In part two of this lesson, we focused on home mortgages. And the specific things to expect when going through what's called the underwriting process. When the terms of the loan are decided. Now it's time to take a look at the specifics of some other types of loans and how they differ. Let's start with auto loans. Lending instrument you will likely use one of more times in your life. In fact, the first big decision you have to make about a car loan is whether to get one at all. What I mean is that you might have enough savings to pay the full amount for a new or used car. But if you do that you won't have that capital to invest maybe earn a higher rate of return. Than the interest rate you're paying on the loan. This trade off is what we economists call the opportunity cost of the car loan. Because you are losing the opportunity to make money in other investments with your capital. The concept of opportunity cost extends to many other concepts in personal finance and economics. But car loans are a good example to demonstrate this key idea. As for negotiating a car loan, should you opt for that. There are two basic ways to go about it. One way is to go directly to your bank or credit union or some other lending institution. To apply for a loan before you go to the dealers. This lets you shop round for terms and compare rates. It also lets you know your credit terms in advance. Alternatively, you can get financing straight from the car dealer. In this case, you agree to pay the car off. And the dealer will either keep the contract and collect your payments. Or it will sell the contract off to a creditor so they can get their money. This route is not only convenient If you trade in your old car. It can count towards a down payment on the loan. Plus, if you still owe money on the old car. You can include the rest of the payments into the financing deal on the new car. The biggest advantage of getting a loan directly from the dealer, however. Is that it lets you take advantage of any special financing programs available from the dealer or the manufacturer. Most car dealers shamelessly use this particular hook to sell you a car. But here is one big catch. In order to take part in some of the better deals, you simply have to have good credit, and here's a key tip. You should know your credit score before you go into a car dealership. If it's a good score, you can then really bargain through strength. As a final tip, it is wise to look into warranties, especially if you are going to be financing your new car. It would be a big financial hit to end up with a lemon of a car that you still owe money on. And not have it covered by the warranty. Now before we move away from auto loans. I would be remiss in failing to note that, if you want to drive a new car. One alternative way to do that is to sign a lease on the car. You still will have a monthly payment on the car for the period of the lease, usually three to five years. And that payment will be smaller than the typical car loan, so you can get a more expensive car to drive. The big downside, however, is that at the end of the lease, as opposed to the end of your loan. The car goes back to the leaseholder and you don't own anything. Sometimes, however, there are terms. That let you buy the car at a somewhat reduced price at the end of the lease. Dealer gets to dictate the price in most cases, so be careful. You might not get a good deal. Leasing is an interesting choice. So if you are tempted to go in that direction, please do a bunch of research. All I can say is that you are usually better off buying rather than leasing over the long term. Moving away from auto-loans, there are also things called debt consolidation loans. With a debt consolidation loan, you round up all the money you owe on your credit card. The electric utility company and so on, total that debt up. And then borrow that amount in the form of one loan and get your bills clear. A big advantage is that you only have one bill to pay. An often bigger advantage is that you can replace the much higher interest rates you pay on credit card debt. With a much lower rate. But just be very sure you're going to be able to handle the payments. Otherwise, you are just exchanging one problem for another. And be even more sure that you don't get sucked into the vortex of exorbitant credit card interest. By running up your balances again. That's where sound budgeting comes in. Now, the last type of loan I'd like to talk about is the standard line of credit. Even though line of credit is used like an umbrella term for most loans nominally. It is a loan where the bank grants you a block of money in an account. You only pay interest on the money you withdraw from the account. And here's a cautionary note. If you don't use the line of credit very much, the bank might charge you a fee of some sort. So be aware of that. So here's the bottom line. Loans have lots of complexities and small details that you'll need to research yourself. It's the proverbial fine print. And, yep, the devil is indeed often in the details. So take what I've shared with you as a baseline. But know that it's incredibly important to read all the terms on the contract. As they might fundamentally change the way the loan behaves. And that you need to be aware of cases where that happens. But all in all loans are a very positive thing, and could be very helpful if you manage them the right way. They have there place in a sound financial plan. But you have to be smart an responsible when you are using these tools. Remember it's all about having a smart plan and being in control. [MUSIC]
