FDIC Consumer News - Summer 2018
25th Anniversary Edition
 Simple Strategies for Saving Money on Loans and Credit Cards
Excerpted and updated from “Special Edition: 51 Ways to Save Hundreds on Loans and Credit Cards,” Summer 2007.
Here are tips for saving money when shopping for new credit and when using loans and credit cards.
Focus on the long-term cost of the loan, not the monthly payment. It may be better to pay slightly more money each month, if it means you will be paying less in total interest. Some people look so much at the monthly payment that they don't notice certain fees or service charges that are imposed.
Build your own rainy-day fund and borrow from yourself when you need money fast. The best way to avoid a cash crunch is to put money into an emergency savings account. This fund can get you through a difficult period without having to take out a loan or borrow from retirement savings. Possibilities include having your paycheck directly deposited into your checking account with a portion automatically placed into your emergency account.
Don't pay for expensive insurance coverage you probably don't need. Many lenders sell disability, life insurance or other similar protection plans which, as an example, might cover minimum loan payments due if the borrower becomes ill or dies. These plans may be far more costly or more limited in purpose than traditional insurance not tied to loans.
Steer clear of fraudulent or deceptive offers targeting borrowers. Unscrupulous individuals try to lure consumers into questionable, high-cost deals or fraudulent transactions, usually involving new loans or credit cards or offers to help deal with debt problems. Deal with financial institutions or other companies you know or that you have independently verified as being legitimate. When in doubt, call your state or county's consumer protection office.
When choosing a credit card, ask yourself if you plan to pay the balance in full each month. In general, if you expect to pay your balance in full most months, look for a card with a full grace period and no annual fee. However, if you plan on carrying a balance, then a card with an annual fee and low APR (Annual Percentage Rate) may be better.
Know your credit limit and stay below it. There are two problems with going over your card's credit limit. One, your card issuer will charge you a penalty. Two, exceeding your credit limit may damage your credit score, which may mean higher interest rates, now and in the future. To be confident you are within your credit limit, periodically check your balance by phone or online. Also give yourself an extra cushion — either try not to get too close to your credit limit or call the card company to get a higher limit if you anticipate a special need, such as a vacation or major purchase.
Consider a fixed-rate mortgage loan even if adjustable-rate mortgages (ARMs) carry a lower initial interest rate. A fixed-rate loan adds certainty and stability to a big part of your loan payment, especially given that other housing costs — such as real estate taxes, insurance and home upkeep — are likely to rise. ARMs generally start with a lower interest rate, but remember that an ARM rate can go up, sometimes significantly.
Look into paying off your mortgage sooner rather than later. A mortgage with a long repayment term (30 or even 40 years) is very appealing because the monthly payments are relatively small. However, the downside is that you'll have a much smaller amount going to pay off your loan each month, and that can dramatically increase the total interest costs. You can save tens of thousands of dollars in interest by sending in extra payments — say, an additional $50 or $100 each month or one large payment once a year. There are pros and cons to the different strategies, so you may wish to consult with a financial or tax advisor about what is best for you.
Research government incentives for first-time homebuyers, low- or moderate-income families and other borrowers. Eligible applicants can save on the interest rate, closing costs, down payment and other loan terms. For example, mortgages insured by the Federal Housing Administration may feature low down payments and low closing costs (go to www.hud.gov/buying/loans or call 1-800-569-4287). For programs offered by your city, county or state government, call its housing agency or check its website.
Think carefully about how much car you can afford and how much of a loan you need. The dollar amount of your loan largely will be determined by the sales price of the vehicle minus your down payment, any rebates and the value of any trade-in. Don't forget the cost of auto insurance, sales taxes, annual property taxes on the car (if any), and options you may be inclined to buy, such as an extended warranty. Also remember that every item you add to your loan instead of paying upfront will add to the interest you pay on the amount financed.
Consider saving, not borrowing, your first choice for paying for college. College loans can be costly, and the easiest way to avoid those costs is to have your own college savings fund. Starting a college savings account, such as a state-sponsored “529 Plan,” allows families to maximize growth in a tax-advantaged account and reap the benefits of compounding small amounts of money into a large sum over time (i.e., by the time the child graduates from high school). Investment advisers also recommend an automatic investment plan tied to your bank account or paycheck.
Think twice before borrowing against your home or retirement accounts to pay for college. Parents who do not qualify for a tax deduction on loans for higher education may want to consider using a home equity loan if they qualify for a tax break on the interest. But remember, a home loan puts your house at risk. Another option is to borrow from your retirement savings, but most investment advisers recommend against that because it may reduce your future earnings from compounding interest and make it tougher for you to retire when you want.
Youth is no excuse for defaulting on a student loan. At some point, perhaps after graduation, the loan payments will begin. While other loans (such as credit cards) and high living expenses make it tough to pay off college loans, the non-payment of a student loan is a bad way to start adulthood. Your credit report will be damaged and your ability to obtain new credit or even qualify for certain jobs may be jeopardized. If your good intentions fail and you have no way of making a payment, contact the lender immediately. Many lenders would rather work out some modified payment plan than have a borrower stop making payments completely. For more information on topics such as student loans and paying for college, visit the U.S. Department of Education’s webpage at StudentAid.gov.
If you’re borrowing to start or operate a small enterprise, consider an SBA-guaranteed loan. Under this program, the U.S. Small Business Administration guarantees a portion of a loan, often up to 85 percent, and enables a small business owner to qualify for attractive interest rates and financing options. For more information, call the SBA toll-free at 1-800-827-5722 or go to www.sba.gov.
Research local small business loan programs. These programs may include loans with below-market interest rates or no origination fees. Start by contacting your state or local department of economic development.