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Maine.gov > PFR Home > Bureau of Financial Institutions > Consumer Services > Banking & Personal Money Management
A Consumer's Guide to Banking and Personal Money Management
"Providing information and assistance to Maine consumers about financial services and practices in a changing banking environment."
The Agency would like to acknowledge the contributions made by the former Consumer Outreach Specialist, David Leach in drafting this booklet.
ABOUT THE BUREAU OF FINANCIAL INSTITUTIONS
CONSUMER OUTREACH PROGRAM:
The Bureau of Financial Institutions, founded in 1827, is a State agency within the Department of Professional and Financial Regulation. The Bureau supervises state-chartered financial institutions for safety, soundness, efficiency, and compliance to state banking law, responds to consumer banking complaints and promulgates rules and regulations.
In 1985, the Legislature's Audit and Program Review Committee recommended that the Bureau of Financial Institutions develop a public education program. Given the rapidly changing financial industry, the committee reasoned that such a program would be of great value to Maine consumers. This booklet is a part of the program.
A Consumer's Guide to Banking and
TABLE OF CONTENTS
The Department of Professional & Financial Regulation does not discriminate on the basis of disability in admission to, access to, or operation of its programs, services or activities.
Individuals who need auxiliary aid for effective communication in programs and services of the Department are invited to make their needs and preferences known to the Department's ADA Compliance Coordinator.
Dear Maine Citizens:
In January of 1989 the Maine Bureau of Financial Institutions published "A Student's Guide to Banking and Personal Money Management". Nine years, a national award from the American Library Association, and over 100,000 copies later, the "Student Guide" is renamed, "A Consumer's Guide to Banking and Personal Money Management," and expanded to appeal to banking customers of all ages.
The original guide was developed with the assistance of 590 high school students from 23 schools across the state who participated in a Bureau of Financial Institutions survey. This updated version reflects the questions and opinions expressed by Maine citizens in over 700 Bureau of Financial Institutions financial seminars since the beginning of our Outreach Program. Credit cards, car financing, vehicle leasing, personal money management, combating telemarketing fraud, investments - - these "hot topics" (and many more) are addressed.
As a government agency charged with regulating the financial institutions in the state of Maine, the Bureau of Financial Institutions is in a unique position to provide Maine citizens with objective information about banking and personal money management issues essential to their understanding.
The Bureau of Financial Institutions Staff hopes you enjoy our new edition of the "Consumer's Guide" and use the information contained in its pages to your financial advantage in the years to come.
Maine Bureau of Financial Institutions
Special thanks to Attorney Arthur Hosford for assisting with the investment section update.
If you already have a banking relationship at one or several financial institutions (bank and credit unions), have you ever asked yourself the question, "Is the financial institution I do business with the best for me?" Smart consumers routinely comparison shop for items like groceries and appliances -- why not banking products and services? Here are some important factors to consider when "shopping" for a new financial institution or reevaluating your existing one:
Accessibility: Is the financial institution close to your home, school, work, etc.? How convenient are its hours? Other accessibility factors could include: ample parking, a drive-up window, automated teller machines (ATMs), outlying branches, internet banking, bill paying services and mobile banking.
Annual Percentage Rate (APR): When shopping for consumer loans for the purchase of items like cars, boats, and homes, it pays to find the lender offering the lowest APR. The difference of ½ of one percent on a mortgage loan can equal thousands of dollars of savings over the term of that loan.
Annual Percentage Yield (APY): The term Annual Percentage Yield (APY) represents the, percentage rate reflecting the total amount of interest paid on an account, based on the interest rate, and the frequency of compounding for a 365 day period...(Federal Reserve Board Regulation DD, Truth in Savings Act). APYs make comparison shopping for savings accounts and CD's much easier. Simply select the highest yield or APY.
Service: If you already have an account ask yourself, "Are the employees of the financial institution friendly? Professional? Knowledgable?Accurate? Do I waste too much time in long teller lines?" For comparisons, ask friends and relatives about the service quality at their financial institution.
Service Charges: These fees vary widely from institution to institution! Savings accounts can have minimum balance requirements, monthly fees for not keeping that balance, or no fees/balance requirements at all! Checking accounts may have monthly fees, per check fees for items both written and deposited, overdraft charges for "bouncing" checks, etc. There may be fees for ATM transaction, bill paying services or mobile banking transactions.
Maintaining a savings account is fairly straightforward. You make deposits and withdrawals and the financial institution pays interest on your deposits. Save your deposit slips and make sure entries posted at teller windows and withdrawals at ATMs accurately reflect the transaction (i.e., correct amount of withdrawal is subtracted or deposit added). Financial institutions occasionally do make mistakes.
TYPES OF SAVINGS ACCOUNTS
Passbook and Statement Savings Accounts: These savings accounts make it easy to access your money and are low risk. Deposits in Maine financial institutions are insured up to $250,000 through the Federal Deposit Insurance Corporation (FDIC). Due to the easy access and limited risk, the interest rates on these accounts are low compared with other accounts/investments. Consumers with statement savings accounts periodically receive statements of account activity (deposits, withdrawals, interest earned, service charges, etc.). Passbooks are updated by tellers when a transaction takes place. Statements are issued to passbook account holders when the accounts are accessed electronically through automated teller machines (ATMs).
Certificates of Deposit (CD's): If you are interested in higher interest rates and can afford to "lock away" your money for a period of time, CD's may be for you. CD's require a minimum initial deposit (typically starting at $500 -- $1000), and must remain on deposit for an agreed upon period of time (6 months, 1 year, 2 years, etc.). Financial institutions commonly penalize depositors who withdraw their funds before the CD's maturity date. Penalties such as loss of interest and, in some cases, loss of principal are commonly assessed. Ask questions and read the CD's deposit contract carefully before signing it! With CD's, the longer you agree to deposit your funds, and the larger the deposit, generally the higher the interest rate you will receive. CD's from financial institutions in Maine are federally insured.
Club Accounts: Customers agree to deposit a fixed amount of money each week over a specified period of time (usually 50 weeks). When the period ends, the financial institution releases the funds to the account owner. Financial institutions commonly pay an interest rate similar to passbook/statement savings accounts or make a "bonus" payment in the customer's account. Most financial institutions assess a penalty for early withdrawals. This is also a federally insured deposit at Maine financial institutions.
