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Life Events, Strategies to Save

5 Questions to Ask Before Choosing the Right IRA Provider

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Choosing the right IRA provider can be challenging, especially when you don’t know what you should be looking for when choosing one. Let’s help you cut through the confusing financial jargon and focus on what you should be aware of when making this important decision.

You’ve finally determined that an IRA is the right move for you… now what?

The internet can be a great place to find information, products and services, however, there is no good way to separate the helpful advice from the misinformation. And, that’s why it’s so important to know what questions to ask. Here are the key areas to focus on when choosing your IRA provider.

1. What investment options are available on the platform?

If you already have or are looking to open an IRA, you probably understand the value of saving for retirement. The goal is to save (and hopefully grow) your money for the future. In order to set yourself up for success, it’s important to choose the appropriate investments for you.

We aren’t going to get into the details about determining which investments to choose, but we will look at what options are available on various platforms. Depending on which provider you choose, you may have access to a number of investment options including money market accounts, CDs, mutual funds, exchange traded funds, stocks, and bonds (this list could go on, but these are the most common options).

Each of these choices will expose you to varying degrees of risk and it is important to choose a platform that suits your needs. Some banks might allow you to open an IRA, but they may not have options outside of a basic interest bearing account, like a money market or a CD. These types of accounts are fine if your goal is to not lose money. The problem is that the interest rates are so low that you will have a difficult time beating inflation over time. The end result is that you will be losing buying power, which is a fancy way of saying that prices on products and services will rise faster than your money.

Other platforms like Fidelity, Vanguard or TD Ameritrade, will provide basic interest bearing options as well as investments that provide exposure to the stock market in the form of stocks, bonds, mutual funds and exchange traded funds (ETFs). These investments can allow you to design a diversified investment portfolio that can potentially grow your money for the long term.

Overall, you want to find a platform with a variety of investment options, ranging from the basic money market account, to index funds, target date funds (funds with a retirement year in the name that automatically move from aggressive to conservative based on your projected year of retirement) and maybe additional mutual funds that focus on specific sectors. This last group is not necessary unless you enjoy choosing your own specific asset allocations.

CFP opinion: Investments (other than stocks and bonds) will come with internal fees called “expense ratios”, the average of which is about 1.2%. These fees are common, so there is no need to avoid them completely. However, there are plenty of investments that charge well below 0.50%, so unless you have a compelling reason to choose a more expensive option, I would stick with the ones with lower expense ratios.

2. What platform fees should I be aware of?

Many providers will gladly accept your money because they know that they will earn revenue from the fees they charge. These fees include account maintenance fees, transactions fees (commissions), low balance fees, account transfer/termination fees, among others.

The size of these fees will range by type; some of them will be free, while others will cost as much as $200 dollars or more.

For example, when you open an IRA with Vanguard and invest in Vanguard mutual funds or ETFs, you will not pay sales loads, 12b-1 fees or commissions. You may also avoid paying annual account service fees by setting up online account access. However, you may be paying all of these transaction fees on other platforms. These fees can range from $8 to $60 or more per trade (buying or selling an investment). Others show up in the form of a percentage of your assets (12b-1 fees). I would suggest avoiding 12b-1 fees all together, as they are hidden fees that can really eat up returns.

The downside of going with a platform like Vanguard is that you won’t gain access to more sophisticated investment options (i.e. options, futures, margin accounts). I wouldn’t recommend using these types of investments anyway unless you consider yourself an investment expert and have the time to do the ongoing research necessary to maintain such a portfolio. So, in the end, this isn’t really a negative for most people.

Many platforms will also charge an account transfer and/or account termination fee. So, if you decide that you want to move your account elsewhere, you may be hit with a $25, $50, or even a $200 charge. I don’t recommend moving your IRA account often, however, you should be aware of what to expect if you decide to make a change.

The good news is that any platform you speak with should be able to provide you with a fee schedule that will list all possible fees. This is an important step before making the decision to open an account with a specific provider. Once you know the fees, you can make an intelligent decision on whether they are worth paying for. Most fees are not worth the cost, as every dollar that goes to fees is one more dollar that can’t be invested. Over time, this can add up to a lot of wasted money.

CFP opinion: I suggest finding a platform that charges very few fees. Choose one that will not charge transaction fees, low balance fees or other commissions. Ideally, you will also find one that does not charge IRA custodian fees. The one acceptable fee is an account termination fee, as the goal is to minimize the amount of times you move your account anyway. I would keep this fee under $100 just in case you do need to move it.

3. What about advisory fees?

Depending on where and how you open your account, you may also pay a financial advisor a fee to manage the account. This often comes into play when you are working directly with an advisor to manage your investments. This fee should be disclosed by your adviser at the onset of the relationship, however, don’t assume that it will be clear. The fee can range from 0.10% to as high as 2%+ depending on the advisor’s company and the way they charge (fee or commission).

Make it a point to ask how much you are being charged and what the fee covers. There are many reasons to pay a financial advisor to manage your investments, but you must be clear on the value you receive for the fee. If it’s not clear to you, don’t pay the fee.

CFP opinion: If you would like to work with an advisor, find a fee-only fiduciary who has your best interests in mind. Don’t pay more than a 1% advisory fee for your investments. There are plenty of excellent advisors out there who will charge this rate or less.

4. Are cash bonus offerings worth it?

Some platforms might offer special cash bonuses for opening an IRA and investing a certain amount of money within a period of time. Getting free money might sound great, but make sure to read the fine print and be aware of the above questions before moving forward. For example, Ally Bank is offering $500 if you open an account and rollover $200,000 from another retirement account.

Transferring that amount of money will be a roadblock for most people, however, even if you can do it, the bonus isn’t that great. It adds up to 0.25% (or less) of the account value. Also, you won’t have access to investments, only CDs and other interest bearing accounts with interest rates below 2%. Ally is a great banking option, but doesn’t have the options and flexibility most people require in an IRA.

Other platforms might offer the bonus but require you to invest in an annuity or keep your money in the account for a certain amount of years. If the rules aren’t followed, you can be hit with some pretty harsh penalties of up to 10% of your account balance.

CFP opinion: Don’t choose the platform based on the bonus. If you would select the platform with or without the bonus, then it might be a good option. It shouldn’t be one of the major determining factors.

5. Is the platform easy to use?

You should also ask to take a test drive on the platform. Many providers will (virtually) walk you through the online experience or point you to a video that will show you what to expect. Pay attention to how easy (or difficult) it is to access and make changes to your account. If you find that the platform is clunky, this may be a good reason to go elsewhere. With so many technological advances in the past 10 years, you should be able to see your account activity and investment allocations online from anywhere in the world.

