A. Even if you don’t have the cash to pay, you should still file your return on time. If not, you’ll end up owing even more, and that won’t be any good. And not filing at all isn’t an option.
As long as you file on time, you won’t face a penalty for filing late, said Joseph Matheson, a certified public accountant with Matheson & Associates in Whippany, N.J..
“Pay as much as you can with your tax return,” he said. “The more you can pay with the return, the less interest and late payment penalty you will incur.”
You can pay online with IRS Direct Pay, which is an electronic payment option available from the Internal Revenue Service, Matheson said. It allows you to schedule payments from your checking or savings account for no charge and you’ll receive an immediate payment confirmation.
Then, pay the rest of your tax as soon as you can.
“If it is possible, get a loan or use a credit card to pay the balance,” Matheson said. “The interest and fees charged by a bank or credit card company may be less than the interest and penalties charged for late payment of tax.”
Matheson said the IRS offers an Online Payment Agreement tool which allows you to ask for an installment agreement.
“You can use a direct debit plan. When you pay with a direct debit plan, you won’t have to write a check each month,” he said. “If you can’t use the IRS.gov tool, you can file Form 9465, Installment Agreement Request instead.”
But whatever your situation, don’t ignore a tax bill.
“The IRS may take collection action if you ignore the bill,” Matheson said. “Contact the IRS or your CPA right away to talk about your options. If you are experiencing a financial hardship, the IRS will work with you.”
No one really wants to talk about debt and certainly no one wants anyone else to know they have debt. The reality is that most people have debt and that debt is not necessarily a bad thing. In fact, you can use debt as a tool to help you get what you want in life. However, I have found that people will quickly tell me that they don’t have any debt at all because in reality they don’t want to catch the debt disease. Debt has the stigma of being dirty, bad and associated with people who don’t pay their bills. I can tell you that’s not really the case. Debt, when used as a tool, can be a good thing, something you live with and something you may even end up liking.
The Good, the Bad & the Ugly
The first step towards being able to embrace debt as a tool is understanding the difference between good and bad debt. Simply put: all debt can become bad debt if it becomes unmanageable. If you’re able to make your monthly payment in full and on time and you have positive cash flow, then congratulations, you have good debt. If you’re struggling to scrounge up the money each month and constantly find yourself making late payments or robbing Peter to pay Paul, then you have bad debt.
Budgeting Isn’t a Dirty Word
Budgeting is key to start making debt work for you instead of against you. Knowing how much money you have coming in and going out each month will tell you what sort expenses you can afford. Let’s say you’re looking to lease or finance a new car. After taking a look at your monthly expenses, you see that you have enough money left over each month to afford a $200 payment. A loan under $200 then would be good debt because you know you’ll be able to manage your payment. On the other hand, anything over $200 will be a stretch and would fall under the ‘bad debt’ category.
Pick Your Battles
Just like you wouldn’t use a screwdriver to hammer in a nail, there are some instances where debt just isn’t the right tool for the job. Let’s say for this year’s Super Bowl you want to get a better look at the game. You head to the store in hopes of picking up a new TV and find one that’s just perfect. Problem is, it’s way out of your price range. Thinking over your options, you decide that you could pick it up today by charging it to a credit card and paying it off over the next couple of months. You have to ask yourself if this really makes sense to you in the short and long term.
Can you afford the payments? Do you really need the item? What is going to change in the next few months in terms of your finances, meaning will you have more money/bills? Remember, if you wind up purchasing the TV, you don’t want to find yourself struggling to pay for it later.
Your Credit Is Married to Your Debt
This is true in sickness and in health. The reality is just about all debt shows up on your credit report. This can help your score or lower it depending on how you’ve managed your debt. It can help at first but then hurt it or hurt it but then help it. Let’s say you have that car loan we talked about earlier and you’ve been making on-time payments for two years. Then you lose your job and stop paying. Now the same credit account that was helping your credit has flipped and impacted your credit negatively when the lender reports that you have not paid your bill.
Arming yourself with the right knowledge and debt management strategies can help to turn debt from a burden into something beneficial. If you keep what I shared here in mind the next time you consider taking on debt, you’ll find yourself making much smarter financial related decisions. So stop living in fear of debt and start seeing it for what it can do for you today.
There’s a big misconception that private student loans can never be discharged in bankruptcy. People have repeated that statement so often they believe it to be a fact. The only problem is it’s not quite true.