Money Market Accounts: This specialized deposit account generally provides interest rates that are higher yielding than ordinary passbook/statement savings accounts or share account. Interest rates are based on an index (some measure of the nation's economy) and can move up or down monthly. Most financial institutions require a large initial deposit, and a limited amount of withdrawals are allowed monthly. Money Market accounts (not to be confused with Money Market Mutual Funds) are federally insured at Maine financial institutions.
Share Accounts: These accounts, offered at credit unions, are similar to savings accounts at banks. They are insured by the National Credit Union Administration (see below), a federal government agency.
Tiered Rate Savings Accounts: The larger the amount on deposit, the higher the Annual Percentage Yield (APY) paid by the financial institution. Interest rates increase in steps. Once the account balance reaches a higher, minimum level, the interest rate is raised accordingly. Interest rates paid generally fall between passbook and CD levels.
QUESTIONS ABOUT DEPOSIT INSURANCE
If you would like to learn more about how the federal government insures your deposits at Maine financial institutions, please contact the following federal agencies:
Federal Deposit Insurance Corporation (FDIC)
1-877-275-3342 (Banks, Savings Banks, Saving & Loans)
National Credit Union Administration (NCUA)
1-518-862-7400 (Credit Unions Only)
For Your Information
If a deposit account has no activity for a period of 3 years, the financial institution is required by law to turn the account over to the Unclaimed Property Division of the State Treasurer's Office after attempting to locate the owner. If you feel you have an abandoned account which has been turned over to that office, please contact them at (207) 624-7470 or online at https://www.maine.gov/treasurer/unclaimed_property/online/ to make a claim.
Many investors dream of finding a high yield investment with little or no risk. However, in the "real world" of investing, the greater the potential profit, the greater the risk. It is a good idea to keep the following thoughts in mind:
If you can't afford to take risks, you are not ready to invest.
There are many different types of investments, each with different characteristics. The following is a brief list of some of the more popular forms of investments:
Annuities: The issuer of this product promises to pay the investor an income over a specified period of time. Annuities can be either fixed or variable. Fixed annuities pay a specific amount; the income from a variable annuity will fluctuate based upon certain market factors provided for in the contract. An investor will be subject to a penalty for early termination.
Common Stock: By purchasing shares of common stock, you become a part owner of the company that issued stock. Shareholders participate in the company's profits through the company's payment of dividends. On the other hand, there are no guarantees; all or part of your money could be lost. Common stocks range from conservative "blue chip" stocks from established companies (many of which are household names) to high risk stocks issued by companies just starting out.
Corporate Bonds: Instead of owning a part of the company, a bondholder makes a loan to that company. The corporation issuing the bond pays interest until the bond matures and the principal is repaid. The risk of corporate default is obviously important for the investor to consider. Although the term "high yield" sounds attractive, it is important to remember that the higher the yield, the riskier the bond. Also, bonds can be bought or sold. Selling the bond prior to maturity may result in a gain or loss of principal, depending upon interest rates at the time (see interest rate risk).
Cash Value Life Insurance: In return for the payment of premiums, a life insurance company agrees to pay a specific sum of money upon the death of the insured. With a "term" policy, the company only agrees to this for a certain period of time, after which another policy would need to be purchased. A "cash value" policy will also have a savings or investment component. The policy holder may elect to "cash-in" the accumulated value of such a policy, or convert to another form of investment, such as an annuity.
Mutual Fund: Also known as "investment companies," mutual funds pool the amounts which their investors pay to purchase their share, and in turn invest in the securities of other corporations. The value of a mutual fund's shares will vary based upon the total value of the fund's investments divided by the number of shares outstanding (net asset value). In an "open end" mutual fund, shareholders may redeem their shares at any time, based upon their shares' net asset value. Mutual fund shareholders are paid dividends based upon the fund's earnings after expenses.
Money Market Mutual Fund: This is a type of mutual fund that invests solely in short-term debt securities, such as Treasury Bills and commercial paper. Interest rates vary depending upon the portfolio mix of the fund and maturity. Dividends typically are declared daily and paid monthly. Money market funds usually strive to maintain a consistent price of $1.00 per share. Although often used as a very conservative, savings-like investment, these funds, as with other securities, are not guaranteed.
State or Municipal Bonds: These bonds are issued by state or local governments to finance various projects, such as highways, bridges, or schools. Bond maturities can run from less than one year to over 30 years. Although these are also frequently considered to be relatively conservative investments and may enjoy special tax treatment, they also, are not guaranteed. There have in fact been occasional, although rare, defaults in the category of municipal bonds.
United States Government Securities: The U.S. Government issues a number of securities. Since they are backed by the government, investors consider these to be very safe. Interest earned on these investments is exempt from state and local taxes. The three major categories of these government issued securities differ in their maturity (time period) and the minimum investment required.
Treasury Bills (T-Bills) are issued by the U.S. Government to finance short-term obligations. The minimum investment is $10,000 and maturities do not exceed one year.
Treasury Notes (T-Notes) are intermediate U.S. Government obligations with 8 maturities from one to ten years. They are purchased in $1,000 increments and have a set yield.
Treasury Bonds (T-Bonds) are long-term U.S. Government obligations, with essentially the same features as T-Notes except with a longer maturity (over ten years).
Zero Coupon Bonds: These are corporate or government bonds which investors purchase at a "deep discount" (well below face value). The investor knows in advance what the bond will pay at its maturity, but does not receive interest until maturity.
INTEREST RATE RISK
Many investments are sensitive to interest rate changes or market conditions; they are vulnerable to interest rate risk. For example:
You have purchased a bond from a brokerage house with a face value of $1,000 and an interest yield of 10%. One year later, interest rates rise and a similar bond is yielding 12%. You're locked in at 10% and decide to sell that bond for the higher yielding one. Unfortunately, you find no investor willing to pay $1,000 for a bond yielding only 10% and are forced to "discount" your bond to $833 in order to sell it. The $167 you lost is a result of interest rate risk.