As with all financial choices you make, it’s important to understand your specific goals and intentions for your IRA money. The best option for you will vary depending on your goals, age, wealth level, time horizon and risk tolerance. In general, you should look for an easy to use platform with online access, low fees, a variety of investment options and great customer service. It’s important to feel comfortable with all aspects, as you don’t want any excuse for ignoring your retirement money. Consistently contributing to and managing your money is paramount to a successful retirement.

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College Students and Recent Grads, Pay Down My Debt

Student Loan Interest: How Does it Work When I’m in School?

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We all know that student loans accrue interest, but exactly how and when interest begins accruing on various types of student loans can be a confusing topic. For example, some types of loans begin accruing interest while you are still in school, while others do not. Additionally, some loans accrue interest during the grace period (the period between when you graduate, withdraw from school, or drop below half-time status, and when your first loan payment is due), while others don’t start accruing interest until after the grace period is over.

It’s important to make sure you understand when interest will begin accruing on each of your student loans, since the amount of interest that accrues can substantially impact the amount of money you ultimately have to pay back. The first step is to check whether your loans are federal or private, and, if they’re federal, what type they are (e.g. subsidized or unsubsidized). With subsidized loans, the government assists the borrower by paying the interest during certain periods.

When interest capitalization occurs

Capitalization is the process of your unpaid interest being added to the principal balance of your loan. Interest does keep accruing after the capitalization process occurs, but the first one is likely to happen after your grace period on student loans is up.

Here is a rundown of the different types of student loans, along with notes about when each one begins accruing interest. You can find additional information about federal student loan interest at the Federal Student Aid website.

Federal subsidized loans

These loans are available to students who have demonstrated financial need.

  • Does interest accrue while I am in school? No.
  • Is there a grace period? Yes, six months.
  • Does interest accrue during the grace period? If your subsidized loan was disbursed between July 1, 2012 and July 1, 2014, it will accrue interest during the grace period. If it was disbursed before or after this period, it will not accrue interest during the grace period. Keep in mind that this could change again for future loans though.

Federal unsubsidized loans

These loans are available to students regardless of whether financial need has been demonstrated.

  • Does interest accrue while I am in school? Yes.
  • Is there a grace period? Yes, six months.
  • Does interest accrue during the grace period? Yes.

Federal PLUS loans

These loans are disbursed to students and parents of students in cases where the cost of a higher education program is not covered by other loans or forms of financial aid.

  • Does interest accrue while I am in school? Yes.
  • Is there a grace period? Student borrowers have a grace period of six months. Parent borrowers are expected to make payments as soon as the loan is disbursed but may request that payment due dates be delayed until after the student has graduated or left school.
  • Does interest accrue during the grace period? Yes.

Federal Perkins loans

These loans are available to students with “exceptional financial need”.

  • Does interest accrue while I am in school? No.
  • Is there a grace period? Yes, nine months.
  • Does interest accrue during the grace period? No.

Private loans

These are loans through banks or other private lenders rather than through the federal government, which means that the terms of the loan may vary depending on your specific lender. It’s important to check with your lender to get accurate information about the details of interest accrual and repayment requirements. Many private lenders may not offer a grace period, and interest will likely begin accruing while you are in school, but check with your lender to be sure.

What you should do to minimize accruing interest while in school

Minimizing the amount of interest that will capitalize is an effective way to reduce the total amount you’ll pay back over the life of the loan. The interest keeps on accumulating after the initial capitalization (principal + unpaid interest), so the lower the amount added to the principal balance, the less you’ll be charged in interest.

Here are a few ways to reduce the interest capitalization.

Work while in school

The action of working alone won’t do much, but it can give you money to pay off at least the interest accruing on your loans. You may even be able to save up enough to take out smaller loans the next year – or better yet – no loans at all. Be sure to explore all the work opportunities on campus, especially jobs that offer tuition assistance such as working as a resident advisor.

Make interest-only payments during school and/or the grace period 

Don’t wait until graduation and after the grace period to start making payments. You can use your money earned working during the school year, or the summers, to make interest-only payments. You can also make more significant payments towards the principal balance if you have the funds. Interest-only payments are a smart way to get ahead of your post-graduation student loan burden. These payments allow you to start paying off the interest as it accrues instead of waiting for it to capitalize on the principal debt.

If you have a subsidized loan, then you should definitely start making payments because you’ll be chipping away at the principal balance. 

Return excess loans

Did you take out more loans than you needed? You might be able to battle your student loan buyer’s remorse. You typically have 120 days after your loans have been disbursed to return the money to your lender; however, you should double-check the fine print as your school may have a shorter timeline to help you with the process.

It can be really tempting to cover your cost of living with student loans, but it’s a move that will cost you dearly in the future. Make an effort to only borrow what you truly need to pay for college instead of using funds to buy coffees between classes, go out to bars with friends and decorate your dorm room.

Pay more than the minimum due

The final strategy helps you attack your interest once those payments come due. Make an effort to pay as much above the minimum payment as possible and be sure to tell your lender you want the extra money applied to your principal balance. The faster you pay down the debt, the less interest you’ll pay overall.

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Balance Transfer, Pay Down My Debt

How to Use a Balance Transfer Check to Deposit Funds into Your Bank Account

Pretty Young Multiethnic Woman Holding Phone and Credit Card Using Laptop.

If you’re struggling to pay debt on a high-interest credit card, you’ve probably considered a balance transfer. If you haven’t, you may want to.

A balance transfer is when you take a balance from Credit Card A with a high interest rate and transfer it to Credit Card B, which is offering a low or 0% APR promotional period.

There are a few catches to consider before jumping head first into a balance transfer. Some balance transfers have a fee of 3% to 5% per transfer, however, these fees are often much less than you’d pay in interest at existing rates. You’re also required to transfer a balance within a certain timeframe typically within 60 days for it to qualify for the deal. And you need to pay off the transferred balance before the intro period ends. Otherwise, your interest rate will hike to the standard post promotional rate, often 15% APR or higher, or in some cases you may even be on the hook to pay with retroactive interest.

However, if you follow the rules, a balance transfer can help you pay off your debt much faster – even debt that isn’t just on another credit card.

How to Transfer Your Debt onto a Balance Transfer Card

Transferring a balance from one credit card to another is pretty easy. You just hunt for a balance transfer card with favorable terms.

