Purchasing your first vehicle is an exciting milestone, but it is also one that requires careful consideration and financial planning.
Military AutoSource created a two-part series to educate military members on their first vehicle purchase. As a young military member, it is important to be financially conscious when making major purchase decisions. Purchasing your first vehicle is a great investment with many benefits, do your research and be prepared and you will enjoy the perks of owning your vehicle. Remember to take advantage of cost-saving military privileges offered to you, such as the First Time Buyers program offered through Military AutoSource.
PART ONE: Interest Rates and Credit Scores
What is an Interest Rate?
An interest rate is the rate at which interest is paid by borrowers (debtors) for the use of money that they borrow from lenders (creditors). Specifically, the interest rate is a percentage of principal paid a certain number of times per period for all periods during the total term of the loan or credit.
Interest is charged monthly, but is set at a yearly rate. Example: 6% APR is charged to the principle .5% every month.
Most loans are simple interest, but there is also compounding interest. Simple interest is interest paid on the original principal only. Compounding interest is the interest earned not only on the original principal, but also on all interests earned previously
What is Credit?
Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. Your credit report is designed to predict risk, specifically the likelihood that you will fail on your credit obligations.
Your credit score is consisted of a number of factors:
There are two types of credit: Secured credit and Unsecured credit
Secured credit has less risk for the bank, and always has lower interest rates. Examples are home loans and car loans.
Unsecured credit has more risk for the bank, and therefore has a higher interest rate. Examples are credit cards and personal loans.
How to Maintain Good Credit
It is important to maintain a good credit score in order to get better interest rates and lower down payments. Below are a few tips for maintaining good credit:
- Always make your payments on time.
- Do not overextend yourself by taking out too much credit at once.
- Do not apply for credit unless you are serious. Too many hits on your credit can lower your score.
- Know what your credit score is and how you stand.
- Utilize free credit checks and credit monitoring services.
What Can Ruin Your Credit?
There are multiple actions that can damage and hurt your credit score. Rebuilding a damaged credit score can take a long time, so it is important to avoid these credit-damaging actions, if possible:
- Late Payments
- Too many loans
It is important to remember that having bad credit can result in higher rates, and a more expensive life. Having bad credit means higher interest rates, which can cost you thousands more.