Conversely, investments can be favorably affected by decreasing interest rates. However, whether interest rates rise or fall, at maturity, the bond (in our example), will be worth its face value.
The Office of Securities is responsible for regulating the offer and sale of securities, the licensing of brokerage firms and salespeople, and the investigation of alleged violations of securities laws. If you have a securities question or complaint, please contact the Division at (207) 624-8551, or 1- 877) 624-8551, Fax (207) 624-8590, TDD (207) 624-8563 or e-mail at http://www.maine.gov/pfr/securities/index.shtml
Checking accounts are a great convenience for people. Owning this type of account reduces the need to carry large amounts of cash, records how you spend your money, and provides proof of bill payment.
Types of Checking Accounts
This is the most commonly used type of checking account. Today, many financial institutions offer “free” checking accounts. Some financial institutions may required a direct deposit of your payroll, pension or government check into your account or electronic statements to qualify for a free account with the financial institutions. Be sure to ask if there is a minimum balance reguired to avoid a monthly service charge. Depositors may have to pay check printing costs. Unlimited check writing is allowed in most cases and generally no interest is paid. Checking accounts are federally insured at Maine financial institutions.
These interest-bearing accounts combine the features of checking and savings. Interest rates are usually below regular savings account rates. Account holders can withdraw funds by writing a Negotiable Order of Withdrawal (NOW draft), similar to a check, to a third party. The monthly service charge may be waived for a relatively high minimum balance requirement. They are also federally insured at Maine financial institutions.
Share Draft Accounts:
This is an account offered by credit unions which is essentially the same as a checking account offered by banks, savings and loans, and savings banks. Share draft accounts in Maine credit unions, which are federally insured, sometimes pay interest.
NOTE: Be sure to review the schedule of fees for other fees that may apply.
NOTICE TO CONSUMERS
Beginning January 1, 1999, all payments from the Federal Government, including Social Security payments, must be made by Direct Deposit.
PARTS OF A CHECK
Let's say your name is Terry E. Consumer. You have a car loan with Ford Motor Credit and your monthly payment of $225.87 is coming due. What should your payment check look like?
Trailing Edge Leading Edge
In order to negotiate (cash, deposit) a check made out to you (the payee), you must endorse it. To endorse a check, place your signature within the top 1 1/2" on the back side of the check's trailing edge.
Types of endorsements:
COMBAT UNWANTED TELEMARKTERS!
"Immediately place my name and telephone number on your do-not-call list -- and don't ever call this number again" . . . are the words you should use to stop a specific company from soliciting you via your telephone. The Telephone Consumer Protection Act and the Federal Communications Commission's rules protect you from receiving unsolicited telephone marketing calls you do not want to receive. You can download the FCC's brochure describing your rights and how to protect yourself from unwanted solicitation calls at http://www.fcc.gov/ccb/consumer_news/ You can request a hard copy of the brochure by calling the FCC's toll-free number: 1-888-225-5322.
THE CHECKING ACCOUNT REGISTER
Checking account customers are provided with a register to enter information about their account. Entries should be immediately logged in for checks written, deposits made, ATM and debit card transactions, etc.
Checking account customers who fail to properly manage their account (excessive overdrafts) run the risk of having the account closed by their financial institution. The record of this account mismanagement is routinely transmitted to national reporting databases which most financial institutions access before opening new checking accounts. Persons who have checking accounts closed often have a difficult time finding a financial institution which will open a new one with this "black mark" appearing on their history.
KEEPING AN ACCURATE BALANCE
Each month, your financial institution will mail you a transaction record of your checking account called the checking account statement. This document gives you a complete listing of your account's activities (checks paid, deposits, debit card transactions, transfers, service charges, etc.) during the statement cycle (usually 30 days).
Make sure all checks paid are recorded in your check register. (A check is paid when the person you made the check out to, the payee, cashes or deposits the check, and it has been returned to your financial institution which withdraws the money from your account.)
ADJUSTED BALANCE ___________________
This figure should agree with the current balance in your checkbook.
If balance does not agree:
"WHEN WILL MY DEPOSIT BE AVAILABLE?"
Did you know when you deposit a check, those funds are not always readily available for use? This is especially important to know when writing checks that rely upon a recently made deposit. Your financial institution may place a "hold" on items deposited to your account within maximum time frames established by Federal Reserve Board Regulation CC. As of September 1, 1990, these maximum time frames are as follows:
Items such as cash, financial institutions' cashier's checks, U.S. Government checks, U.S. Postal money orders, electronic payments [U.S. Treasury regulations and some automated clearinghouse (ACH) association rules often require electronic payments to be available on the date the financial institution receives the funds.], and State of Maine and local (Maine) government checks are generally available the next business day (any weekday, Monday through Friday, excluding holidays) after date of deposit.
Local Checks - most other checks are considered local checks and funds must be made available within two business days after day of deposit.
(NOTE: Up to $200.00 of the aggregate deposit by check or checks not subject to next day availability on any one banking day must be made available the next banking day.)
A financial institution can exceed these maximum time frames when:
A check is deposited to a new account opened 30 days or less;
A check is deposited to an account that has been frequently overdrawn (bounced checks);
An account has deposits totaling more than $5000.00 in checks in a single day (funds in excess of $5000.00 must be made available no later than the 11th business day);
The financial institution reasonably doubts (or has reason to doubt) the collectability of the check being deposited;
The customer re-deposits a "bounced check"; or
There is an emergency, such as failure of communications or computer equipment.
"The beginning of the end of paper checks?"
A debit card (sometimes referred to as a "check card" or "money card") in many ways resembles a traditional credit card: it's made of plastic, carries a major credit card logo, is accepted by merchants that accept credit cards, and has a magnetic stripe on the back. Unlike a credit card, the funds you are accessing are your own -- and not drawn on an interest accruing line of credit! For some consumers, debit card transactions have replaced traditional paper checks.
Several reasons for popularity:
International Acceptance: Try buying something in Paris, France or Paris, Texas with a check drawn on a local Maine financial institution. It's not going to happen!!
Convenience: It is easier to have a merchant "swipe" a debit card through an electronic terminal than it is to write out a paper check.