Some private student loans are clearly eligible to be wiped away in a consumer bankruptcy. Even in a Chapter 7 bankruptcy, it takes only about 90 days to forgive the debt tax-free.
And while these special rules apply to private student loans that meet some criteria, all private students loans are no longer legally collectible once they have expired under the statute of limitations in your state. In that case, while they may be listed as a debt on your bankruptcy filing, there isn’t much of a need since the lender can no longer sue you or garnish your wages over those debts. In some states, the statute of limitations is as little as three years. In others it is 15 years.
But for some private student loan debt you don’t have to wait that long. You don’t even have to wait a week.
Where Did You Go to School?
If you owe private student loans for a school that was not accredited, your loans can probably be discharged in a Chapter 7 bankruptcy right away. Even some big-time lenders still make private student loans to such unprotected organizations. It’s quite common to find vocational and trade school students with these types of unprotected loans. Flight schools for pilots seem to notoriously be unaccredited. Yet pilots errantly labor under hundreds of thousands of dollars of unmanageable student loans believing there is no hope for them. You can see some real case studies showing how easily these loans were discharged.
In particular the issue that makes these private student loans so easily dischargeable in bankruptcy is the fact the school was not a “eligible educational institution” or that the loans were for a “qualified higher education expense.”
In order for a loan to be qualified as a private student loan:
“(1) it must have been made under a government or nonprofit student loan program, or (2) it must be a qualified educational loan under section 221(d)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.”
As bankruptcy attorney Craig Andresen says, “For example, perhaps you were not an “eligible student” at the time the private student loan was made to you; or maybe the loan was not incurred to pay ‘qualified education expenses’; or perhaps the loan was not for attendance at an ‘eligible education institution’ because the school was not accredited under Title IV of the Higher Education Act. All these are requirements imposed by section 221(d) of the Internal Revenue Code. Failure of a private student loan to meet any of these criteria means that the loan is fully dischargeable, because it would not qualify under section 523(a)(8) of the bankruptcy law.”
But the characteristics of a private student loan get even more specific. Just because a school was accredited, they must also have offered Title IV federal loans or the private loans may not be protected from discharge in bankruptcy.
Some attorneys have also reported to me other types of entities have been financing services using private student loans. One facility on particular was an inpatient drug treatment facility. Clearly that does not seem to be a protected category for private student loans.
How You Used the Loan Matters
But wait, just because your school might have met all the requirements of a Title IV of the Higher Education Act of 1965, that doesn’t mean some or all of your private student loans are not eligible to be eliminate in bankruptcy. If your loans were used for things other than a “qualified higher education expense” the law does not protect those amounts. So if you used your private student loan money for things other than tuition, books, supplies and required equipment, that part of your student loans may be eliminated in bankruptcy today.
Private student loan bankruptcy discharge is one of those issues in the debt world that many just make the wrong assumptions about. It pays to learn more.
One of the best ways to eliminate your mortgage debt is moving into a 15-year fixed-rate loan. With the average spread a full 1% compared to its 30-year mortgage counterpart, a 15-year mortgage can provide an increased rate of acceleration in paying off the biggest obligation of your life.
Can You Pull It Off?
In most cases, you’re going to need strong income for an approval. How much income? The old 2:1 rule applies. Switching from a 30-year mortgage to a 15-year fixed-rate loan means you’ll pay down the loan in half the amount of time, but it effectively doubles up your payment for each month of the 180-month term. Your income must support all the carrying costs associated with your home including the principal and interest payment, taxes, insurance, (private mortgage insurance, only if applicable) and any other associated carrying cost. In addition, your income will also need to support all the other consumer obligations you might have as well including cars, boats, installment loans, personal loans and any other credit obligations that contain a monthly payment.
The attractiveness of a 15-year mortgage in today’s interest rate environment has mass appeal. The 1% spread in interest rate between the 30-year mortgage and a 15-year mortgage is absolutely real and for many, the thought of being mortgage-free can be very tempting. Consider today’s average 30-year mortgage rate of around 4% on a loan of $400,000 — that’s $287,487 in interest paid over 360 months. Comparing that to a 15-year mortgage over 180 months, you’ll pay a mere $97,218 in interest. That’s a shattering savings of $190,268 in interest, but there’s a catch — your monthly mortgage payment is going to be significantly higher.
