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Debt Management

5 tips for making the most of a low rate loan for new military members

A career starter loan can help you manage your finances, but experts advise against taking one out just for the low interest rate


Some financial institutions offer exclusive loans with low rates to newly commissioned military officers, midshipmen or cadets. But low rate loans for upcoming members of the military aren’t for everyone, say experts. Here are five tips for making the most of a military career starter loan.

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If you’re just starting your military career and have been offered a five-figure loan for a below-market interest rate, it may seem like a no-brainer to accept.

Financial institutions, such as USAA and Navy Federal Credit Union, offer exclusive loans to newly commissioned officers, midshipmen or cadets with rates starting as low as 1.25 percent to 2.99 percent.

But low rate loans for upcoming members of the military – often called career starter, commissioning or career kickoff loans – aren’t for everyone, say experts.

“When used responsibly, career starter loans can be a great way to consolidate loans or reduce the interest rates on your current loans,” says Ryan Guina, founder of The Military Wallet.

They can also help you finance upcoming expenses, such as your first and last month’s rent, an inexpensive car or even a wedding or engagement ring. USAA allows you to borrow up to $25,000, while Navy Federal Credit Union allows you to borrow up to $32,000.

But if you aren’t sure how you’ll use your career starter loan, taking one out just because you’ve been offered a rock bottom rate is probably a mistake.

“While the interest rates are attractive, they are still loans and must be repaid,” said Guina.

Here are five tips for making the most of a career starter loan.

See related:  Credit guide for military members and their families

1. Check the rates on your current loans

Before considering what to buy with a career starter loan, first think about what you can pay off, suggests Spencer Reese, publisher of Military Money Manual.

“Probably the smartest strategy for cadets and midshipmen is to look at their financial situation,” said Reese.

If you have other outstanding loans, such as student loans, a car loan or credit cards, chances are the interest rates are well above 3 percent. In that case, “it totally makes sense to take a loan and pay it off,” he said.

Student loan rates, for example, can run as high as 4 percent to 11 percent or more. Meanwhile, average card APRs currently range from 17.80 percent to 25.16 percent. Consolidating your debt onto a low rate starter loan could potentially save you thousands of dollars in interest.

With a starter loan, you may also have an easier time folding your monthly payment into your budget, suggests Doug Nordman, publisher of The Military Guide.

“You’ll have a smaller payment for a shorter amount of time,” he said.

2. Add up your upcoming expenses

Before you settle into your new post, you’re going to have a number of miscellaneous expenses, including startup costs for your new home, uniforms, food and other expenses – and you won’t necessarily have an immediate income to pay for it.

If you’re a cadet, for example, you may have to wait several months before getting paid, said Reese.

“When you do graduate, your military pay doesn’t kick in right away,” he said.

Some people have to wait as long as three to six months before they report to service. And it may even take time to get your first paycheck after you’ve reported.

“If you’re waiting on reimbursement, you’ve got to find some way to eat right or pay your first month’s rent or security deposit,” said Reese.

A starter loan can help you pay for those expenses without having to take on credit card debt or borrow money from family. You can also use a rewards card to earn cash back or points on all your expenses and then use your starter loan to pay off the balance in full. However, try not to borrow more than you need, says Carlos Perez, COO of AAFMAA, the longest-standing nonprofit association exclusively serving the U.S. military community.

“Just because they offer you $25,000 doesn’t mean you have to take the $25,000,” he noted. “Make sure you borrow within your means.”

Rather than take one lump sum, draft a budget of your upcoming expenses and then borrow whatever you need to avoid carrying a balance on a high interest card.

See related:  How military members can earn rewards on a permanent change of station

3. Skip the fancy wheels

With so much money available, you may also be tempted to use the loan to splurge on something you want, but don’t necessarily need, such as a fancy car. However, that’s a mistake, says Nordman.

“Twenty-five years ago, when I was getting [a career starter loan], it used to be because you needed deposits for rental property or utility bills. These were generally just costs for getting your career going.” But, “over the years, now it’s become known as a car loan.”

The problem with that, though, is brand-new cars are depreciating assets, said Perez.

“You need transportation, but you don’t need to take the entire loan for a fancy car that’s going to depreciate.” You’re better off instead purchasing a used car with low mileage.

4. Think ahead

Before accepting a starter loan, also consider who’s offering you the loan and whether they’re a good fit for you over time, says Perez. Banks offer loans to young people, in part, because they’re trying to pick up customers for life.

However, the institution offering you a loan may not be such a good fit for you if they aren’t able to grow with you and your career, Perez warned. For example, when Perez took out a loan at the start of his military career, he chose a local institution that wasn’t designed for members of the military or people who moved around the world.

“I found myself having to explain things like why I was moving. I realized that while it was a great loan, it was really not the best bank for me,” said Perez.

Before settling on a loan, do your due diligence first, says Perez. For example, ask: “What is their reputation? How familiar is that institution with military servicemembers? Does it offer other services to you that will provide value for a lifetime?”

Also consider the impact a starter loan might have on your credit score. A starter loan may boost your score over time by giving you a broader mix of loan types and a chance to build a history of on-time payments.

But if you borrow more than you can afford to repay, you could seriously damage your score. Before you accept the loan, make sure you’ll be able to afford the monthly payments.

“A five-year, $25,000 loan at 2.99 percent has a monthly payment of about $450 a month,” noted Ryan Guina. This may seem affordable at first. “But it may become cumbersome once you add in your everyday living expenses.”

See related:  Military Lending Act credit card rules cap finance charges

5. Proceed cautiously if you decide to invest your loan instead

Some servicemembers decide to invest their starter loans, rather than use them for expenses. According to Stuart Grazier, founder of the Military Investor Network, this can be a good option if you understand investing and are careful.

“Starting out in the military, you have paychecks, you have housing. You have all of your basic needs taken care of already,” said Grazier. “So if you are smart about it and live below your means and live off of the allowances that are provided to you, you can really take advantage of this low interest loan and better your financial future by investing it wisely.”

You need to educate yourself and be disciplined about it, though, says Grazier. You also need to be able to live on a budget, so you don’t get yourself into more trouble than you can afford.

“If you have no idea where your money is going, you need to get that under control first,” Grazier said.

Bottom line

Starter loans offer young servicemembers a unique opportunity to save money and avoid high interest credit card debt. However, don’t forget they’re still loans that you’ll eventually need to pay off.

“It’s nice to have access to a line of credit like this at such a low interest rate,” noted Reese. But “don’t look at the terms of the loan and think that this is free money because it’s not.”

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