Identification Requirements: Merchants generally do not require much (signature verification) identification when their customers use debit cards. Checks often require two forms of identification.
Unlike a paper check, a traditional stop payment cannot be made on a debit card purchase of an inferior good or service. Many card issuers assist their customers with merchant disputes - ask what their policy is before obtaining a card! The merchant's refund and return policies are applicable.
Consumers who forget to immediately record a debit card transaction in their checking account register can end up in an overdraft situation. This is becoming a common problem since some people easily confuse debit and credit cards!
Debit cards are covered under Federal Reserve Board Regulation E (Electronic Funds Transfer Act). Unlike credit cards which generally limit consumer liability for unauthorized use to $50, REG E limits liability to $50 only if the transaction in question is reported to the financial institution within 2 days of learning of loss or theft of the card, $500 if reported within 60 days, and unlimited liability if you exceed 60 days. Some debit card issuers are adopting the $50 maximum liability limit similar to credit cards -- ASK!!!
Watch out for monthly and individual transaction fees. Weigh your individual financial needs when deciding whether to utilize any type of checking account.
No Interest Charges: Unlike a credit card, you are using your own funds and avoiding high interest costs.
Automated Teller Machines (ATMs):
Most of these self service machines dispense cash, transfer funds, accept loan payments, provide account balances, and some accept deposits. Some financial institutions charge their customer's for using ATM cards at their machines. Many, but not all, ATM owners charge non customers a fee generally (50 cents to $1.50) to use their machines. ATM machines are located at financial institution branches, supermarkets, colleges, shopping centers, airports, and other places frequented by consumers.
ATM Cards: These cards resemble debit (check) cards but lack the major credit card logo. Their primary use is to withdraw funds from ATM machines. A limited number of stores (much less than debit cards) accept them for payment. ATM cards require the cardholder to provide his/her Personal Identification Number (PIN) for transactions.
Internet Banking: Access your bank account(s) at home through your personal computer. You may be allowed to pay bills online, also.
Direct Deposit: Arrangements can be made to have your pay or Social Security check electronically deposited into your checking or savings account.
Individual Retirement Account (IRA): This is a tax deferred, fully insured (up to $250,000) deposit account that individuals contribute funds toward their retirement. Not everyone is eligible for the tax deferment. For tax information, contact the Internal Revenue Service (IRS).
Safe Deposit Box: This is a locked drawer in a financial institution's vault rented to consumers for the safekeeping of documents, jewelry, coins, etc.
Trust Services: The financial institution acts as a trustee (makes financial decisions for the consumer) for stocks, property, bill payments, bank accounts, etc. The customer pays a fee for this service.
United States Savings Bonds: These savings certificates, backed by the federal government, can be ordered through financial institutions in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. Purchased at ½ face value ($100 bond costs $50), interest rates and maturities vary. Savings bonds cannot be redeemed until six months after the purchase date.
Applying for a loan for whatever reason: car, boat, education, home, etc... is a serious matter which should not be entered into lightly. It's a promise to repay an amount of money over a period of time -- with interest! Failure to do so can have adverse affects on not only future loan requests but future employment opportunities as well. The debt section of the "Consumer Guide" is designed to inform you about the major issues associated with credit so you will be prepared to expertly deal with them when/if the time comes.
Whether the item you are thinking about financing is a new car, used truck, personal computer, boat, or a jet ski . . . take the time to get the best deal on not only the item's sale price, but the financing as well! The following is a step-by-step example of the loan process.
EXAMINE YOUR FINANCES. Review the personal money management section on page 30 to determine what monthly payment you can afford without compromising your lifestyle and financial goals.
SHOP AROUND FOR FINANCING. If you're buying a new or used vehicle from a dealership it's very likely they will offer to finance the purchase. Do your "credit homework" first by calling every financial institution in your area to determine who is offering the lowest Annual Percentage Rate (APR). The same is true when purchasing snowmobiles, boats, campers, home computers, personal water craft, all-terrain vehicles (ATVs), etc--the dealer/store may or may not have the lowest APR.
NEGOTIATE PRICE. With new vehicles the "golden rule" is to negotiate up from the dealer's cost, never down from the window sticker! New car price guides are available at libraries, bookstores, and a growing number of Internet sites. Used vehicle retail (sale) prices can be easily accessed by calling local financial institutions and asking for a "Blue Book" quote. Sale prices on cars, snowmobiles, boats, campers and personal water craft are negotiable while computers and stereos are best purchased during a sale. Remember, the lower the selling price, the less your monthly payment will be. Be patient, be firm!
SET UP A LOAN INTERVIEW. After finding the lowest APR and getting the best price on the item, it's time to set up a loan interview. Call ahead and set up an appointment. If the lowest APR is available through the dealership/store, this step will not be necessary.
THE LOAN INTERVIEW. Be on time and be prepared to provide a variety of personal information: Social Security Number, monthly income, bank account numbers, the size of your downpayment, current debts/monthly payments, and a copy of the buyer's order for the item you wish to purchase.
CREDIT INVESTIGATION. The lender will enter your name, address, Social Security Number, and date of birth into a special computer terminal to access your credit history. A credit analyst will study both your present and past debts, how much you owe, and how you pay your obligations: early, on-time, or late!
THE CREDIT DECISION. Additional factors such as: your ability to repay the new debt, your job stability, and other important factors will be reviewed prior to reaching a credit decision.
THE LOAN CLOSING. If approved, you will be asked to sign loan documents. By signing these forms, you contractually agree to periodically repay a specific amount of money, over an agreed upon period of time (loan term), at an established interest rate (APR).
LOAN REPAYMENT. After the closing, you may be mailed a booklet containing payment coupons which are used when making loan payments. Sometimes payments are made through automatic deductions from your checking or savings account. To maintain good credit standing, make loan payments on or before their due ate!
Example: $10,000 Sale Price
Buyer One: Pre-planned the purchase by saving the amount of money necessary to buy the car outright. No loan, no finance (interest) charges, and the lowest total cost!
Buyer Two: Made a 30% downpayment and took out a relatively short term loan of 24 months. Paid only $674.96 in finance charges.