Here’s how it breaks down. The 30-year mortgage in our case study pencils out to a $1,909 monthly payment covering principal and interest. Weigh that against the 15-year version of that loan, which comes to $2,762 a month in principal and interest, totaling $853 more per month, but going to principal. This is why the income piece makes or breaks the 15-year deal. Independent of your other carrying costs and other credit obligations, you’ll need to be able to show an income of $4,242 a month to offset just a principled interest payment on the 30-year fixed-rate mortgage. Alternatively, to offset the principled interest payment on the 15-year mortgage, you would need and income of $6,137 per month, essentially $1,895 per month more in income just to be able to pay off your debt faster. As you can see, income is a large driver of debt reduction potential.
What to Do If Your Income Isn’t High Enough
When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.
Lenders are going to consider the minimum payments you have on all other credit obligations in the following way. Take your total proposed new 15-year mortgage payment and add that number to the minimum payments on all of your consumer obligations and then take that number and divide it by 0.45. This is the income that you’ll need at minimum to offset a 15-year mortgage. Paying off debt can very easily reduce the amount of income you might need and/or the size of the loan you might need as there would be fewer consumer obligations handcuffing your income that could otherwise be used toward supporting a stable mortgage plan.
Can You Borrow Less?
Borrowing less money is a guaranteed way to keep a lid on your monthly outflow maintaining a healthy alignment with your income, housing and living expenses. Extra cash in the bank? If you have extra cash in the bank beyond your savings reserves that you don’t need for any immediate purpose, using these funds to reduce your mortgage amount could pencil very nicely in reducing the 15-year mortgage payment and interest expense paid over the life of the loan. The concept of the 15-year mortgage is “I’m going to have to hammer, bite, chew and claw my way through a higher mortgage payment in the short term in order for a brighter future.”
Can You Generate Cash?
If you can’t borrow less, generating cash to do so may open another door. Can you sell an asset such as stocks, or trade out of a money-market fund in order to generate the cash to rid yourself of debt faster? If yes, this is another avenue to explore.
You may also want to explore getting additional funds via selling another property. If you have another property that you’ve been planning to sell such as a previous home, any additional cash proceeds generated by selling that property (depending upon any indebtedness associated with that property) could allow you to borrow less when moving into a 15-year mortgage.
Are You an Ideal Match for a 15-Year Mortgage?
Consumers who are in a financial position to handle a higher loan payment while continuing to save money and grow their savings would be well-suited for a 15-year mortgage. The other school of thought is to refinance into a 30-year mortgage and then simply make a larger payment like you would on a 25-year, 20-year or 15-year mortgage every month. This is another fantastic way to save substantial interest over the term of the loan, since the larger-than-anticipated monthly payment you make to your lender will go to principal and you’ll owe less money in interest over the full life of the loan. As cash flow changes, so could the payments made to the loan servicer, as prepayment penalties are virtually non-existent on bank loans.
There is an important “catch” to taking out a 15-year mortgage — you also decrease your mortgage interest tax deduction benefit. However, if you don’t need the deduction in 15 years anyway, the additional deduction removal may not be beneficial (depending on your tax situation and future income potential).
If your income is poised to rise in the future and/or your debt is planned to decrease and you want to have comfort in knowing by the time your small kids are teenagers that you’ll be mortgage free, then a 15-year loan could be a smart move. And when you’re mortgage is paid off, you’ll have control of all of your income again as well.
Proximity to retirement is another factor borrowers should consider when carrying a mortgage into retirement isn’t ideal. These consumers might opt to move into a faster mortgage payoff plan than someone buying the house for the first time.
Three days. That’s the fastest loan officer Scott Sheldon has ever seen someone get approved for a mortgage.
“He had every single iota of possible documentation you could imagine upfront,” said Sheldon, who’s a senior loan officer in Santa Rosa, Calif., and regularly writes about mortgages for Credit.com. That three-day turnaround was unusual, but so was the time it took roughly two months to get mortgage approval. “If the borrower was just a little bit more transparent upfront, we probably wouldn’t have had that.”
Mortgage approval is a multi-step process, but the more consumers do from the beginning, the more likely it is to go quickly. Sheldon said he’s currently seeing a five- to six-day timeline for mortgage underwriting approval and about 18 days from the start of the process to issuing a commitment letter — when the lender commits to giving you the loan. The initial underwriting approval is often contingent on receiving more documentation from the borrower.
“Many times the documentation and supply opens up more questions,” Sheldon said. “We actually just had one that went upward of 45 days (for final loan approval) because the borrower’s financial picture kept changing.”