Once you apply and get approved, there’s usually a section in the online account management dashboard where you input the card number of the account from which you want to roll over the balance. Or you can call into a representative to initiate the transfer for you. Within a week or two, the balance will appear on your new account and be paid off from the old account.

Using a balance transfer check is another way to get your debt from one account to another. This option is particularly useful if you need to transfer a debt that’s not on another credit card.

What is a Balance Transfer Check?

A balance transfer check is like a typical check except it’s issued by your credit card company and used to withdraw cash from your credit line. You can write out a check directly to the company that has the debt you want to pay off. Or you can write a balance transfer check payable to yourself for a cash deposit.

Here’s an example. Say you open up a balance transfer card with a $15,000 credit line and you want to pay off the last $5,000 of your student loan. You make out a balance transfer check of $5,000 payable to yourself. Once you get the cash in your bank account, you pay off the student loan with your balance transfer. Then you enjoy an interest-free period on the $5,000 balance that’s now sitting on the balance transfer card.

The Good and Bad of the Balance Transfer Check

Besides using the balance transfer check to pay off debt, you may able to use it to obtain cold-hard cash. In this scenario, you would keep some of the cash or all of it instead of using it to repay a debt. This isn’t a good idea if you’re deep in debt. It’s not free money and you’ll eventually owe interest on it.

There are a few other things to keep in mind when using a balance transfer check. First, not all credit card companies offer balance transfer checks as a way to transfer money. If your sole reason for signing up for a balance transfer card is using a balance transfer check, you need to read through the terms or reach out to the credit card company to make sure it’s an option. Otherwise, you could end up with a balance transfer card promotion that serves no purpose.

Even if you do happen to find a credit card company that offers balance transfer checks, verify that the process of obtaining a balance transfer check will happen quickly. As mentioned above, balance transfer deals usually have a deadline. If you transfer a debt after the deadline, it won’t qualify for the promotion.

You also need to be sure you pay off the balance before the end of the promotional period, especially on debts like student loans. If you use a balance transfer to pay off a student loan debt at 8%, then dropping to 0% sounds great. But if you have a lingering balance of say $1,000 after the promotional period is up, your debt has gone from a high of 8% to probably 18%! Be sure you have an actionable and realistic plan to pay off the debt before using your balance transfer.

Beware of the Cash Advance Convenience Check

You’ve probably come across a convenience check offering a cash advance in the mail before. Sometimes credit card companies will send them out with your monthly statements. Or Credit card companies trying to get your business will send them via snail mail to persuade you into taking on more debt.

Where a balance transfer check allows you to transfer funds with a low-interest or no-interest promotion, withdrawing cash through a convenience check cash advance can be costly. Standard cash advance rates and fees may apply regardless of your balance transfer deal.

For a quick example, Credit Card A offers an intro special of 0% APR that doesn’t apply to cash advances. Going through with a cash advance could cost as much as 25.24% interest right away regardless of a promotional deal.

Be careful and read the fine print that comes along with all checks that come from a credit card company. Whatever check you use to initiate a balance transfer shouldn’t cost you an arm and a leg.

Final Word

We can’t stress enough the importance of making sure a credit card company offers balance transfer checks if that’s the method you want to use. For the most part, transferring a debt from one credit card to another online is the most convenient way to take advantage of a balance transfer special which is something to consider.

If you plan to use a credit card check to increase your bank account balance, it may cost you. Do your homework before hastily writing out a check from your credit card company.

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How to Make the Best Impression At Your First Job

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Whether or not you worked all through high school and/or college, those early days (or months, even) at your first job out of school are bound to bring on the nerves. There’s a lot to learn about office politics, how to behave, how to best deal with co-workers and bosses, all before you even start trying to perfect the skills you’ll need to perform your new job to your optimal ability.

Here are some things to keep in mind that will hopefully help you navigate those first tricky days in the real world, when everything might seem scary and totally brand new.

1. Have an open mind and be flexible

Probably far and away the trait that will help get you through the first couple months at your new gig is the ability to be flexible. So you were told you’d be reporting to two people and now it’s three, and the desk they showed you at your interview is actually half a mile from where you’ll actually be sitting (near the noisy kitchen facing a brick wall). Repeat after us: It’s all good. While there are certain things that won’t be okay to have pulled out from under you after you start working (like your salary and benefits, for example, but that’s why you get everything in writing before signing on the dotted line), the quicker you can realize that everything else is open to change, the quicker you’ll be able to adapt to the curveballs that surely will be thrown your way.

2. Be a team player

The sooner you can prove to the staff that you’re on their side and eager to be a part of the team, the sooner you’ll start winning people over and making strong, valuable first impressions. Of course being a team player doesn’t mean you sit back and only do what you’re told, but be strategic in terms of when and how you decide to share your own thoughts and opinions (which you absolutely should!). Taking the first couple of days to get the lay of the land and understand how work flows through the office before suggesting your 20-point plan for increasing productivity might be a good idea, for example.

3. Never be without a notepad

Those first couple of months at your new job will be chock full of things you’ve never done before, phrase you’ve probably never heard and people you’ve definitely never met. Keep a notepad and pen with you at all times and take diligent notes to avoid having to follow up multiple times on the same point. Having said that, always ask questions if you have them, rather than doing something incorrectly the first time and needing to fix it.

4. Be busy all the time

While it will probably take you a while to get into the groove of your new gig, and it might be hard for your boss to break away throughout the day to explain projects to you or help point you in the right direction, be sure that you’re using any down or free time you have to your advantage by tidying up where you see messes, researching on upcoming or past projects your company has undertaken or anticipating things your boss might need before he or she even has to ask (low on printer paper or toner? Work on getting those things refilled before your boss even notices.) It also doesn’t hurt to show up a little early and stay until you’re basically told to leave those first couple of weeks. A good first impression is everything.

5. Don’t be a stranger

Even though you’ll be pretty busy getting caught up those first couple of weeks, if you notice a group of co-workers hanging out in the kitchen during lunch, take a couple extra minutes to stop by and say hello, even if you can’t stay the entire time. The sooner your co-workers get to know your real personality, the sooner you’ll start to feel more like one of them, and less like ‘the new person’ in the office, which no one likes to be.

6. Be organized

Even if organization isn’t your strongest suit, make it your strongest, as least for the first couple of weeks. Keep your area tidy and familiarize yourself with where everything is kept that you might need at a moment’s notice (like that extra printer paper and toner we mentioned before). Do some practice runs on the copy machine and scanner, tidy up after yourself in the kitchen and refill the coffee pot if you finish it. Every little bit adds up, especially when you’re new.

