Career Starter Loans?

[Guest mopack]

Hey Everyone,

I have a heard a lot about these loans that you can get a certain time before commissioning. I know one is supposed to be offered by USAA but, I have not been able to find out much information on it. Could anyone help me out with the details of some of the loans that are currently offered. Any help is appreciated thanks a lot!

[guineapigfury]

I think you are looking for the "precommissioning loan" from USAA. I was actually able to get mine several months after commissioning. I got $25K at 2% interest, but this was several years ago. Call USAA and ask to talk to their loan department.

[Odium]

Interest ranges have fluctuated between 2% and 5% over the past few years

[guim]

Marine federal has one at 1%. The bank kind of sucks though, so you have to weigh the ease of USAA vs getting 1%

[Champ Kind]

Advice you didn't ask for and probably don't want to hear, but I wish I had heard it when I was a new Lt:

Do not take out any kind of loans. Period. If you want something, save for it. If you need a car, get something you can pay cash for, and then take what you would be paying on a car payment and save that away until you have enough to "upgrade" at a later date.

Contrary to popular belief, you do not HAVE to have a car loan/personal loan like it's some sort of pet. Avoid debt and use that sweet income you are going to be making to pile up cash. Start maxing out a ROTH IRA ($5,000/year = $416.66/month). Avoid credit cards like the plague even if they offer sweet sounding "rewards". I know this involves some delaying of pleasure and sounds boring but you are only cheating yourself if you don't start right away.

For those of you that would talk about the ridiculously low interest rates and how you can take advantage of them -- well, probably not much I can say to you other than people who are millionaires (which you can be) didn't get there by taking advantage of low interest loans and credit card rewards. If you do insist on borrowing money, pay it back ASAP (like, double-triple payments at a minimum). As a borrower, you are slave to the lender.

Finally, the most valuable book (in my opinion, and no, I don't work for him, but I am a huge believer in his ideas) is Dave Ramsey's "Total Money Makeover". Go buy it off of Amazon. Yesterday. Seriously. It's the best thing you can read this early in your career.

Best of luck and congrats on making it this far.

Edited October 29, 2011 by Champ Kind

[KWings06j]

Advice you didn't ask for and probably don't want to hear, but I wish I had heard it when I was a new Lt:

Do not take out any kind of loans. Period. If you want something, save for it. If you need a car, get something you can pay cash for, and then take what you would be paying on a car payment and save that away until you have enough to "upgrade" at a later date.

Contrary to popular belief, you do not HAVE to have a car loan/personal loan like it's some sort of pet. Avoid debt and use that sweet income you are going to be making to pile up cash. Start maxing out a ROTH IRA ($5,000/year = $416.66/month). Avoid credit cards like the plague even if they offer sweet sounding "rewards". I know this involves some delaying of pleasure and sounds boring but you are only cheating yourself if you don't start right away.

For those of you that would talk about the ridiculously low interest rates and how you can take advantage of them -- well, probably not much I can say to you other than people who are millionaires (which you can be) didn't get there by taking advantage of low interest loans and credit card rewards. If you do insist on borrowing money, pay it back ASAP (like, double-triple payments at a minimum). As a borrower, you are slave to the lender.

Finally, the most valuable book (in my opinion, and no, I don't work for him, but I am a huge believer in his ideas) is Dave Ramsey's "Total Money Makeover". Go buy it off of Amazon. Yesterday. Seriously. It's the best thing you can read this early in your career.

Best of luck and congrats on making it this far.

Great advice here. Though I do have a few caveats..

Stay away from credit card DEBT not necessarily from credit cards. I put almost all my expenses on a credit card every month and I have it set to automatically pay in full every month. So I get the rewards, hang onto my money for an extra month, and pay zero in interest. Plus I'm building my credit rating.

The pre-commisioning loan is a good deal. It's not just that it's a ridiculously low interest rate, but that it builds your credit history. You can take it out, put it in low risk investments and pay it off with either minimal actual expense or a slight profit. The benefit is you have an installment loan for a large amount of money on your credit history that you successfully made regular on time payments on. This is huge for your credit score. And yes, initially it will hurt your score to take out a large unsecured loan like that. But as you make payments it will quickly turn from a negative to a huge positive.

