LOOKING INTO LOANS

The business of borrowing money

What great stuff awaits in your near future? Your own car? College or career education? Then chances are, borrowing money will be in your near future, too. There are things you can do right now to improve your chances of getting your first auto loan. And the options for paying for college include loans as well as ‘free money’ such as scholarships and grants. Start here to gain an overview, then visit the suggested websites for more detailed information. Because once you understand the basics of borrowing you’ll be ready to get loans without groans!

Financial aid 101

Aid and ‘free money’

The absolute best way to offset the cost of higher education is by being the absolute best high school student you can be. Excellent grades could earn you a scholarship. And college-level AP courses certainly take a bite out of tuition costs. There are also thousands of scholarships offered each year from a wide variety of sources, and many go unused simply because students do not know they exist. So do your homework, and you may be delighted to find you qualify for more free money than you imagined.

 

To begin your search for scholarships, try these resources:

  • Your school counselor
  • The financial aid department of the colleges/career schools to which you’re applying
  • The US Department of Labor’s scholarship search tool
  • Your library
  • Your parents’ employers (or yours, if you are working)
  • Religious and civic groups, foundations and community organizations

 

In addition to ‘merit-based’ scholarships, you may qualify for ‘need-based’ grants. Both options are frequently called ‘gift aid,’ because the money you receive does not have to be repaid. Most states offer grant money to qualified students, so be sure to investigate what’s available there.

 

But the mother lode of financial aid comes from the federal government, which provides over $150-billion to students yearly. All searches for federal grant money must begin by submitting a Free Application for Federal Student Aid or FAFSA. A few weeks later, you and the schools you have applied to will receive a Student Aid Report (SAR), indicating how much grant money you are eligible to receive.

 

Popular sources of need-based grants come from:

  • Pell Grants
  • Federal Supplemental Educational Opportunity Grants (FSEOG)
  • Teacher Education Assistance for College and Higher Education (TEACH) Grants
  • Iraq and Afghanistan Service Grants

 

FAFSA applications, state and federal deadlines, and a wealth of ‘free money’ resources can be found on the US Department of Education site.

 

Federal student loans

Going beyond ‘free’

Once you’ve applied for every scholarship, looked into every grant, and exhausted all your ‘free money’ options, it’s time to consider a student loan. Like all loans, these will accrue interest that must also be repaid. There are two main types available to you: federal and private.

 

You will probably want to look into a federal loan first, because it offers a lot of perks, including:

  • fixed interest rates that are generally lower than private loans
  • deferred payments (which don’t begin until after you’ve graduated)
  • flexible repayment plans (including postponing or reducing your payments if you’re having trouble repaying the loan.

 

In some cases, based on employment situations, some or all of the debt may even be forgiven. Federal loans include:

 

  • Direct Subsidized Loans – for college and career school undergraduate students with financial need. Your school determines the amount you can borrow, and the government pays your interest while you are in school, and for a specified grace period after graduation.

  • Direct Unsubsidized Loans – for undergraduate and graduate students, regardless of financial need. Your school determines the amount you can borrow, and you are responsible for paying all interest. If you choose not to pay your interest while in school, it can be deferred though it will accrue and be added to the principal amount of your loan.

  • Direct PLUS Loans – Parent Loans for Undergraduate Students (PLUS) loans provide funds for parents of dependent undergraduate students to help pay for school. Graduate and professional students may also apply for PLUS loans. A credit check is required for a PLUS loan.

  • Federal Perkins Loans – unlike the above loans, in which the US Department of Education is your lender, this is a school-based program for both undergraduates and graduates. With these loans, the school is your lender.

 

Depending on your circumstances and the loan you choose, you pay be able to borrow up to $12,500 per year in Direct Loans. Graduate students can borrow up to $20,500.

 

Private student loans

Do your homework first

When there’s still a gap between scholarships, grants, and federal loans, students (and their parents) may turn to this option. Most private loans are offered by financial institutions. This means you need to shop around for the best interest rates, lowest fees, and most flexible repayment terms.

 

A growing number of schools offer private loans through their list of preferred lenders, and though you are not obligated to use them, the overwhelming majority of students choose from that list (in fact they usually go with the first bank listed). Resist that temptation until you’ve done your comparison shopping. Here are some other suggestions to ensure you make the most of (and pay the least for) a private loan:

 

  • Choose the shortest loan term possible. Longer terms may mean smaller monthly payments, but you’ll be paying a lot more interest over the life of your loan.