7. Let your confidence shine through

The more you come across as confident, the more your boss and co-workers will see you that way. Being confident can be tough, since it often includes straddling the line for things that appear opposites of each other (take initiative but know when to ask questions or just follow orders; stand up for your own thoughts and opinions but know when to apologize for mistakes), but if you find yourself struggling, remember the golden rule that most people at work are following as well: fake it ‘til you make it. No one expects you to know or understand everything about your new job the first day or first few weeks you’re there, but put in a solid effort and always be present and make smart decisions, and soon enough you’ll catch on.

While we’re on the topic of jobs, check out this piece for suggestions on how to network like a pro, this one for three questions you should ask yourself before taking on a low-paying gig, and this one for six things you should do right away if you lose your job.

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What is a 401(k) Loan and How Does it Work?

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If you’re in need of money and your savings account balance is low, you may be tempted to use the handy little loan provision that most 401(k) plans offer. That’s right! You can probably borrow money from your 401(k). Right from your own account! It’s a nifty feature, but is it a good idea?

Today we’re going to start examining that question by diving into what exactly a 401(k) loan is and how it works. The next post in this series will look at a few situations in which borrowing from your 401(k) can work in your favor.

Let’s get into it!

Quick note: Every 401(k) plan has different terms and conditions and some plans don’t allow for loans at all. Consult your Summary Plan Description for specific details about how your plan handles loans.

What Is a 401(k) Loan?

When you borrow from your 401(k) you are actually borrowing money directly from yourself.

The loan is taken directly out of your 401(k) account balance. Then a repayment plan is created based on the amount you borrowed and the interest rate and those payments are made back into your 401(k) account, typically through an automatic payroll deduction.

In other words, you are borrowing from yourself and paying yourself back. Both the principal and the interest on the loan eventually make their way back into your 401(k).

How Much Can You Borrow?

Figuring out how much you can borrow from your 401(k) can be a little tricky, but here’s a quick summary.

If you haven’t had any outstanding 401(k) loan balance within the past 12 months, you are allowed to borrow the lesser of:

  • $50,000, or
  • 50% of your vested 401(k) balance. If that amount is less than $10,000 then you can borrow up to $10,000, but never more than your total account balance.

Sounds simple, right? But wait, there’s more…

If you have had an outstanding 401(k) balance within the past 12 months, the amount you’re allowed to borrow is reduced by the largest balance you had over that period.

Let’s look at a few examples:

  • Example #1: Joe has $25,000 in his 401(k) and has not had a 401(k) loan balance within the past 12 months. He is allowed to borrow up to $12,500.
  • Example #2: Theresa has $15,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $10,000.
  • Example #3: Becca has $150,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $50,000.
  • Example #4: Steve has $25,000 in his 401(k) and did have a 401(k) loan balance of $5,000 within the past 12 months. He is allowed to borrow up to $7,500.

What Is the Interest Rate?

Each 401(k) plan is allowed to set their own loan interest rate. You should consult your Summary Plan Description or ask your HR rep for details about your specific plan.

However, the most common interest rate is the prime rate plus 1%.

What Can the Money Be Used For?

In many cases there are no restrictions on how you use the money. It can be put to work however you want.

But some plans will only lend money for certain needs, such as education expenses, medical expenses, or a first-time home purchase.

How Long Do You Have to Pay the Loan Back?

Typically, your 401(k) loan must be paid back within 5 years. If the loan is used to help buy a house, the term may be extended up to 10-15 years.

The catch is that if your employment ends for any reason, the entire remaining loan balance is typically due within 60 days. If you aren’t able to pay it back within that time period, the loan defaults.

What Happens If You Default on the Loan?

A 401(k) loan defaults any time you aren’t able to comply with the terms of the loan. That could be failing to make your regular payments or failing to repay the remaining loan balance within 60 days of leaving the company.

When that happens, the remaining loan balance is counted as a distribution from your 401(k). That has two big consequences:

  1. Unless you’re already age 59.5 or meet other special criteria, that money will be taxed and hit with a 10% penalty.
  2. The defaulted amount is not eligible to be rolled over into an IRA or other employer retirement plan. So there’s no way to avoid the taxes and penalty.

The good news is that the default is not reported to the credit bureaus and therefore has no impact on your credit score. Though if you’re applying for a mortgage or other loan, the lenders may ask about any 401(k) loan defaults and factor that into their decision.

How Do You Apply for a 401(k) Loan?

And as long as you have a vested 401(k) balance, the process loan application process is typically pretty simple.

Other than adhering to any specific restrictions your plan may enforce (see above), it’s usually as easy as requesting the loan. That can often be done online or at worst with a little paperwork through your human resources department.

There is no credit check for 401(k) loans, which can make them easier to get than other types of loans. And loans must be available to all employees, so you should be able to get approved no matter what your position is in the company.

Other Considerations

Here are a few other things to consider as you weigh the pros and cons of taking out a 401(k) loan:

  • Other than the possibility of default, the biggest potential cost is the missed investment returns while the money is out of your 401(k). Depending on the size of the loan and the market returns during the life of the loan, that could be significant.
  • Your spouse often has to sign off on the loan.
  • You can have more than one 401(k) loan out at a time, but the total loan balance can’t exceed the limits described above.
  • There may be a fee involved with taking out the loan.
  • Your loan payments do not count as 401(k) contributions, and your employer may or may not allow you to keep contributing to your 401(k) while your loan is outstanding.
  • Because the loan is not reported to credit agencies, a 401(k) loan is not a way to build your credit history or increase your credit score.
  • You typically cannot take a loan from a 401(k) you still have with an old employer.

Is a 401(k) Loan a Good Idea?

Those are the nuts and bolts of 401(k) loans, so is taking out a 401(k) loan a good idea? The answer is a definite maybe. There are times where it can be the best option, times where it’s a bad idea, and times where it can actually increase your overall investment return. Regardless, you should be sure to do a deep analysis and determine if you will definitely be able to pay the loan back in a timely manner before utilizing the 401(k) loan.

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19 Options to Refinance Student Loans – Get Your Lowest Rate

19 Options to Refinance Student Loans - Get Your Lowest Rate

Updated: May 24, 2016

Are you tired of paying a high interest rate on your student loan debt? Are you looking for ways to refinance your student loans at a lower interest rate, but don’t know where to turn? We have created the most complete list of lenders currently willing to refinance student loan debt.