Buyer Three: Same downpayment as buyer two but a longer loan term (36 vs. 24 months) and a higher APR (10% vs. 9%). The good news -- the monthly payment is less, the bad news -- $1,131.32 in finance charges.
Buyer Four: A smaller downpayment (10%), higher APR (11%), coupled with a longer loan term (48 months) equals a finance charge of $2,165.28!!!
Buyer Five: This is the, "No Money Down! Sixty Months To Pay!!" approach which many new car dealerships heavily promote. The buyer finances more ($10,000.00) for a longer term (60 months), at a higher APR (12%), and ends up with a relatively small monthly payment ($222.44). However, this borrower pays $3,346.60 in finance charges!!! It's your money, it's your choice.
New car buyers who finance 100% (no money down) of a vehicle's sale price place themselves at great financial risk due to new vehicle depreciation. A new vehicle, when driven off the lot, becomes a used vehicle with its value quickly depreciating. Car owners in this financing scenario almost always initially owe more on the vehicle than it's worth! Depending on the depreciation rate of the vehicle and the length of the loan, this problem could persist for the majority of the loan's term. For obvious reasons, the "No Money Down" approach can lead to major problems (negative vehicle equity) when trading in a car or truck before the loan is paid.
(Compare with Car Financing Chart)
Downpayment- The larger the downpayment, the lower the monthly payments and total finance charge (with similar APR/loan terms). Lenders are more likely to grant a loan request to an applicant (especially one with little or no established credit) with a "large" (30% or more) downpayment.
Amount Financed - This is the sale price, plus title, sales tax, etc., minus downpayment.
Annual Percentage Rate (APR) - The interest rate (%), plus any additional finance charges associated with the loan, expressed on an annual basis. The APR plays a major factor (along with downpayment and loan term) in determining the total cost of the item being financed.
Loan Term (in months) - The longer the term, the smaller the monthly payments, and quite often a higher APR (and vice versa).
Monthly Payments - Don't be taken in by "low" monthly payment quotes! The real "bottom line" is your "Total Cost" (see below).
Total Cost - Add the downpayment figure with the total of monthly payments ($3000(DP) + ($317.79(MP) x 24(LT) = $10,674.96 Total Cost) to arrive at this amount. Low monthly payments over a long term loan (48 - 60 months) seem like a good deal until you take the time to add up all the costs. Subtract the sale price ($10,000) from the total cost to arrive at the finance charge (interest paid).
When a vehicle manufacturer has an excess inventory of a particular new car or truck model, financial incentives to customers in the form of cash rebates ($500 dollars and up), or low rate financing (as low as 0% APR) are routinely offered. In most cases consumers have to choose between one or the other -- rarely do they get both! The example below illustrates when it makes sense to select the cash rebate over the cut rate finance offer.
"Too Many Mini Vans!"
Due to an over supply of a popular mini van model a rebate of $2,000.00 or 5% APR on a 48 month loan is available to qualified buyers. A customer at the local dealership expertly negotiates the selling price down from the window sticker of $19,995 to $18,000 after finding the dealer's cost in a new car guidebook. She shopped for financing and found a local financial institution offering a 10% APR, 48 month new car loan. The buyer is making a $4,000 cash downpayment. She now has a decision to make.
CONCLUSION: The consumer takes the rebate (reducing the amount financed by $2,000) and borrows from a local financial institution saving $866.88. In a different scenario featuring a smaller rebate, larger amount financed, and a lower APR offered by the manufacturer, selecting the cut rate financing over the cash rebate could be the best deal. Always take the time to compare!
It's not buying...it's not renting. Leasing a new car or truck is essentially paying for the expected depreciation cost of the vehicle, plus interest, over the term of the lease (generally24, 36, or 48 months). Leasing is the fastest growing segment of the car financing industry and probably the least understood. To lease, or not to lease, that is the question!!
You get a new car every two to four years.
That new car will be under warranty for most, if not all the lease's term.
The monthly lease payment is generally less than the payments on a new vehicle loan, since you're only paying for its temporary use.
You turn in the vehicle at the end of the lease avoiding problems associated with trying to sell or trade in a used car or truck.
You don't own the vehicle at the end of the lease, leaving you with nothing to trade in against your next purchase or lease.
If you drive a great deal each year you could be assessed a penalty charge -- 15 cents a mile for each mile over the allowance (12,000 miles/year) for example.
You may be subject to reconditioning fees or forfeiture of a security deposit if the vehicle you return has sustained more than average "wear and tear." Read your lease contract carefully.
You have committed to keep this vehicle for the entire term of the lease unless. . .
You break the lease and could be faced with expensive early termination fees.
Adjusted Capitalized Cost: Gross Capitalized Cost minus the Capitalized Cost Reduction.
Amount Due at Lease Signing: Title charges, taxes, first payment, security deposit, downpayment, etc.
Capitalized Cost Reduction: A rebate, cash payment, net trade-in allowance or non cash credit which reduces the gross capitalized cost.
Gross Capitalized Cost: The agreed upon value of the leased vehicle plus additional costs such as: taxes, insurance, service agreements and any remaining balances from prior loans or leases.
Lessee: Person who enters into a consumer lease.
Lessor: The person offering the lease to the consumer.
Money Factor: An "interest like" charge factored into the Adjusted Capitalized Cost. Find out what this figure is and try to reduce it!
Periodic Payments: The payment made (generally each month) to lease the vehicle.
Purchase Option: This part of the leasing agreement states whether or not the lessee can purchase the vehicle at lease end.
Residual Value: The remaining value (Purchase Option Price) of the vehicle at the conclusion of the lease.
A "REAL WORLD" LEASE
The following example was taken from a leasing advertisement in a Maine newspaper. The vehicle is a sport utility model.
Term of Lease -- 24 months.
Monthly Lease Payment-- $339.00
Due at Lease Inception -- $1,849.00 Downpayment, $339.00 1st Month's Lease Payment, $375 Security Deposit (Refundable).
Total of Lease Payments -- $8,136.00
Purchase Option -- Not disclosed in advertisement.
Mileage Allowance -- 12,000/year, 15 cents/mile penalty over that.