The cleaner your financial history, the faster your approval process is likely to go, but speed is more reliant on how much information you provide your lender from the beginning. Sheldon said the applicant whose loan approval took 45 days had a lot of financial issues — a low credit score, previous short sale, previous foreclosure and outstanding debt with the Internal Revenue Service — and these problems weren’t clearly disclosed from the start.
“My best advice to buyers is let your lender pre-approve you — give them at least 72 hours to really pre-approve you with all your financial documents, including a credit report,” Sheldon said. He said consumers often expect pre-approval in a day, but that’s not enough time to thoroughly complete the process, especially if important documentation hasn’t been submitted. “All loans today go through automated underwriting. … It’s only as good as the information we put in there.”
If the pre-approval is based on flawed information, borrowers risk needing the lender to pull together a loan while they’re trying to sign a contract for a property. Loan issues could complicate the transaction, which is something to avoid when making one of the largest financial decisions of your life. Before you start shopping for a home, look at your credit reports, bank statements, outstanding debts and credit scores (if you don’t know what your credit profile looks like, check Credit.com’s free credit report summary, updated every 30 days, to get an idea of how lenders see you), and be prepared to keep supplying paperwork as they request it. You can also get your free annual credit reports on AnnualCreditReport.com.
You’ve won a prize! I’m in a foreign country, and I need cash. We’re temporarily unable to accept credit cards. Your dream apartment is available immediately at an incredible price!
These are statements that get attention and often tempt the most reasonable, intelligent and trusting consumers into literally handing over their hard-earned dollars to complete strangers. Money transfer scams come in many forms, so it is vital to stay on top of the latest scams to steal your money. Some fraudulent attempts can tug at your heartstrings, entice you financially and intrigue your curiosity. However, often what seems to good to be true…is.
Protect yourself against consumer fraud by not falling victim to money-scamming schemes. Here is some information about money transfer scams:
Know who is contacting you to receive or send money.
Research to see if others have had experience similar to yours.
Be aware that sending money via wire transfer is like handing over cash. Once it is out
of your hands, it is gone.
Use a credit card for online purchases, even if the seller requests a wire transfer.
Help educate others by reporting these incidents.
Wire money to someone you don’t know, including someone advertising an apartment
or vacation rental, a potential employer or an online-only acquaintance.
Wire money to someone in crisis who claims to know you. Verify the identity and
story through a direct source, such as a phone call.
Deposit a check from someone who tells you to send some of the money back to them.
The check will bounce after the money is sent.
Send money to receive money.
Never give out your bank account or credit card numbers in response to an unsolicited call, text message or e-mail. This can allow thieves to transfer money from your account.
If you think you have been a victim of a fraudulent money transfer, report the claim to the money transfer company and ask that it be reversed. It is highly unlikely that the transaction will be refunded, but it is important to report these activities. Don’t forget to file a complaint with the Federal Trade Commission at ftc.gov/complaint.
Credit cards and other loans can serve as a lifeline, when making ends meet may seem out of reach during times of financial hardship. Unfortunately, relying too much on these types of loans can actually damage already poor credit, and recent data indicates that this kind of problem could be getting worse.
New data from credit bureau Experian shows that consumers with average to poor credit are spending more of their available credit. Looking at data from the last quarter of 2014 and the last quarter of 2013, consumers in all credit levels increased the amount of money they spent on their cards, relative to their credit limits. Since credit scores are determined in part by the amount of available credit in use, this trend could spell trouble for people with already weak credit scores.
Credit limits can be tricky, because even if you have up to $1,000 to spend on a single card, that doesn’t mean you should. Having a card balance close to your limit can damage your credit standing. It’s called credit utilization — how much you use of your available credit — and it’s the second most influential aspect of your credit score (payment history is first).
Keeping your credit utilization low isn’t always as easy as it sounds. Using less than 30% of your available credit — or better yet, less than 10% — is a good guideline for utilization, but when your credit limit is $1,000, or even or $500, keeping your utilization low can be a challenge.
People with bad credit who have credit cards often have very low credit limits, so to keep their credit utilization low, they have to be careful about how they use their cards. For example, if someone with very poor credit, between 300 and 499 on the VantageScore 3.0 scale, has a $500 credit limit she should only spend $150 on it before paying it off to keep her utilization at 30% or lower, in order to help her credit score. If the consumer really wanted to work on her credit, she might want to only spend $50, to keep her utilization at 10% or lower.