You should always shop around for the best rate. Don’t worry about the impact on your credit score of applying to multiple lenders: so long as you complete all of your applications within 14 days, it will only count as one inquiry on your credit score. You can see the full list of 19+ lenders below, but we recommend you start here, and check rates from the top 5 national lenders offering the lowest interest rates. We update this list daily:

LenderTransparency ScoreMax TermFixed APRVariable APRMax Loan Amount 
earnestA+

20


Years

3.50% - 7.05%


Fixed Rate

2.13% - 5.35%


Variable Rate

No Max


Undergrad/Grad
Max Loan
apply-now
SoFiA+

20


Years

3.50% - 7.74%


Fixed Rate

2.14% - 5.94%


Variable Rate

No Max


Undergrad/Grad
Max Loan
apply-now
lendkeyA+

20


Years

3.25% - 8.22%


Fixed Rate

2.14% - 6.92%


Variable Rate

$125k / $175k


Undergrad/Grad
Max Loan
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commonbondA+

20


Years

3.50% - 7.74%


Fixed Rate

2.15% - 5.95%


Variable Rate

No Max


Undergrad/Grad
Max Loan
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PurefyA+

20


Years

3.95% - 6.75%


Fixed Rate

3% - 4.95%


Variable Rate

$350k / $350k


Undergrad/Grad
Max Loan
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We have also created:

But before you refinance, read on to see if you are ready to refinance your student loans.

Can I Get Approved?

Loan approval rules vary by lender. However, all of the lenders will want:

  • Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loans and all of your other expenses.
  • Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.

If you are in financial difficulty and can’t afford your monthly payments, a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.

This is particularly important if you have Federal loans.

Don’t refinance Federal loans unless you are very comfortable with your ability to repay. Think hard about the chances you won’t be able to make payments for a few months. Once you refinance, you may lose flexible Federal payment options that can help you if you genuinely can’t afford the payments you have today. Check the Federal loan repayment estimator to make sure you see all the Federal options you have right now.

If you can afford your monthly payment, but you have been a sloppy payer, then you will likely need to demonstrate responsibility before applying for a refinance.

But, if you can afford your current monthly payment and have been responsible with those payments, then a refinance could be possible and help you pay the debt off sooner.

Is it worth it? 

Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.

If you are able to reduce the interest rate by re-financing, then you should consider the transaction. However, make sure you include the following in any decision:

Is there an origination fee?

Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, then you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.

Is the interest rate fixed or variable?

Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when.

This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance to a better option (because all rates will be going up).

We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet. Some providers with variable rates will cap them, which can help temper some of the risk.

Places to Consider a Refinance

If you go to other sites they may claim to compare several student loan offers in one step. Just beware that they might only show you deals that pay them a referral fee, so you could miss out on lenders ready to give you better terms. Below is what we believe is the most comprehensive list of current student loan refinancing lenders.

You should take the time to shop around. FICO says there is little to no impact on your credit score for rate shopping as many providers as you’d like in a single shopping period (which can be between 14-30 days, depending upon the version of FICO). So set aside a day and apply to as many as you feel comfortable with to get a sense of who is ready to give you the best terms.

Here are more details on the 5 lenders offering the lowest interest rates:

1. Earnest*: Variable Rates from 2.13% and Fixed Rates from 3.50% (with AutoPay)

earnest1Earnest (read our full Earnest review) offers fixed interest rates starting at 3.50% and variable rates starting at 2.13%. Unlike any of the other lenders, you can switch between fixed and variable rates throughout the life of your loan. You can do that one time every six months until the loan is paid off. That means you can take advantage of the low variable interest rates now, and then lock in a higher fixed rate later. You can choose your own monthly payment, based upon what you can afford (to the penny). Earnest also offers bi-weekly payments and “skip a payment” if you run into difficulty.

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2. SoFi*: Variable Rates from 2.14% and Fixed Rates from 3.50% (with AutoPay)

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SoFi (read our full SoFi review) was one of the first lenders to start offering student loan refinancing products. Although SoFi initially targeted a very select group of universities (it started with Stanford), now almost anyone can apply. You need to have a degree, a good job and good income in order to qualify. SoFi wants to be more than just a lender. If you lose your job, SoFi will help you find a new one. If you need a mortgage for a first home, they are there to help. And, surprisingly, they also want to get you a date. SoFi is famous for hosting parties for customers across the country, and creating a dating app to match borrowers with each other.

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3. LendKey*: Variable Rates from 2.14% and Fixed Rates from 3.25% (with AutoPay)

Lendkey1LendKey (read our full LendKey review) works with community banks and credit unions across the country. Although you apply with LendKey, your loan will be with a community bank. If you like the idea of working with a credit union or community bank, LendKey could be a great option. Over the past year, LendKey has become increasingly competitive on pricing, and frequently has a better rate than some of the more famous marketplace lenders. And, during May 2016, anyone who applies via MagnifyMoney will receive a $250 cash bonus, which will be awarded when the loan closes.

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4. CommonBond*: Variable Rates from 2.14% and Fixed Rates from 3.25% (with AutoPay)

Commonbond1CommonBond (read our full CommonBond review) started out lending exclusively to graduate students. They initially targeted doctors with more than $100,000 of debt. Over time, CommonBond has expanded and now offers student loan refinancing options to graduates of almost any university (graduate and undergraduate). In addition (and we think this is pretty cool), CommonBond will fund the education of someone in need in an emerging market for every loan that closes. So not only will you save money, but someone in need will get access to an education.

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5. purefy: Variable Rates from 3% and Fixed Rates from 3.95% 

purefy

Purefy (read our full purefy review) was formerly known as CordiaGrad. The founder of purefy used to work for a big bank, and decided to buy a small bank and use it as a platform to grow. Purefy will refinance undergraduate and graduate loans.

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In addition to the Top 5 (ranked by interest rate), there are many more lenders offering to refinance student loans. Below is a listing of all providers we have found so far. This list includes credit unions that may have limited membership. We will continue to update this list as we find more lenders. This list is ordered alphabetically:

