Planning major life purchases


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These are the major purchases that loom on the horizon, such as a new vehicle, college tuition or a home. For these dream purchases, a credit card won’t cut it. You’ll definitely need a loan.

Student loans

If you’ve got the cash (or your parents will give you the cash) to pay your way through school, congratulations! If not, you’ll need to borrow the money. Here are the ins and outs of student loans.

Federal student loans are loans you get through the government and are guaranteed by the government. This money is generally disbursed directly to the school, and covers school-related expenses such as tuition, room and board, fees, books, supplies, equipment, dependent childcare, transportation, and the rental or purchase of a personal computer. Nearly all students are eligible to receive these funds, regardless of credit score or other financial issues. 

Federal student loans are either subsidized or unsubsidized. Subsidized student loans are only offered to students demonstrating financial need, and financial need can be determined differently from school to school. The government makes interest payments for the students with subsidized loans during the student’s term of schooling.

Nearly all students are eligible for unsubsidized federal student loans regardless of need. These loans, however, accrue interest during your term of schooling. The interest is added onto the loan and is payable after you graduate. If you’re a keener, you can work some of these interest payments into your budget while you’re in school; however, making interest payments is not required until after you graduate.

Both types of federal student loans carry a six-month grace period, which means you don’t have to start paying the loan back for six months following your graduation (provided you are maintaining at least a half-time student status during those six months).

The other path you can take is to apply for a private student loan. These are loans offered through your credit union and other financial institutions, and usually help make up the difference when a federal loan can’t cover what you need, due to certain fund maximums. Private student loans can be paid directly to the school or the student. These usually have higher loan limits and more flexible repayment terms. However, they don’t carry the government guarantee, and could have higher interest rates and additional fees. Determination for granting these is mostly dependent on your credit score.

Student aid resources

  • For some great tips and resources, especially about planning for university and student aid, visit ed.gov
  • Learn about your student aid options, and try out some cool calculators at finaid.org
  • For the real skinny on getting that student loan, visit mahalo.com
  • Who offers the best education for the lowest price? Check them out at kiplinger.com (scroll down to the "College" section)

Vehicle loans

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Since this field guide is all about Young & Free, it’s no surprise that we recommend your first car be a used car—used is the closest to free!  

Step 1: Figure out what kind of car you need

Which vehicle below best meets your needs?

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Compact

  • People hauling: Up to 4
  • Stuff hauling: Books and takeout
  • Driving/fuel mileage: Lots of driving or commuting
  • Four-wheel drive: Rarely

Sedan

  • People hauling: Up to 4 people
  • Stuff hauling: Groceries and a few boxes of stuff you left at your parents’ house
  • Driving/fuel mileage: Mix of around town and highway driving
  • Four-wheel drive: Some

Van

  • People hauling: More than 4 people
  • Stuff hauling: Lots of people AND stuff on a regular basis
  • Driving/fuel mileage: Around town with the occasional long distance trip
  • Four-wheel drive: Some (all-wheel drive)

Truck

  • People hauling: 2-4 people
  • Stuff hauling: Work tools, equipment or pulling a trailer
  • Driving/fuel mileage: If you drive and tow equipment a lot, consider a diesel engine
  • Four-wheel drive: Yes

Step 2: Find the vehicle you need

It pays to do a little research to find the best compact, sedan, van or truck available. 

  • Visit the manufacturers’ websites to find a model you like.
  • Visit websites (see list to the right) that research and investigate vehicles for consumers. Find out all you can about the vehicle you like.
  • Search Google with key phrases such as “I love my Toyota Matrix” or “I hate my Chevy Malibu” to see who loves or hates the vehicle you want to buy so much that they created a blog or community about it.
  • Visit your local dealer, used car lot or classified ads and start tracking that vehicle down!

While you’re shopping around, make notes about the vehicles you find. This will help you do more research before you plunk down the cash.

Step 3: Find out what you can afford

If you worked through the budget exercise starting in chapter 3, you’ll have an idea of what kind of monthly payment you can afford. Here are some other things you should price out before going ahead with your car purchase. Once you have done that, fill in the right column below.