Many people in that situation, however, aren’t doing that, according to Experian’s data, which indicated that people with the lowest credit scores had nearly maxed out their available credit in the last quarter of 2014. Even those with fair credit didn’t do a great job of keeping their debt levels low: The average utilization rate for mid-tier credit card users was well over half the limit. The average credit utilization rate across the board was 20%, but here’s how the data breaks down by credit level:
Super prime (781 to 850 VantageScore 3.0)
Average credit utilization in Q4 2014: 5.7%
Prime (661 to 780)
Average credit utilization: 27.5%
Near prime (601 to 660)
Average credit utilization: 63.7%
Subprime (500 to 600)
Average credit utilization: 76.7%
Deep subprime (300 to 499)
Average credit utilization: 95.6%
That gap between near prime and prime consumers is huge. Of course, it’s a lot easier to keep your credit utilization down when you’re approved for a high credit limit, as people with super prime credit scores generally are. At the same time, lowering your credit utilization is one of the easiest ways to improve your credit score, so if you have poor credit, it’s something you can focus on.
First, you have to know your credit limits and pay attention to your spending. If you have a very low limit but you prefer to use the card for frequent transactions, consider paying off the card multiple times a billing period to keep utilization low. Once your credit improves, you may be able to qualify for a higher limit. As you work to improve your utilization and your credit standing as a whole, you should check your credit and make sure your information is properly reported to the credit bureaus. You can get a free summary of your credit report every 30 days on Credit.com to track your progress.
Thinking about your own death is not fun; paying for something that will be useful only when you die can be even less so. But protecting your assets and dependents in case something happens to you is important. Once you calculate how much life insurance you need, you can start to look for the right policy and coverage for you. If you already have insurance or are worried about those pesky monthly costs, check out the tips below for reducing your life insurance premiums.
1. Shop Around
It’s a good idea to get life insurance quotes from different companies. Find a policy that matches your wallet and your circumstances, giving you the right amount of coverage for an amount you can afford. Keep in mind, cheapest is not always best. Also, term life insurance is usually more affordable than whole. It’s important to run the numbers for both types to see what makes the most sense for your situation.
2. Get Healthy
Life insurance premiums are based on risk, so the greater the risk you will die before the policy term ends, the more you will have to pay each month. Factors that go into assessing risk include your family’s medical history, your weight and lifestyle factors (like whether you smoke). If you undergo a big change like quitting tobacco products or getting a chronic medical condition under control, you may want to get a new quote or negotiate a better price with your current carrier. Basically anything that helps increase your life expectancy will also reduce your life insurance premiums.
3. Plan Ahead
The earlier you buy life insurance, the healthier you will likely be and the more likely you are to save on premiums. You can lock in a lower rate by getting in early. You can also plan ahead on a smaller scale by being prepared for your health exams. Your insurance policy may require a medical exam, so it’s a good idea to find out which tests you will be taking and prepare. You may want to fast for a few hours, drink more water than usual and avoid fatty foods.
4. Ask for a Better Deal
Sometimes you just need to ask in order to find price breaks. Talk to your provider about making annual payments rather than monthly ones, meaning more money upfront but significant savings over time. Don’t be shy when it comes to negotiating with insurance providers. It is a competitive market and they know premiums can be the difference between getting your business and losing it.
Purchasing the right life insurance is important, but you don’t want the stress of affording your premiums to shorten your life! Having financial protection for your loved ones doesn’t have to be a headache. Follow our tips and keep looking for new ways to keep your premiums down without sacrificing the coverage you need.
For consumers who are entitled to a steady stream of future payments, like a pension or structured settlement after a lawsuit, they may find themselves eligible for a lender offer on an “advance” lump-sum, upfront payment on that money. It’s kind of like taking out a loan on money you’ve already been promised. Since the “loan” payment is guaranteed by a strong entity like a pension fund, you’d think these products have low interest rates. However, when Congress’ General Accountability Office went undercover and got information about dozens of pension advance offers last year, it found interest rates ranged from 27% to 46%.
The problem with the upfront payments is this: The lump sum is far less than the total of the payments. On rare occasions, the upfront payment can make sense for someone in a bind, but generally, consumers need to be aware of the high costs. That’s why the Consumer Financial Protection Bureau has issued an advisory about “pension advance” traps, joining a chorus of other voices warning consumers about these kinds of expensive financial arrangements.