  • Alliant Credit Union: In order to qualify, you need to have a bachelor’s degree. The minimum credit score is 680, and you need two years of employment and a minimum income of $40,000. Interest rates start as low as 3.75%. Anyone can join this credit union by making a $10 donation to Foster Care for Success.
  • Citizens Bank: To get the best deal, you should have at least a bachelor’s degree. They will look at your credit history, and want to make sure that at least the last three payments on your student loans have been made on time. If you don’t have your degree, you need to have made the last 12 payments (principal and interest) on time. You must make at least $24,000 per year. They offer fixed rates starting at 4.74% and variable rates start from 2.18%.
  • College Avenue: College Avenue offers fixed rates starting at 4.74% and variable at 2.50%, and only offers 15 year terms.
  • CommonWealth One Federal Credit Union: Variable interest rates start at 3.36%. You can borrow up to $75,000 and need to be a member of the credit union in order to qualify.
  • Credit Union Student Choice: This is a tool offered by credit unions. The criteria and pricing vary by credit union. The credit unions have restricted membership, but you can find out if you qualify on this site.
  • DRB Student Loan*: They will refinance undergraduate, Parent PLUS and graduate loans including MBA, Law, Medical/Dental (Post Residency), Physician Assistant, Advanced Degree Nursing, Anesthetist, Pharmacist, Engineering, Computer Science and more degrees. Variable rates as low as 4.17% and 5.77% fixed.
  • Eastman Credit Union: They don’t share much of their criteria publicly. Fixed rates start at 6.5% and you must be a member of the credit union. Credit union membership is not available to everyone.
  • Education Success Loans: You must be out of school for at least 30 months, and you must have a degree. You also need a good credit score, with on-time payment behavior. Variable and fixed loan options are available, with rates starting at 4.99%.
  • EdVest: They offer refinancing options for private loans used to finance attendance at a Title IV, degree-granting institution. If the loan balance is below $100,000 you need to make at least $30,000 a year. If your balance is above $100,000 you need to make at least $50,000. Variable rates start at 3.180%, and fixed rates start at 4.740%.
  • First Republic Eagle Gold. It’s hard to beat these rates – starting at 1.95% fixed and 1.87% variable. But you need to go in person to a First Republic branch to complete your account opening. They are located in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland (Oregon), Boston, Palm Beach (Florida), Greenwich, and New York City. Loans must be $60,000 – $300,000 and you need a 750 or higher credit score with 24 months experience in your current industry.
  • IHelp: This service will find a community bank. Community banks can actually be expensive. You need to have 2 years of good credit history, with a DTI (debt-to-income) of less than 45% and annual income of at least $24,000. Fixed rates are available, starting at 6.22% with a co-signer, and 7.21% for non-cosigned loans.
  • Mayo Employees Credit Union: You need at least $2,000 of monthly income and a good credit history. Variable rates are available, starting at 5.00% and you would need to join the credit union.
  • Navy Federal Credit Union: This credit union offers limited membership. For men and women who serve, the credit union can offer excellent rates and specialized underwriting. Variable interest rates start at 3.87%.
  • RISLA: You need at least a 680 credit score, and can find fixed interest rates starting at 4.49% if you use a co-signer.
  • UW Credit Union: $25,000 minimum income required, with at least 5 years of credit history and a good repayment record. Fixed and variable interest rates are available, with variable rates starting at 2.21% and fixed rates starting at 4.04%. You need to join the credit union in order to refinance your loans.
  • Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 3.49% and fixed rates starting at 5.99%. Wells Fargo does not have a tradition of being a low cost lender.

You can also compare all of these loan options in one chart with our comparison tool. It lists the rates, loan amounts, and kinds of loans each lender is willing to refinance. You can also email us with any questions at info@magnifymoney.com.

Don’t forget to follow us on Twitter @Magnify_Money and on Facebook.

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Building Credit

Build Credit with $10 a Month on a Secured Card

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Updated May 24, 2016

In 2008 (bad timing), I moved to the US with my wife, Margarita, after living in Moscow, Russia working for Citibank.  She was not a US citizen, and had no credit history or credit score.  Being without a credit score in the US basically means you don’t exist!  So, we had to fix that fast.

Opening a secured credit card

Margarita opened a secured credit card.  It is a fairly straight-forward concept.  She gave the bank $500, which they kept as collateral.  They then gave her a credit card with a $500 credit limit.  That credit card worked like any other. Your credit limit, balance and payment information is reported to the credit bureau. The only difference: if you fail to pay your credit card on time, the bank can take your deposit and apply it towards the debt. After a year, the bank returns the deposit and will likely increase your credit limit.

So – the bank has a guarantee that they won’t lose money. And you have the opportunity to prove that you will use your credit wisely.

It has become easier to find excellent secured credit cards. Just this year, Discover launched a new secured credit card, which is our favorite. Here are the details:

Discover it® Secured Credit Card – No Annual Fee

discoveritsecuredcardDiscover has just launched a market leading secured credit card. This is one of the best no fee secured credit cards on the market. Unlike most credit card companies, Discover is ensuring that benefits and rewards traditionally associated only with unsecured credit cards will be available on the secured card.

  • No annual fee. No late fee on your first late payment. Paying late won’t raise your APR.
  • Earn 2% cash back at restaurants & gas stations on up to $1,000 in combined purchases each quarter. Earn 1% cash back on all other purchases.
  • Discover matches all the cash back you’ve earned at the end of your first year – automatically. New cardmembers only.
  • Your minimum security deposit amount of $200 or more will establish your credit line (up to the amount we can approve).
  • Monthly reviews start at 12 months to see if you qualify to get your security deposit back while you continue to enjoy your Discover card benefits.
  • Reports to 3 major credit bureaus so you can build or rebuild credit with responsible use.
  • FICO® Credit Score for free on monthly statements & online.
  • Click “Apply Now” to see rates, rewards, FICO® Credit Score terms, Cashback Match™ details & other information.

Apply Now

Strategizing to build credit

Given that I was a bank credit risk manager at the time, I knew a bit about credit scoring.  So, I made sure Margarita followed this strategy:

  • She used the card every month, but for a very small amount. Her typical monthly bill would be around $10.

  • She made sure that she paid the balance in full and on time every month by signing up for automatic payments.

  • She subscribed to a credit scoring service to watch her score improve over time.

It took about 6 months for Margarita’s score to cross the 600 threshold. At that point, she applied for a store card.  I like store cards because they have no annual fee. She never used that card – but it made her file less thin.

About 18 months after starting, she had a score well above 700. At that point, she applied for a rewards credit card.  It had a great sign-on bonus and a frighteningly high $25,000 credit limit.

The great thing about the Discover it credit card (which was not available when my wife moved to the US) is that they will do automatic annual reviews on your account. If you qualify, your card will automatically be converted to a standard credit card.

So, it only took a year and a half for someone to go from being a credit nobody to one of the most sought after customers in the country. What was the trick?

The two biggest contributors to your credit score are utilization and paying on time

By only spending $10 or less each month on the card, we made sure that her utilization was a shockingly low 2%. When she opened the store card (that was never used), the utilization dropped below 1%. Why does that send a good signal to the credit card company? Because they see that you don’t just max out every credit card you have. By paying on time, we showed that she was responsible and could be trusted with credit.

