How sharp are you when it comes to borrowing money? Do you know the angles that can cut costs and save all the grief?
Take this simple test and give yourself 10 points for each correct answer. If you score below 30, better you borrow from your Uncle Fred; 50 is passing and 70 makes you a credit whiz.
1. The ’94 cars and trucks are rolling into dealers’ showrooms and it’s way past time to replace old Betsy. Where’s the best place to get a four-year loan?
A. The dealership that sells the car
B. A commercial bank
C. A savings and loan or savings bank
D. A credit union
Answer: A credit union. National surveys of the biggest banks, thrifts and credit unions found that credit unions charge an average of 7 percent on a four-year new-car loan, according to Bank Rate Monitor. That’s a full percentage point less than banks and a point and a quarter less than thrifts on new-car loans. Assuming you borrow $13,000, the credit union loan will be $291 cheaper than a bank loan and $365 less than a thrift loan.
2. You want to refinance your mortgage, but everyone says not to because you plan to move in a few years. True or false: Your friends are smarter than you on this.
Answer: False. You can refinance, even if you plan to move in less than three years. Look at a “no-closing-costs” mortgage. The rate isn’t as low as if you paid points and other expenses, but with this mortgage no cash comes out of your pocket. You simply get a lower rate and monthly payments than what you currently have. Second, consider a low-rate adjustable-rate mortgage. Bank Rate Monitor surveys have found lenders charging as little as 3.38 percent for the first year. The big drop in monthly payment could recoup the closing costs in a year or so.
3. You’re being soaked for 19.8 percent on your Visa and MasterCard balances. Along comes a mail offer of 9.9 percent if you switch your balance. Should you:
A. Sign up as fast as you can
B. Toss the offer in the trash can
C. Start reading the fine print
D. Ask your Uncle Louis for a loan
Answer: C. Many offers have strings attached, such as transferring a minimum amount to qualify for the lower rate. Or, the rate may be good for only a limited time, such as six months to a year. After that, the rate shoots up.
4. You want to buy a first home, but on your own you can’t come up with the money for a 10 percent down payment. True or false: That’s the end of your American dream.
Answer: False. Lenders nationwide are inventing ways of getting first-time buyers into homes. One approach is to reduce the down payment to as little as 3 percent, especially if you meet middle- and lower-income requirements. Another is to allow a relative to contribute part of the down payment.
5. Junior just headed off to college, and you’re thinking about how much the next several semesters will cost. You know you don’t have the savings and are thinking about a home equity loan. What should you look at when shopping lenders?
A. The rate
B. The closing costs
C. The repayment schedule
D. The amount you can borrow
Answer: All of the above. See if the rate’s fixed or variable. If it floats, it could skyrocket to as high as 25 percent in some states. Look for a no-closing-costs offer from an aggressive lender. Review the repayment schedule, because you can pay a ton in interest charges if you sign up for a low, low monthly payment. And ask how much equity you can tap. Most lenders stop at 80 percent of your home’s appraised value, minus any first mortgage. But some outfits go the full 100 percent.
6. The depressed economy has battered your personal finances. Your spouse has lost his or her job, you can’t keep up with the monthly bills, and your savings are rapidly dropping to $0. True or false: You should file for personal bankruptcy.
Answer: False. Before taking so drastic a measure, talk to the folks at Consumer Credit Counseling Services (800-388-CCCS), a non-profit organization. A counselor may say there’s no way to get back on course, but at least you’ll have explored other options.
7. Even though fixed-rate mortgages are at their lowest levels since 1968, you’ve decided to get an adjustable-rate mortgage. The lender has several choices, with the rate on each tied to a different index. Which is best?
A. The one-year Treasury Constant Maturity Index
B. The 11th District Cost of Funds Index
C. The OTS national index on savings
D. LIBOR
Answer: This is a trick question. The choice depends on what you want in an index. The one-year Treasury and LIBOR (London Interbank Offered Rate) are both market-sensitive rates, keeping pace with the latest trend. The 11th District and OTS indexes are calculated monthly and lag rate trends. So, if you want an index that’s going to stay down even if rates head upward, look at B and C. If you’re willing to gamble that rates will fall further, consider A and D.
