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When making high-pressure or long-term purchases, it’s hard to keep emotions out of the equation. But whether you’re buying a car, investing in a home or struggling to make ends meet, emotions can cloud your judgment, leaving you and your family vulnerable to mounting debt, various scams and bad credit.
“You want to make a financial decision with your head, not your heart,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling (NFCC), a nonprofit financial counseling organization with 600 member agency locations nationwide.
Read on for some scenarios Soldiers may face, along with lending advice from Cunningham and other experts.
You’re about to sign for a car when the dealer hands you a huge stack of paperwork. You don’t want to lose face and leave without the car, but the confusing fine print has put you on the spot.
“They want you to sign on the dotted line while they have you emotionally involved in the car,” Cunningham says. Instead of focusing on the monthly payment, she warns, look at the overall cost of credit, which is influenced by the interest rate and the term.
Dealers may try to convince you to use their lenders. If you’re not familiar with your credit score—or haven’t shopped around for loans before test-driving—they may tell you that you qualify only for a high interest rate, when in fact, you may qualify for much lower.
Many Soldiers go to subprime lenders because they assume they won’t qualify for prime credit. “If they’d seen how healthy their credit was, they could’ve submitted the same application to a credit union or a bank and gotten approved on prime terms with the lowest possible rate,” says Bruce McClary, government relations and public policy manager for ClearPoint Credit Counseling Solutions (CCCS), an NFCC-affiliated consumer financial counseling agency based in Atlanta. “Failure to shop around and understand terms is very costly.”
Within the contract, be wary of the phrase “ancillary credit insurance,” a product for people concerned about not paying the loan due to unemployment or sickness, McClary says.
“If you qualify for the loan, you can get it without the added protection,” he says. “Subprime predatory lenders try to make people believe [it’s] required for loan approval, [which is] actually illegal.”
The car will still be there tomorrow. Tell the dealer you’ll come back after an independent, objective review by a financial professional.
Besides looking for red flags in the fine print, you also want to make sure you’re being offered a fair interest rate and term.
“Loan approval should not be contingent on signing 30 seconds after the paper is pushed across the table,” McClary says. “In cases where the person is pressuring the borrower to sign quickly, it’s a big red flag. Under law, there are points they have to hit: the interest rate, payment terms, when payments are due. If they skip things, [or] are hesitant to answer questions, that’s your cue to stand up and go.”
You’ve just returned from a deployment and are anxious to own your own home. You want to take advantage of your VA home loan benefit to get settled as soon as possible.
“We never recommend that the tail wag the dog,” says Grant J. Moon, president of VA Loan Captain Inc., a private company that seeks to offer service members competitive interest rates on VA home loans. He also is a former Guard Soldier who served in Iraq in 2007 and today is a member of the U.S. Army Reserve. “Just because you have a benefit doesn’t mean you should use it immediately.”
If you don’t have a stable job or you’re unsure whether you’ll be in the area for more than five years, it’s not the right time to purchase a home, with or without your VA home loan benefit, he says.
Assess your life situation. Then, if you’re ready to buy, don’t settle for the first lender.
“The military banking market is unique in that the banks most Veterans would use don’t necessarily provide [them] the best deal,” Moon says.
Compare interest rates and fees among multiple lenders. You should receive pre-approvals from several banks and compare them pragmatically. The goal is to create a bit of competition between banks, Moon says. “A home will likely be the largest purchase of a Guard member’s life,” Moon says. “The difference between one-half of a percent in the rate on a $300,000 home for a 30-year fixed mortgage for a VA loan can be tens of thousands of dollars over the life of the loan. I would rather take those thousands and use them for my child’s education.”
You don’t have enough to cover the bills. To lessen stress, you consider going to a payday lender, adding more credit cards or taking a tax refund anticipation loan.
Each short-term solution has its own set of pitfalls, Cunningham says:
• What may seem like an insignificant payday loan could result in a triple-digit annualized rate. A typical two-week payday loan with a $15-per-$100 fee, for example, equates to an annual percentage rate of nearly 400 percent, says the Consumer Financial Protection Bureau.
• If you are seeking more credit cards because you’re maxed out, you’ll soon spiral into deeper debt.
• With refund anticipation loans, a tax preparer says, “I can give you a loan based on the amount of your expected tax refund. You get the money today and when the refund comes, we keep it.” But beware of associated fees that could be predatory.
The worst thing you can do in a financial crunch is to grab a short-term solution that will lead to a bigger crisis. Credit counselors can identify the root of your problem and provide guidance to help you weather the storm.
“Everyone vows to themselves, ‘It’s just this once. I’m in a terrible situation.’ But then it continues because of their crisis lifestyle,” Cunningham says. “One of our agencies had a client who got credit cards with the intention of using them for emergencies. And then suddenly, they began labeling everything an emergency, resulting in tens of thousands in debt to pay off.”
If you’re in financial trouble, reach out to an NFCC member agency. To make an appointment with a certified counselor, dial 800-388-2227, or find one at NFCC.org.
KNOW YOUR RIGHTS
Before dealing with a lender, understand how the Military Lending Act protects Guard Soldiers on Active Duty, says Bruce McClary of ClearPoint Credit Counseling Solutions.
• You can’t be charged more than a 36 percent Military Annual Percentage Rate.
• Creditors must tell you both orally and in writing about interest rates and other fees.
• A creditor can’t refinance the same loan unless the new loan has more favorable terms for you.
• Creditors aren’t allowed to take loan payments automatically from your paycheck; penalize you for early loan payment; mandate that you waive consumer protection laws; or require you to submit to arbitration if you have a dispute.
The Better Business Bureau can help you steer clear of lenders with bad track records. Do your homework at BBB.org