In this first post in a series discussing the many financial tools freely available, I want to focus on two simple online resources which will better prepare you for your next loan. Most of us have loans of some sort: car loans, mortgages, student loans, and the most expensive of loans, credit card balances. But, before you walk into a lending institution you can do some homework and have a good idea a) how much you need to save in advance of the loan, possibly to lower your payment, and b) your desired loan duration based on the monthly payment the bank or credit union will expect.
Now, it is certainly true that not everything will be under your control during the process, but at the very least, you will go into the meeting with reasonable expectations. While a loan with a longer duration might seem more affordable in the short term (lower monthly payment), it is in fact more expensive, as more interest will accrue as time passes. However, an exception of this is interest-free financing (remember all the auto dealer commercials...), and if it corresponds with a need you have, is certainly a great way to save money.
Both of these highlighted resources are provided by FINRA, the Financial Industry Regulatory Authority, a company you've probably never heard of, but is responsible for the monitoring of financial institutions across the country. Click the "Savings Calculator" link above to give it a try, a screenshot of it appears below.
This calculator can be used to plan toward a savings goal, whether it be for your next car, home improvement project, or family vacation. I have imputed a $500 monthly savings goal with a starting amount of only $1,000. You can see that in three short years of consistent saving you can easily save the recommended 3-6 month emergency fund, depending on your income, or have a significant down-payment for your next loan. This is a great motivational tool!
The second of these resources is the loan calculator. Say you need a new car, and it costs around $25,000. You've been diligently saving and intend to pay $10,000 of it in cash to lower your monthly payment. The Loan Calculator can be used to determine exactly how much you can afford to finance, by way of the ultimate monthly cost of the loan.
I researched a local credit union's best interest rate for an auto loan and inserted that information and the loan amount into the calculator. How long do you want to pay for your car? This might be determined by the monthly payment, so you can try several different loan terms. I settled with an manageable payment just over $300/month over 4 years for this example.
This could also be a great learning tool for children and teens, too. Please pass along this information to others who might find it useful, financial literacy is too important for us to neglect!
Stay tuned for another post soon!