“Many retirees depend on a pension to cover day-to-day as well as occasional unexpected expenses, such as health emergencies or home repairs,” the CFPB said in its advisory. “We’ve heard that some retirees with pensions who are facing financial challenges have responded to ads for cash advances on their pensions. Although pension advances may seem like a ‘quick fix’ to your financial problems, they can eat into your retirement income when you start paying back the advance plus interest and fees.”
The arrangements are complex. Not only do pension recipients sign over five or 10 years of their benefits, they are often required to take out life insurance policies, to prevent payments from stopping in case of death.
Military veterans have also been targeted by pension advance offers, even though it’s generally illegal to assign federal benefits like pensions to a third party. That doesn’t stop companies from trying, however. California’s Department of Business Oversight issued a warning about pension advance loans to veterans in November.
“There are unscrupulous operators out there misleading investors and preying on vulnerable veterans who need cash,” said agency Commissioner Jan Lynn Owen. “We want veterans to know they cannot sign away their right to their pension or disability benefits.”
The alleged scams can also hurt investors, who supply the upfront cash and are often unaware the arrangements can be illegal, the California agency said.
1. Avoid loans with high fees and interest. Pension advance companies may not always advertise their fees and interest rates, but you will certainly feel them in your bottom line. Before you sign anything, learn what you are getting and how much you are giving up.
2. Don’t sign over control of your benefits. Companies sometimes arrange for monthly payments to be automatically deposited in a newly created bank account so the company can withdraw payments, fees and interest charges from the account. This leaves you with little control.
3. Don’t buy life insurance that you don’t want or need. Pension advance companies sometimes require consumers to sign up for life insurance with the company as the consumer’s beneficiary. If you sign up for life insurance with the pension advance company as your beneficiary, you could end up footing the bill, whether you know it or not.
Everyone overspends from time to time, but when it comes to big purchases, like a home or vehicle, something that seems like an exciting splurge could end up devastating your finances.
The question of, “How much is too much?” is quite personal. To say that you should only spend a certain percentage of your income on a car doesn’t take into account where vehicle ownership sits on your list of priorities, how often you drive or what the purpose of the vehicle will be. Knowing it’s a personal choice, Elizabeth Grahsl, a certified financial planner in Dallas, tells her clients to use 15% of their income as a guideline for how much to put toward auto expenses. Generally, you’re spending too much on a car if the total cost of ownership prevents you from reaching other financial goals.
“I see a lot of clients [whose] car payment is close to what they pay on housing,” Grahsl said. She clarified that “car payment” included all expenses related to a vehicle, like insurance, maintenance, parking and so on. “Then they can’t afford to save or travel or do fun stuff.”
“I think an hour’s worth of work could save you thousands of dollars over the five years you own the car,” said Hank Mulvihill, a certified financial planner in Richardson, Texas. Consider a vehicle’s fuel economy and how fluctuations in fuel prices could impact your budget (for example, if you have a long daily commute, a 20% increase in gas prices could really hurt). Call your insurance agent to find what your premium will be for a specific vehicle. Spend time consulting car reviews and get an idea of what maintenance could cost you.
“Anybody should do some basic research,” Mulvihill said. “Total cost of ownership may not be something you budget for unless you think about it.”
Even if you’ve done your due diligence and go to a dealership knowing exactly what you want, you may still overpay for a car if you’re not prepared to stand your ground against a salesman or ignore features you want but don’t need.
“The unfortunate thing about cars is they’re not just a financial purchase, they’re an emotional purchase,” said Rick Kagawa, a certified financial planner in Huntington Beach, Calif. He’s a self-described car nerd and will buy cars for his clients to remove their emotions from the equation: They go over everything the clients want in vehicles, decide on exactly what the clients are going to get, and he goes to complete the purchase. That prevents his clients from gravitating toward a common, costly loan — one with a long term.
“The price for the car is so big people cannot relate to a $40,000 or $50,000 purchase, but what they do relate to is a monthly payment,” Kagawa said. Prioritizing a certain monthly payment may leave you with a loan spread out over six or seven years, which may be longer than the consumer plans on owning the car in the first place.
“The finance person says, ‘I can get you to whatever the number is,’ but you’ll be on a six-year note, and people don’t care,” Mulvihill said. Extended warranties, maintenance plans and other add-ons may be included in a monthly payment quote, which you may or may not need, so it’s crucial to pay attention to the details. “If you don’t understand all that, you’re going to end up with way more obligations than you should.”