We don’t make big purchases often, so your better off if you know what to look for in these situations.
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