Because you are essentially paying for the expected depreciation value of a vehicle during the term of a lease, it makes sense to lease a low depreciating vehicle. The less the vehicle depreciates, the less your monthly lease payment should be. Used vehicle price guides which list the vehicle's original M.S.R.P. and its current, depreciated value is one potential source for this information.
The Federal Reserve Board has produced an excellent publication, "The Keys to Vehicle Leasing", which describes vehicle leases in greater detail.
Over the past few years there has been an unprecedented marketing effort (direct mail and telemarketing) by credit card issuers directed at consumers of all ages -- from well-established senior citizens to low and no wage high school and college students. It is important to realize if you say yes to a "pre-approved" credit card offer with a line of credit of several thousand dollars, you'll have to find a way to pay back this debt, generally at a relatively high APR. If you can't make your monthly payment and become delinquent, this "black mark" will probably remain on your credit history for 7 years!! This means difficulty in gaining loan approval for items such as college tuition, new and used vehicles, snowmobiles, boats, and most importantly, a home mortgage.
WHY CARRY A CREDIT CARD IF THEY'RE (POTENTIALLY) SO BAD?
For cardholders who are financially able to repay the debt, a credit card can serve as a valuable and convenient tool. In some situations, credit cards give the cardholder additional rights in disputing the purchase of defective goods/services. Persons who travel frequently use credit cards to reserve hotel rooms, rent cars, and charge meals without having to carry large sums of cash -- which could be lost or stolen. Credit cards also come in handy in emergencies, such as unplanned car repairs (flat tires, engine problems, broken mufflers). Again, all these features have little value if the cardholder cannot pay back the amount charged plus interest!
COMPARISON SHOPPING FOR CREDIT CARDS:
"WHAT TO LOOK (OUT) FOR"
APR (Annual Percentage Rate): Find the lowest rate possible and read the fine print! Some low, low "teaser" rates (5.9%, 6.9%, etc.) are only for a limited time (6 months) while other slightly higher (yet still relatively low) rates (9.9%, 10.9%) are for customers who are rarely, if ever, late making a monthly payment. One credit card issuer raised its cardholder's rates to over 25% APR for making delinquent payments!! Once in this "penalty phase," in many instances, it can take the cardholder up to 12 months of on time payments to reduce the APR to its regular level. This is especially serious for people experiencing financial difficulties -- the last thing they need is for the APR on their "maxed out" credit card to skyrocket! While most APRs are fixed, some credit cards feature a variable rate which moves up or down based on an index (example: Prime Rate) with a margin or "spread" (example: plus 10%) added to it!
ANNUAL FEE: This is the cost you pay on a yearly basis to hold a particular credit card. Some card issuers charge no annual fee while others waive it for the first year only. Annual fees can be $50.00 a year or more!
GRACE PERIOD: This grace or "free ride" period (typically 25 days) allows cardholders to pay off their card balance in full each month and avoid all interest charges. Example: If Terry E. Consumer gets a new card in September, charges $22.00 and receives her credit card statement in early October, Terry can mail a payment check to the card issuer for the entire balance of $22.00 and avoid all interest charges if her card offers a grace period and they receive her payment before this time limit expires. Credit cards issued by Maine financial institutions must offer a 25 day grace period!
LATE FEES: If you are late making a payment you may be assessed an additional fee.
OVER THE LIMIT FEES: If you exceed your card's credit limit you probably will be assessed a "stiff" penalty fee.
"A NIGHTMARE AT THE MALL"
When Terry Consumer's friend Danny turned 18 he said "yes" to a pre-approved credit card offer in the mail. Several weeks later he received a card with a $2,500.00 credit limit. Terry's friend had a 15 hour a week after school job paying slightly over minimum wage. He immediately went to the mall and bought a dozen music CD's, new basketball shoes, lunch for three of his closest buddies, two NFL team jackets, designer sunglasses, a video game system, software, and lots and lots of expensive clothes. Danny was surprised to learn he "maxed out" his entire credit limit in ONE WEEKEND!!! Then came payback time!
Danny never paid much attention to the numerous warnings from his family, teachers, government agencies, and the news media about the misuse of credit cards. Once he got his statement in the mail he was relieved to discover he only had to make a minimum payment of $50.00 a month for all that incredible merchandise!! That's a $50.00 monthly payment, on a $2,500.00 balance, at 18% APR.
Month 12: After one year of $50.00 monthly payments ($600 paid in total) his balance only went down $163.02 ($436.98 went to interest)!!!
Month 60: After 5 years of $50.00 monthly payments ($3000 paid in total), the original balance was not even halfway paid (Balance: $1,297.32)! Fashion Note: the basketball shoes wore out four years ago, the NFL team on one of his pro jackets moved to another city, and the remainder of the clothes, now out of style, have been donated to a local thrift shop.
Month 93: After 7 years and 9 months, the exasperated 25 year old (remember, he was 18 when he went on this ill-fated shopping spree) "scrapes" together enough money to pay the remaining balance ($54.69) and cuts his card into 100 small pieces!!
WHAT DID THIS CREDIT NIGHTMARE REALLY COST?
Total of monthly payments $4,654.69
Original Cost of Merchandise $2,500.00
Interest Paid (Finance Charge) $2,154.69
TOTAL COSTS OF SELECTED PURCHASES
FACTORING IN INTEREST COSTS PER ITEM
Retail Total Cost (Add Interest)
Basketball Shoes $125.00 / $232.50
Designer Sunglasses $ 75.00 / $139.50
Football Jackets (2) $225.00 / $418.50
Lunch for 4 at the Mall $ 27.80 / $ 51.70
Video Game System $199.99 / $371.98
Games $260.00 / $483.60
MORAL OF THE STORY
If you choose to carry a credit card, pay off the balance in full every month during the card's grace period. If you can't pay off the entire balance, pay the remaining balance over the next few months. But, never, ever fall into the trap of paying just the minimum payment each month, or you'll end up in the same situation as Danny. That's a nightmare!
If you lose your credit card, report the loss immediately (by telephone) to the issuing lender. The Truth-in-Lending Act (Federal Reserve Board Regulation Z) limits your maximum liability to $50 per card. You are not responsible for any amount charged after issuer notification.