So, if your goal is to build your score quickly (rather than borrow money today), this is a pretty good strategy. Secured card, followed by a store card – and then enjoy a great rewards card.

CLICK HERE TO COMPARE SECURED CARDS

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Get A Pre-Approved Personal Loan

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Personal Loans

Getting Loans from Someone Other than a Bank

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Updated May 24, 2016

Personal loans allow borrowers to have access to a fixed amount of money at a fixed interest rate, with a fixed monthly payment and you know when you’ll have completely paid off the loan. They are a great resource for someone looking to refinance debt and can’t use a balance transfer. If you need cash, personal loans are usually the best way to borrow.

How to get a personal loan?

Step 1: Check and see if you can get a loan with an Internet-only lender
Step 2: Go to your local credit union and see if they can match or beat your P2P loan
Step 3: Take the loan with the lower interest rate

If you aren’t eligible for a P2P loan from an Internet-only lender then try your local credit union. After exhausting those resources, consider OneMain, a non-bank lender.

Internet-only lenders

The rise of technology allowed a new wave of lenders to offer an alternative to traditional bank loans. Peer-to-Peer lending (or P2P for short) allows borrowers to receive loans from “peers” often in the form of individual investors or hedge funds, endowments and pension funds.

Peer-to-peer loans are interesting because they were developed specifically for the digital environment. This makes them accessible with a few clicks on a computer and a relatively simple application process. Companies like Prosper, LendingClub and Upstart facilitate matching borrowers with investors. There is no need to visit a bank branch. The aim of P2P lending is to give a borrower lower interest rates while giving investors higher returns.

Interestingly, some big banks have acquired or built their own online lenders which are offering consumers even better rates. SunTrust has done that with the acquisition of LightStream.

Read more about P2P lending here

LightStream*

Pro:

  • If you have excellent credit, LightStream offers some of the lowest interest rates in the market. Rates start as low as 1.99% (to finance an auto) and 4.19% (to refinance credit card debt).
  • You can get the money by the next business day. This is a remarkably fast process.
  • LightStream has a rate match promise: if you find a lower interest rate somewhere else, they will match it.
  • There is no pre-payment penalty and no origination fee.

Con:

  • You must have excellent credit to qualify.
  • LightStream does not have “soft pull” functionality. If you apply for a loan, there will be a hard inquiry on your credit report.

LendingClub*

Pro

  • Their interest rates are most likely lower than other loans with an APR range of 5.99% to 35.89%.
  • You can find out your interest rate without a hard inquiry on your credit score. Prosper uses a “soft pull” so there will be no point reductions on your credit score, nor an inquiry left on your report for finding out the interest rate.
  • There is no pre-payment penalty (fine if you pay off the loan early), but they won’t refund your loan fee.

Con:

  • You must have a high credit score (600 or higher) to be eligible to get a personal loan from LendingClub.
  • You probably won’t be accepted if you have a history of missed payments.
  • There is an upfront fee, but your APR will include the fee. Be sure to compare the APR and not just the interest rate when you’re shopping around.

Upstart*

People with minimal credit history can turn to Upstart for an opportunity to be eligible for a personal loan.

Upstart evaluates where you went to school, your area of study, your grades and employment history to determine your eligibility for a loan and your interest rate.

Credit Unions

Credit unions are not-for-profit organizations that offer alternatives to traditional banks. They have more of an emphasis on serving their community than worrying about a corporation’s bottom line. Unlike banks, credit union members own the credit unions.

Credit unions do offer loans, but first you must become a member of the credit union. Some credit unions are closed. But others (like PenFed) will let you join if you make a $15 donation to a charity.

Pros

  • Loans from a credit union usually have lower interest rates than a bank, and possibly the lowest you can find.

Cons

  • You will need to join a credit union, and may not qualify for a loan so you could be out the cost to join.

PenFed offers a 10.25%-14.00% interest rate with no upfront fee for a term of five years.  However, you will need to have a 700+ credit score to be competitive for this personal loan.

Non-bank lenders

OneMain is a non-bank lender owned by Citigroup. You will have to physically visit a branch to get approved. But, the process usually takes less than 30 minutes. Borrowers with high credit scores should first explore the P2P space and credit unions before turning to OneMain, because it will be a more expensive form of borrowing.

Pros:

  • If having face-to-face contact is important to you, then you can visit physical branches.
  • OneMain will approve people with credit scores as low as 550, so it is possible to get a loan when other reject you. Although expensive, OneMain will be much less expensive than payday loans or title loans.

Cons:

  • You have to visit a branch, even if you’re preapproved online. If you don’t have a branch near you, this could be a serious hassle.
  • There will be a hard inquiry on your credit report
  • Likely higher interests rates (APRs) than a loan from P2P lenders like Prosper or LendingClub
  • A few complex terms and conditions

Warning:

  • Don’t bother with the insurance products they’ll try to sell you.

Do your research

Personal loans can be valuable tools to help pay down debt, reduce interest rates and save you hundreds to thousands of dollars. But remember; don’t rush into a personal loan just because it seems like a good deal. Take the time to do your research, shop around and ensure your getting the absolute best interest rate you can. Even the difference of .01 can make a difference in the long run.

Read where to find the best personal loan rates online here

Got questions? Get in touch via TwitterFacebook or email (info@magnifymoney.com) 

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Auto Loan

11 Things to Know Before You Lease a Car

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Nearly one quarter of new cars in America are sold under lease agreement, and low monthly payments entice buyers who want to drive new cars, but don’t want to deal with a large cash outlay.

Lessees don’t build equity in their vehicle, but for the right person, a lease can be a good option. These are things you need to know before you consider a lease.

1. The best way to think about a lease

It’s best to think of a lease as a pay for use contract. A lease allows you to pay for the depreciation you put onto a vehicle at a reasonable interest rate. You get to drive and depreciate a vehicle for a certain period of time then you can walk away.

Due to higher markups, higher interest rates and additional fees, leasing tends to be an unfavorable financing mechanism, but if you don’t care about owning the car, a lease may be a good option for you.

As a lessee, you will drive the car during its most rapid depreciation phase, so in the long run, continuously leasing a vehicle is the most expensive way to drive, but if you always want to drive a new car, leasing can be a low hassle way to make that happen.

2. Leasing affects your credit score

Taking on a lease affects your credit the same way that taking on a car loan affects your credit. Applying for a lease triggers a credit inquiry on your report, which has a small adverse effect on your credit score. Taking on a lease increases credit utilization which also adversely affects your credit score. Over time your credit utilization will fall, and timely payment history will cause your score to increase again.