[Champ Kind]

What does one need a credit score for if they are going to live within their means and not borrow money?

Start out your professional life with that mentality and you will be doing yourself a service. That's my point here.

[KWings06j]

What does one need a credit score for if they are going to live within their means and not borrow money?

Start out your professional life with that mentality and you will be doing yourself a service. That's my point here.

Even living within your means most people need a loan to buy a house. Not to mention it's used for risk assessment for everything from cell phones to insurance rates to future employment.

Plus what if you have an unforseen medical or other financial emergency? odds are low, and while your on active duty you're probably ok. But it's easier to get a loan to cover it with an 800 score than with no score.

[Champ Kind]

need a loan to buy a house

There are mortgage lenders out there who don't rely solely on your credit score when making determinations. You can get a mortgage loan with a "0" for a credit score by proving you are in good shape financially by providing copies of your pay stubs, W2s, bank statements, and portfolio/assets. In other words, you're saying, "Yes, my credit score is non-existent, but here is what I do with my money, and it is not borrowing it from other people." That's all that a credit score is: a rating of how well you borrow money. If you don't need to borrow money in the first place, then who cares what some algorithm spits out with regard to your credit score?

Couple that with applying for a mortgage for a house you can afford, and you should be all set. A rule of thumb is that the total payment should be no more than 25% of your monthly income on a 15-year fixed rate mortgage, with 20% down at closing. You offer that up with all of the financial information above, and if a lender is still dumb enough not to give you a mortgage, you probably did not want to deal with them anyway.

Plus what if you have an unforseen medical or other financial emergency?

You can plan for this by taking all of that money that you are saving by not having loans and subsequent payments and putting it away and making your own emergency fund in the process. A target should be 3-6 months of your expenses. That way, when something out of the ordinary happens, you can take money out of that emergency fund to pay whatever you need to pay, and then eventually put money back into it when things calm down. Yes, you are somewhat vulnerable while you are initially saving up for this fund, but if you do it once, while you are young, and keep up with it as your income/expenses increase, you will be in incredible shape, and never have to rely on someone else to loan you money if times get tough.

KWings,

I am not trying to debate you by going tit-for-tat with you here. I am not sure if you're in the AF yet or for how long, and it doesn't really matter here, but I saw this topic about "career starter loans" and it just made me a feel a little queasy. I took the very same loan, as do many others. It's been long paid off, but I wish I hadn't taken it and I wish that I had known that you really did NOT have to be in debt when I was 21. I'm hoping that some guys read this and that maybe a lightbulb goes off and they start off their professional lives right.

Edited October 30, 2011 by Champ Kind

[KWings06j]

I took out the starter loan as well years back. I have less than a year until it's paid off. Overall I've made more in interest off it than I paid and I used it to create my emergency fund. The only debt I have now is my mortgage which is just over 20% of my income (15 yr) that I'm paying extra on (another debatable decision). I easily got the lowest rate available and am now temporarily ruining my credit rating by opening new cards to get the sign-up bonus ($40 discount on amazon, 10% off at bass pro, etc). To date I have never paid a penny in interest to a credit card but by using own card regularly I slowly rebuild that credit rating.

As a general rule of thumb the only things worth going in debt for are Home, Health, and Education. The last of the three being debatable to some extent. And yes, my support of the starter loan goes directly against this rule of thumb.

Champ - Your right in that you can get by without a credit rating. But I'd rather have it and not need it. To each his own I suppose. If your responsible with your money either option can be a good choice. If someone is going to get tempted by that big chunk of change in there account then they probably should steer clear. I'm with you in that hopefully people see this thread and make a better decision than they might have otherwise.

[matmacwc]

The credit card answer is in the statistics, at some point you are going to mess up and not pay it off month to month, that's what the credit card companies count on. Do you think real millionaires use credit cards? Most don't, and the ones with the black Amex cards are getting paid to flash it, not use it. I follow Dave, read the millionaire next door if you want the answers to the comments or questions listed above. If not, good luck as a SIM operator after 20 years when your house is upside down, both kids college isn't covered by the GI bill and you only have 100K in the bank, you think those guys want to live in Enid/Del Rio/Columbus?