Compare your monthly statement with your sales receipts (always save these) for illegal charges. Crooks sometimes steal card numbers, rather than the card, and have goods shipped to their post office box. The $50 per card liability applies.
Sign all new credit cards immediately upon receipt. Criminals love to steal unsigned cards!
Ask for (and later destroy) your carbonized sales receipt in manual credit card imprinting machine transactions. Con artists sometimes search store dumpsters ("dumpster divers") for receipts bearing carbonized credit card imprints. Retain the non carbonized receipt for your records!
Keep credit card numbers, name(s) or issuing institution, and their telephone number(s) in a separate, safe place in the event of the loss or theft of your card(s).
When using your credit card to withdraw funds from an ATM (cash advance), in most cases, interest is immediately assessed against that amount until you pay your bill. Grace periods generally do not apply to cash advances.
In 1995 the Maine Legislature deregulated a majority of the credit card laws in Maine. Items like interest rate caps and annual fee limits (formerly 18% and $12/year respectively) on credit cards issued by Maine financial institutions have been removed.
Never disclose your credit card number to an unknown telephone solicitor.
The Fair Credit Billing Act gives cardholders the right to dispute charges which appear on their monthly credit card statement which are either purchases the customer feels he/she did not make, was charged too much for, charged on an incorrect date, or for defective goods or services over $50 in value which were bought either in the cardholder's home state or within 100 miles of his/her home address. To utilize Fair Credit Billing Act protections, the cardholder must:
Within 60 days of the statement date, notify the card issuer (creditor) in writing (a phone call will not preserve your rights), at the special billing error inquiry address found on the monthly statement, with a description of the dispute. In the case of defective goods or services, the cardholder must make an attempt to resolve the dispute before contacting the card issuer. The cardholder's attempt at resolution must be mentioned in the letter to the card issuer.
The cardholder must withhold the amount in question and pay the remainder of the bill he/she normally does.
The card issuer must resolve the dispute in 30 days, or send the cardholder a separate letter if the investigation will take additional time. The dispute must be resolved (in writing to the cardholder) within the next 60 days--if not, the account must be credited for the amount in question.
If the results of the investigation are in the cardholder's favor, he/she owes neither the amount of the good or service in question nor any interest accrued during the investigation. If the findings are against the cardholder, the opposite if true.
You do not have to pay for an item you have ordered but have not received. If it appears on your statement, follow the billing error procedure described previously.
The card issuer must credit your payment to your account on the day of receipt -- unless the delay does not cause additional finance or other charges to be assessed.
You may not be sent a credit card on an unsolicited basis. Renewals or substitutes for existing cards are allowed.
The method the credit card issuer uses to calculate the balance (on which interest is assessed) is an important consideration for cardholders who do not pay off their balance in full during the grace period. Below are some balance computation methods.
Average Daily Balance Method (Excluding New Purchases): Take the outstanding balance (less new purchases, payments and credits) and divide it by the number of days in the billing cycle. Many consider this the most preferred method since it gives the cardholder a grace period on each new purchase -- even when the cardholder is carrying a balance from the previous billing cycle.
Average Daily Balance Method (Including New Purchases): This method is calculated by adding the outstanding balance plus new purchases (deducting payments and credits) for each day in the billing cycle, and then dividing by the number of days in that billing cycle.
Two-Cycle Average Daily Balance Method (Excluding New Purchases): This method takes the sum of the average daily balances for two billing cycles. The first balance is for the current billing cycle and is calculated by adding the outstanding balance (excluding new purchases and deducting payments and credits) for each day in the billing cycle, and then dividing by the number of days in the billing cycle. The second balance is for the preceding billing cycle [Regulation Z 226.5a (g) (2) (ii)].
Two-Cycle Average Daily Balance Method (Including New Purchases): Like the previous method except new purchases are included. This method includes all new purchases in the current month's balance without allowing for a grace period on those new purchases. Wise consumers avoid opening credit cards offering this balance calculation method.
Adjusted Balance Method: This balance is figured by deducting payments and credit made during the billing cycle from the outstanding balance at the beginning of the billing cycle [Regulation Z 226.5a (g) (3)].
Previous Balance Method:
"GRACE PERIOD" DISCLOSURE
If you choose to carry a credit card, having one which offers a "grace period" is essential. Credit card disclosures are required to contain the term "grace period" if they offer one.
This balance is based on the outstanding balance at the beginning of the billing cycle [Regulation Z 226.5a (g) (4)].
Most people have difficulty obtaining their first loan. A person with no prior credit history and limited job experience is often seen as a credit risk. If establishing credit is important to you, apply for a department store charge card, or borrow against your savings account (passbook loan). A large downpayment (30% or more) on a "big ticket" item like a car or a snowmobile can also improve your chances for loan approval.
Cosigning a Loan
The cosigner agrees to pay the loan if you cannot pay. Cosigners should have excellent credit history, ample income, good job stability, and need not be a relative. If you ask someone to cosign a loan for you, make sure they clearly understand if you don't make the payments -- they will! Lenders routinely ask prospective borrowers to provide a cosigner when the applicant has little, if any, established credit.
During the loan interview you will be offered the opportunity to purchase credit life and disability insurance. You are not obligated to purchase insurance of this type. Have the loan interviewer quote your monthly payment with and without the insurance. Weigh the advantages and disadvantages and make an informed decision.
NOTE: Casualty insurance on the item you are purchasing (car, boat, home, etc.) is required if you are using the item as security for the loan.
Signing Loan Documents
Carefully read every document you are asked to sign. Also, have verbal promises put in writing.
Are you considering going to college or trade school? Do you know how you are going to pay for this educational expense? If you must borrow money to finance your education, the Finance Authority of Maine (FAME), Higher Education Assistance Division has several free booklets available which answer many questions regarding student loans.
"INSTANT" LOAN CHECKS - An Advisory
Recently the Bureau of Financial Institutions has been receiving calls from Maine consumers regarding unsolicited checks (in envelopes) appearing in their mailboxes. The checks, in varying amounts ($2,500, $5,000, $7,500, etc.), "instantly" become installment loans if the consumer elects to endorse and deposit the check in their bank account. Consumers must understand that this is an interest charging loan offer, not free money! As in the case with any loan, consumers should always take the time to examine how this potential new debt will affect their personal finances and comparison shop for the lowest APR available.