  • Use a co-signer. Interest rates and fees are based on credit scores. Even if you qualify for the loan on your own, if your parents or guardian have better credit than you, it’s money saved.

  • Limit the number of loans you apply for. True, you won’t know what interest rate you’ll receive until you apply for a private loan. So your tendency may be to compare a bunch of them before deciding. But applying for more than 3 loans can affect your credit score, potentially raising your interest rate.

Auto loans

Car loan = credit history

If every teenager could create a wish list, a car would probably cruise smoothly into first place. Buying your first car is a rite of passage that represents freedom, adulthood…and some pretty big challenges. You may be old enough to drive, but unless you’re 18 and gainfully employed, you’re not old enough to qualify for an auto loan on your own.

 

Of course, if you saved enough to buy your car with cash, you’re in the driver’s seat when it comes to shopping, negotiating and insuring your car. But if you need an auto loan you will need an adult co-signer. That person’s credit score and employment history will determine the interest rate of your loan, so it’s smart to get his/her credit report in advance, to ensure you’ll be offered the most favorable rates.

 

Remember: that co-signed loan establishes your credit history. Do not even think of borrowing the money unless you are positive you can handle your debt. Making on-time payments is not just expected – it is essential!

Improve approve-ability

Put the ‘yes’ into your loan process

Teens (and adults with no credit history) have a tough time getting approved for loans, because they’re viewed as high-risk by lenders. This translates into higher interest rates at best, and lots of turn-downs at worst. However, there are things you can do to increase your chances of being approved:

 

  • Be Realistic. Shop within your price range. Then calculate the total amount you will be paying – not just the car’s final price after taxes, fees, etc. but the amount of interest you will be paying on your financing. In addition to the monthly payments, you’ll be shouldering insurance costs (which are quite high for teenagers, even if they’re on their folks’ policy). And experts advise to add at least $225 a month for gas and maintenance. If it looks like you can’t afford it all, or if the car doesn’t seem worth that number, it’s a bad lending scenario. Walk away, and don’t even bother to present your case to a lender.

  • Dress the Part. Lenders want to see a responsible, mature person asking to borrow their money. Leave the flip-flops home and look as professional as you can.

  • Save Up. A sizable down payment can make all the difference. The rule of thumb is to pay 20% of your car’s cost in cash, and finance the rest. Low (and no) down payment loans are out there, but terms and interest rates can be way higher than you can handle.

  • Work For It. Of course a full-time job helps get loan approvals. But a history of part-time work can demonstrate your ability to pay back. Even when your financing is with a co-signer, the lender likes to see that you can afford to make payments on your loan.

  • Check All Sources. Be a comparison shopper. Approval criteria can vary from lender to lender. In addition to traditional brick-and-mortar banks and credit unions, ask about financing through the car dealer. Online lending (from reputable companies) is also growing in popularity, because of quick loan approvals. Shop around until you find the most favorable requirements, rates and terms.

Lease or buy?

Weigh the pros and cons

If you’re under 18, you’ll probably need a co-signer for either option. In the case of leasing, your parents would most likely need to lease the auto themselves, and list you as a regular driver.

 

Whether you lease or buy, you’ll be responsible for insurance and repairs. That said, which is a good way to go?

 

Leasing pros:

  • You get to drive a brand new car
  • Option to put little or no money down
  • May have lower monthly payments
  • Factory warranty means minimal repair costs for you
  • No worries about selling it – you simply return it at lease end

 

Leasing cons:

  • It’s more expensive than buying
  • You only have the car for a specified number of years
  • You’ll never own the car – you’re just ‘renting’ it
  • Yearly mileage is limited, 10,000-15,000, depending on lease term; you must pay for each mile over the limit
  • You may be responsible for excess wear and tear

 

Buying pros:

  • Once you’ve paid off the loan, the car is ‘free’
  • It’s the economical way to go, especially if you plan to keep the car for a long time
  • You have equity – after your loan, you can sell your car or trade it in

 

Buying cons:

  • Down payment requirement – as much as 20%
  • Depreciation reduces your car’s value about 50% in three years
  • Higher monthly payments than with leasing
  • You’re responsible for all maintenance and repairs
  • When you’re ready for your next car, you have to deal with getting rid of this one
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