Leases are considered installment loans, and having a high utilization rate on installment loans does not have as much of an adverse effect on your credit score as having high utilization on credit cards or other forms of revolving credit. As with any form of credit, late or skipped lease payments drag down your score

Further Reading: Credit Score Guide

3. Leasing terminology

Manufacturers and salespeople shroud leasing in complex jargon. To understand the terms of your lease, these are the definitions you need to know.

  • Capitalized Cost: The price of the vehicle. This could be MSRP (Manufacturer’s Suggested Retail Price), or it could be reduced based on your negotiations.
  • Capital Cost Reduction: This is a down payment. The most favorable leases (for those who don’t intend to purchase at the end of the lease) should not include a capital cost reduction unless it’s an incentive.
  • Residual Value: This is the estimated value of the car at the end of the lease. The higher this price is relative to the capitalized cost, the more favorable it is to lease a car. Cars.com keeps a database of residual values on file that you can use to understand if you’re getting a fair residual value.
  • Factor, Money Factor or Rate: This is the interest rate of your loan, but it’s not expressed as an annual percentage rate. The number expressed needs to be multiplied by 2.4 to get to an APR. For example a 1.35 money factor is a 3.24% interest rate. LeaseHackr.com keeps an up to date list of “official” factors (column entitled MF) that you can use in negotiations. Interest rates on leases range from 2-3 times as high as interest rates on traditional car loans, but it is possible to negotiate this rate.

4. You can negotiate a lease

Unlike car loans, leases come from car manufacturers rather than banks. However, this doesn’t mean that it’s impossible to negotiate a lease. Anyone who intends to lease should try to drive down the capitalized cost, and people with good credit should also look to reduce or even eliminate the money factor. Small fees like documents fees, tire fees and more can be waived completely if you take the time to negotiate.

Even if a dealership advertises a “Manufacturer’s Leasing Special”, you should negotiate the terms of the lease. Salespeople depend on getting you to drive away in a new car, so consumers hold upper hand in negotiations.

5. No money down

One advantage of leasing a vehicle is that it shifts depreciation risk from the customer to the manufacturer. A down payment (or a capital cost reduction) shifts the risk back onto the customer. In a lease, a down payment is a form of pre-payment. If you terminate the lease before the end of the lease period (if your car is totaled or stolen), you lose the benefit that the down payment purchased. Putting no money down is an important strategy for keeping the lease in the lessee’s favor.

6. Extra insurance costs

Leasing yields lower monthly payments compared to buying using traditional financing, but some of the monthly cash flow advantage is lost by increased insurance costs. To protect themselves financially, lessees should purchase “Gap Insurance” in addition to traditional car insurance.

Gap insurance covers the difference between the actual cash value and the amount owed on a lease. As soon as a lessee drives the car off the lot, the car is worth less than the lessee owes on their lease. If a car is totaled or stolen during a lease period, you need to be able to buyout the lease early, and gap insurance allows you to do that. Gap insurance should be purchased through a traditional insurer, and adds anywhere from 3-10% to the traditional cost of insurance.

7. Fees, fees, fees

Every lessee runs into at least three substantial fees during the course of their lease. The first fee is an acquisition fee (alternatively called a financing fee). This fee is not a down payment, but it runs anywhere from $500 for basic compact cars to nearly $1,000 for luxury vehicles.

Dealerships also charge a $300-$900 Delivery Charge which covers the cost of the vehicle being delivered to the dealership lot. Lessees need to be prepared to pay this fee upfront, but some companies try to sneak a second delivery fee into the contracts. The second delivery fee can be negotiated to zero.

The last fee every lessee will encounter is either a disposition fee or a purchase option fee. These fees run between $300-$400 depending on which option you choose. When a lease ends, you will pay a fee to the dealership unless you negotiate it away at the outset.

In addition to these larger fees, many lessees will run into mileage overage fees which range from $.15 per mile for basic vehicles to $.30 for luxury vehicles. Most people drive more than their lease allows, and these extra miles cause additional depreciation on the vehicle. Since a lease is a “pay for what you use agreement”, it’s fair to pay for those extra miles. Of course you can avoid overage fees by limiting the amount you drive or by purchasing the car at the end of the lease.

You should negotiate smaller fees like advertising fees, tire fees, document fees, vehicle preparation fees down to zero.

8. Repairs required

Lessees bear the financial burden of repairs and maintenance on their leased vehicles. Some dealerships offer free tire rotation and oil changes, but the lessee has to pay for other maintenance. New cars shouldn’t require much maintenance, but accidents, chipped paint and broken windshields need to be paid for, and longer lessees may need to buy new tires while they own the vehicles

9. Exit options

Turning in a leased vehicle early is akin to defaulting on a car loan. Your credit will take a hit, and you will still owe money. However, it is possible to “sublet” your car through websites like SwapALease and LeaseTrader.

If your lease is about to end, you’ll have to decide whether or not to purchase the car or return it. If you want to buy the vehicle, you may be able to negotiate the buyout price. If you have the cash on hand to pay for the vehicle, and the purchase price is lower than an equivalent used car, you can purchase the vehicle outright and sell it for instant equity. If you have to obtain financing, the additional fees may erase any favorable pricing you obtained.

If the vehicle is worth less than the purchase price at the end of your lease, you should probably walk away from the vehicle or attempt some strong negotiations. Of course, the beauty of a lease is that the termination of the lease means that you can hand the keys back to the dealer and move on. 

10. Consider leasing if…

Anyone with midterm vehicle needs (only needing a vehicle for a few years) may find that a lease is a good value and a good fit for their lifestyle. Likewise, anyone who loves driving new cars and doesn’t mind having a monthly payment may enjoy leasing long term.

Continuously leasing vehicles is more expensive than “driving a vehicle into the ground,” but many people don’t mind that they get what they pay for.  People who enjoy driving newer, fancier cars may find that leasing can be a reasonable lifestyle, especially if they can easily afford the payment.

11. Avoid leasing if… 

Avoid leasing if you’re trying to drive as inexpensively as possible. The low monthly payments are enticing, but leasing is the most expensive way to drive in the long run. Leasing has high interest rates and high fees. If you can’t afford the monthly payments associated with owning a new car, consider buying used or choosing a basic model. Both of these methods end up being cheaper than leasing.

If you drive a lot, or if you frequently drive in poor conditions, you’re a bad candidate for leasing. The additional depreciation may mean that you’re left paying extra fees at the end of your lease. Additionally, anyone seeking to own a vehicle should pursue paying cash or taking out a traditional loan rather than leasing.

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