Step 4: Bring the right info to your credit union

You can do this step first and get a pre-approval. Having a pre-approval from your credit union gives you some negotiating power with a dealer or used car lot, as they know you are serious and they know your budget.

Before visiting your credit union, make sure you have this information: 

  • Social Security number
  • Driver’s license
  • Last two pay stubs or other proof of income
  • Copy of your credit report (if you ran one; see chapter 5)
  • Copy of the vehicle inspection report (if you received one)
  • Full information on the car you wish to purchase (year, make, model)

Automotive resources

Auto tip

  1. For no charge, Carfax.com will show you how many records are available for a specific VIN, but if you want to view the records, there is a charge.
  2. VIN  stands for vehicle identification number. It provides information, right down to the location of the factory where the vehicle was assembled. Visible through the windshield, the VIN is on a metal plate at the base of the driver’s side dashboard.
  3. There are three places to find used cars: a car dealership, a used car lot or a private seller. Dealerships and car lots will always be more expensive because they have overhead, and (hopefully) have done safety inspections and minor maintenance on the used cars they’ve brought in before they sell them. Private sellers usually have better prices, but you need to do more legwork to make sure the vehicle is legal, safe and in good running condition.

Home loans 

So you’re ready to quit renting and start owning. Good for you! Home loans are commonly known as mortgages. A mortgage is the largest loan you are likely to have in your life, as well as the one that could last your entire life! Mortgages can be complicated, because they involve the legal transfer of property.

The first step you should take is to examine whether the benefits of home ownership outweigh the advantages of renting, as renting is likely what you’re doing now. Read through the following chart and select the statements that best match your situation. The side with the most checks wins!

What kind of home can you afford?

It’s best to make an appointment with your credit union to discuss this thoroughly. They have lots of resources to help you determine what your needs are and the type of mortgage that will best suit your situation. However, it’s helpful to prepare as much as possible for that meeting.

This chart can help you determine what income you need for a specific mortgage payment and rate. The calculations are based on a $95,000 mortgage, on a 30-year payment schedule, assuming a payment ratio of 25%.

Income to payment ratios 

Interest Rate / Monthly Mortgage Payment / Minimum Annual Income

  • 4%  /  $454  /  $21,770
  • 5%  /  $510  /  $24,476
  • 6%  /  $570  /  $27,370
  • 7%  /  $632  /  $30,338
  • 8%  /  $697  /  $33,460
  • 9%  /  $764  /  $36,691
  • 10%  /  $834  /  $40,017
  • 11%  /  $905  /  $43,426
  • 12%  /  $977  /  $46,905

Source: National Association of Home Builders, Economics Division.

Quick terms

  • Adjustable rate  An interest rate that rises and falls due to financial market conditions.
  • Amortization  The amount of time over which a debt is repaid in full by regular payments.
  • Equity  The value of a thing you own, after you subtract the money still owing on it. For example, it’s the value of your car after you subtract your loan, or the difference between the market value of your home and the amount of your mortgage (money you owe to your lender).
  • Escrow  Money, property or a legal document held in the possession of a third party until a specific condition has been fulfilled.
  • Fixed rate  An interest rate that doesn’t change, usually for a specific term.
  • Insurance (homeowners)  An amount you pay (usually monthly) to protect your home, property and belongings against fire, theft and other damage.
  • Insurance (mortgage)  A safeguard against you defaulting on your mortgage payments. Paid monthly. Usually assessed if you are unable to put 20% or more as a down payment on the cost of your home. 
  • Interest  Amount paid to your credit union for the use of the money loaned to you by your credit union.
  • Mortgage  An agreement by which money is lent for buying property.
  • Prime rate  The best rate a financial institution will offer its best members. The prime rate is indexed 300 basis points above the federal funds rate, which is the rate that banks charge each other for overnight loans.
  • Principal  An amount invested or lent, excluding interest, taxes or other fees. 
  • Term  A set amount of time for which an interest rate and payments are assessed (a smaller amount of time within the overall amortization of a mortgage).
  • Title  Right to ownership of a property, whether in your possession or not.