Like the star athlete who trains diligently for a series of increasingly important contests, you must prepare for the short, medium, and long term financial goals facing you in the future. For example:
Short Term Goals: Clothing, New Stereo, Entertainment.
Medium Goals: Vehicles, College Costs.
Long Term Goals: Children's College Expenses, Home Purchase, Retirement Funding.
While purchases like clothing and nights out at the movies can be saved for over relatively short periods of time, medium and long term goals like vehicle purchases and home ownership take considerable planning and dedication to reach fruition. Whatever the amount of money necessary to attain those goals, remember this key phrase:
"PAY YOURSELF FIRST!"
Set money aside each payday -- whether that's weekly, biweekly, or monthly. Figure out how much of your take home pay you need to save; 10%, 15%, 20% or more!! Have those funds either electronically or manually removed from your paycheck. This lessens your temptation to overspend. You will learn to "get by with less" while building an impressive balance! Before you know it, you'll have the money to purchase that new car, stereo, or maybe enough for a downpayment on a new home!
BUDGET YOUR RESOURCES
With so many expenses chipping away at personal income (meals and snacks, movies, gas, clothes, etc.) it may seem difficult, if not impossible to dedicate a portion of your paycheck exclusively for financial goals. The budget process requires you to look at every purchase you make, from how many cable channels you really need to how many times you eat out during the course of a week. Most consumers are surprised at how much discretionary income they spend and the simple adjustments they can make to save an extra fifty or one hundred dollars a month. For some people it's replacing fast food with a bag lunch, substituting store brand products for name brand goods, or going from the "super deluxe" cable package to "basic". It's a personal decision every consumer makes between having it all now (oftentimes on credit) or making personal sacrifices today for a better tomorrow (a.k.a. delayed gratification). It's your money, it's your financial future!
"A TALE OF TWO SAVERS"
After college graduation Terry Consumer got a job and immediately began saving. In early January of each of the next 10 years Terry transferred $2,500.00 from savings to her Individual Retirement Account or IRA (page 16). Terry talked an old friend named Danny into opening an IRA at their 10th year college reunion. Danny followed Terry's advice and contributed $2,500.00 each January for the next 34 years. Both IRAs have interest rates of 7% (interest rates on "real" IRAs vary over time).
Terry's total IRA contribution was only $25,000, versus Danny's $85,000, but was worth $25,688.20 more at age 65 than Danny's. Why? The secret to building wealth is to start early in life and establish regular patterns of saving.
After the reunion Terry stopped adding to her IRA and through payroll deduction bought U.S. Savings Bonds for "the kid's" college education. She also began regular contributions to a tax deferred, pension plan at work.
Be smart, start early, have a plan!
Traumatic financial events like divorce, major illness, prolonged unemployment, strikes, overspending, bad investments, or major unexpected repairs can adversely impact your financial condition. If you become several weeks behind on your bills, consider taking these steps to rectify the situation and preserve your good credit standing.
Convert Assets: Sell the snowmobile, jet ski, four wheeler, boat, second car, stocks, etc. Part first with the items which are not absolute necessities.
Contact Creditors: Explain your financial situation. Most (if not all) will appreciate your honesty and be willing to work with you. While creditors still expect to be paid, they often set up repayment plans with reduced monthly payments for a limited period of time.
Contact Consumer Credit Counseling Services of Maine (CCCS): This nonprofit, state wide group has been serving Mainer's debt management needs for 25 years. For a small fee they work with both the debtor and the creditor to arrange a workable budget and repayment plan. They can be reached toll free at 1-800-539-2227.
Many financial experts recommend individuals maintain the equivalent of 2 - 4 months pay in readily accessible accounts to combat unplanned financial hardships. By doing this, events like a one month factory shutdown or strike should not ruin a person's finances.
Whether it's a car loan at the local credit union, a student loan from a bank, or the nonpayment of money owed on CD's ordered from a music club, your credit history is being "built"with each credit experience.
Credit Bureaus are for profit companies, many of which operate nationwide. Their job is to compile credit histories on consumers. Each month, creditors like department stores, mortgage companies, finance companies, and financial institutions forward information on their borrowers to these reporting agencies. In turn, companies who are being asked to lend money order individual credit histories of their loan applicants. Some businesses check job applicant's credit history before granting employment.
Delinquent credit remains on a person's history for 7 years. When someone files bankruptcy, it remains on file for 10 years!
To maintain a "good" credit history, follow this simple advice, "Make your loan payments on or before their due date!"
For more information about this subject, call 1-800-332-8529 to order your free copy (Maine residents only) of, "Downeaster Consumer Guide to Credit Bureaus and Credit Reports" prepared and distributed by the Maine Office of Consumer Credit Regulation.
Most of you have already been faced with financial decisions: how to budget your paycheck, balance a checkbook, save for the future. How you choose to manage your finances will have a direct bearing on the quality of your life.
Good luck, your financial future is in your hands!
For the following publications write or call:
"Postsecondary Education Loans"
Describes the Stafford Loan Program, PLUS Loan Program for Parents, and the Supplemental Loans for Students (SLS) Program.
"Maine Guaranteed Student Loan - Lender Directory"
A listing of all Maine lenders that make Guaranteed Student Loans.
"Higher Education Loans"
A pamphlet describing the Federal Family Education Loan Program and Lender Directory. Topics include: Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, and Federal PLUS Loans for Parents.
"Blaine House Scholars Program"
This guide details how those interested in pursuing a degree in the field of education can apply for this program. Also described in this booklet are the Robert C. Byrd Honors Scholarship and the Paul Douglas Teacher Scholarship Program.
"Maine Student Incentive Scholarship Program"
Information on a State and federally funded scholarship program for Maine residents attending degree granting institutions in Maine.
"The Scholarship Book"
A listing of privately offered scholarships for Maine residents. Eligibility, award size, and application information are detailed.
"The Student Guide"
A 74 page U.S. Department of Education publication which explains various federal student aid programs and how to apply for them.
Last Updated: June 5, 2013
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