High APR, high payments equal steady instant-noodle diet
By Pfc. Ethan Hoaldridge
| | May 07, 2007
U.S. MARINE CORPS FORCES, PACIFIC, CAMP H. M. SMITH, Hawaii --
Is it worth it to rush into an auto loan to get a fancy new car, and subsequently live off of instant noodles, mac ‘n’ cheese and PB & Js for the next four or five years?
Most Marines who arrive at a new duty station immediately want to check out their new surroundings, experience the culture and see the sights, but don’t have any transportation to do it.
“When I found out my first duty station was Hawaii, I couldn’t believe it,” said Pfc. Ryan Kernan, an administration clerk, MARFORPAC training office. “I already knew a lot of the things I wanted to do before I even got here, but it was hard to get around without a car.”
Some Marines who already have vehicles will take new Marines under their wing and drive them around.
Marines can take taxis, bum rides or use public transportation, but that can become a hassle.
When Marines arrive at their new duty station and decide to get a car, they need to be aware of the many traps they can fall into when they go to a used car lot or dealership.
“Usually what happens is someone with no credit or a low credit score gets excited when they find a dealership that says, ‘we’ll finance anybody,’” said Cpl. Robert White, a former Land Rover salesman, now MARFORPAC combat illustrator. “When they say that, it usually means the buyer will have a really high annual percentage rate and pay up to $5,000 more for the car.”
A car salesman makes a living off commission, so the more they can charge you over the Manufacturer’s Suggested Retail Price, the better the commission.
“If you can’t get a decent APR, then don’t buy a car. Just save your money and buy a car off the lemon lot,” said White. “Also, I recommend bringing an experienced buyer with you to the dealership when buying a car to help determine if you’re getting a good deal or not.”
Some first-time buyers become impatient and won’t wait until their credit is built and make hasty decisions like buying a car outside of their budget.
“The first problem young enlisted service members run into is their credit score,” said Carol Richards-Boyd, Navy-Marine Corps Relief Society financial advisor. “We usually tell Marines to get a credit card and pay it off every month on time to establish credit.”
The credit bureaus Experian, Equifax and TrueCredit all have Web sites that allow you to check your current credit score. By law, any one is allowed to check their credit score annually for free.
Young people usually won’t have credit scores or they will be 550 or below, until they get their first credit card and make those monthly, on-time payments, according to the NMCRS Web site.
“Once you have a high enough credit score to get a loan, it doesn’t mean you’re ready to buy a car,” said Richards-Boyd.
The better credit score a buyer has, the lower the monthly payments will be.
According to CarBuyingTips.com, no prospective car buyers should purchase if they cannot buy a car that they can afford to pay off in 48 months. Also, they should be able to put down 20 percent of the car loan to keep from getting “upside down,” where you owe more on the car than it is worth.
Once a Marine has saved 20 percent of his anticipated price range, they should consider what type of vehicle to buy.
Things to consider as normal criteria for a car:
•Safety (vehicles must pass state safety inspection before a driver will receive their vehicle registration)
•Reliability, low maintenance
•Good gas mileage
•Fulfills the buyer’s personal needs
“Once you’ve decided what kind of vehicle to buy, you should research car insurance quotes,” said Richards-Boyd. “GEICO and Progressive Auto Insurance are two companies that usually give the lowest rates for customers.”
Some banks and insurance companies offer discounts or lower rates for military.
Along the road to buying a car, there are a few acronyms and words a Marine should learn the definitions of and how they apply when purchasing a car.
MSRP, the Manufacturer’s Suggested Retail Price, and APR, Annual Percentage Rate, are both important to understand.
The dealership will sell a vehicle for as much above the MSRP on a vehicle as they can to make maximum profit.
The APR a buyer receives on their loan affects how much they will pay for the car total after the 48 or 60-month payment schedule. The buyer will pay the bank much more money on a $15,000 loan with an 18 percent APR, than someone who has the same loan with a 6 percent APR.
“Before walking into a dealership, I suggest making sure you have done your homework and know the invoice price and MSRP on the type of vehicle you intend on buying,” said Richards-Boyd. “Almost all car dealerships mark up the price of their vehicles. You don’t want to pay $14,000 for an $11,000 car.”
Kelly Blue Book is a common source to find the value of a car. By visiting their Web site at www.kbb.com, a buyer can check the recommended price of almost any make and model of vehicle.
A good credit score will get the buyer anywhere from four to eight percent APR, which means they pay much less interest on their loan than someone with a bad credit score and an APR of 15 percent on their car loan.
A good credit score is 650 or above, but consumers should shoot for above 700, according to Equifax’s Web site.
A $15,000 car with 15 percent APR for a 60-month finance term could make the monthly payments $376 with $15,825 as the total amount financed. A one percent difference would make the payments $368 and could mean as much as $500 difference on the total amount paid after the 60 months.
“First-time buyers should definitely visit NMCRS for financial management counseling before they go off and buy a car, because we can help them see unforeseen costs down the road that would greatly impact their life style and budgeting,” said Richards-Boyd.
Initial costs of buying a car from a dealership include paying for sales tax, title, registration, the first insurance payment, and a down payment usually.
“I would also suggest considering how much it cost for regular maintenance and upkeep for the vehicle,” said Richards-Boyd. “Gas costs around $3 a gallon, changing the oil, buying new tires and paying insurance on top of the car loan can be overwhelming for a junior enlisted.”
Buyers can also consider how to pay the loan off sooner than scheduled to save money in the long run.
The interest is recalculated after each monthly payment, and after each payment the balance on the loan is less, therefore the bank will calculate the interest on a smaller balance.
“Ultimately, buying a car is a huge step for first-time buyers and will have a lasting effect on the rest of their life,” said Richards-Boyd. “If a Marine rushes into it and gets into debt over his head, they might start making payments late or not at all and the vehicle will be repossessed which goes on the credit history for a long time.”
A repossession will stay on a credit report seven to 11 years.
If a vehicle becomes repossessed the owner will still owe the difference on their remaining balance and what the bank auctions it for.
The buyer can always walk away from a pressured situation that seems like a bad deal. The consequences of signing contracts without research and understanding can be costly.
Each time someone bounces a check or there is a late payment on a loan it creates a black mark on their credit.
According to the Equifax Web site, account histories, which are supplied by creditors with whom a consumer has an account, include the date the account was opened, the credit limit or amount of the loan, the payment terms, the balance, and a history that shows whether or not they’ve paid the account on time. Closed or inactive accounts, depending on the manner in which they were paid, stay on their credit report for seven to 11 years from the date of their last activity.
“It is critical that any first-time buyer know exactly what their getting themselves into and do their homework,” said Richards-Boyd. “With all the resources the military has to offer, it would be [smart to] take advantage. Never fall in love with a car, because there’s always another deal.”