[Dupe]

For those of you that would talk about the ridiculously low interest rates and how you can take advantage of them -- well, probably not much I can say to you other than people who are millionaires (which you can be) didn't get there by taking advantage of low interest loans

Actually, quite a few people became millionaires by using low interest loans. It's called leverage. The BLUF is to use low interest funding to invest into higher yielding opportunities. Used right, the ultra-low interest starter loans are a hell of a deal. Used wrong, they're financial zip-ties instead of hand cuffs. Here's a good reason to go with the a career starter loan: Say you want to buy a house right out of school (feasable if you're not rated). Since the career starter loan interest is less than what you can get a lender to give you for a VA, it makes much sense use a career starter loan to finance the first part of your house then use a slightly higher value/loan ratio to earn you a lower home loan rate. Alternatively, you can use your career starter loan to pay down your first year's Roth IRA ($5K) then invest the rest wisely. At the minimum, pretty much any corporate bond fund should net you greater than 3% annual yield with a low risk. A horrible way to use the loan is to get yourself a motorcycle, a new flat screen, and a pad full of trendy Ikea furniture.

[brabus]

at some point you are going to mess up and not pay it off month to month, that's what the credit card companies count on.

No, people aren't perfect and will make mistakes, but I'm going on 6 yrs with not a cent of interest paid to a CC company. If you can't control your spending, don't get a CC, but if you can pay it off every month and on time, there are benefits to CCs. I don't agree with the "No CC ever for any reason" line of thinking...provided you're not one of those people with a spending/late payment problem. Just an opinion.

My thought on the loan in question is do not take it if you're going to blow it on crap you don't need (and that includes a $25-30K car...been there, done that - not the financially smart decision). However, a low interest rate loan can be a good thing if you use it wisely. Hell, you could put the thing in a super low risk CD for 2.5% and pay your interest AND make profit. Will it be a lot of profit...no, but that's still an example of doing something smart with the loan. Just saying, there are good reasons to take the loan, but there's also a lot of bad reasons. Be smart about it and figure out which side of the fence you're on. I know too many dudes who spent $25K on an awesome European trip or an M3.

[brewskis]

I'll throw in my .02. I'm young, a new 2d LT, and currently going through UPT with a wife and an 'unexpected', but awesome kiddo. I took the bait and took out the career starter loan a few years back, and I have generally mixed to negative feelings about taking it.

On the positive, I made up the forecasted interest rate due to some good investments on my part. That money helped me get through some unexpected costs that come with having a kid (born just prior to entering AD, so wasn't on Tricare yet), but a good portion of that money was gone when I had initially planned on keeping it.

On the negative, I HATE being owned by the bank, especially with the current economic climate. I also hate having 500 bucks a month come out of my paycheck, minimum. I try to pay more than the monthly payments off as much as possible to get out from under it, but that can't always happen (electrical bills during the summer in OK can be killer..). I would much rather put that extra $500+ a month in a retirement fund, college savings fund, or any other long term investment account. When I stack on the Montgomery GI bill payments and other payments back to finance (it took months to get all my pay correct), I don't even see a good chunk of my paycheck. I'm smart enough to not have any credit cards and put what I can in long term investment accounts, but trying to reach a target savings level is still difficult.

To cut through the bullshit, coming from a guy that has made financial mistakes and had to deal with unexpected costs, don't take it. If you don't listen to the advice on this board and take it, at least put it in a retirement account or somewhere where you can't touch it (because you'll want to, we're all young and stupid at some point).

And for the love of God, DO NOT BUY A F***ING CAR when you commission. Take care of what you have and buy a new one only when you absolutely have to. I firmly believe that in this line of work, there is no reason to buy a brand new car, especially at the 2d LT level.

Learn my lesson, and listen to Champ Kind about not getting into debt. It sucks, and I probably don't have it as bad as some of the other married couples in my stage of the game.

[Champ Kind]

I HATE being owned by the bank...I also hate having 500 bucks a month come out of my paycheck

T H I S.

There is your reality, young guys. If you don't listen to me, listen to this guy who is living it. Making a 4% gain on a starter loan over a couple of years is NOT WORTH IT when you are losing a significant chunk of your paycheck to do it. There are such better things you can do with 500 bucks.... Like put it aside for a rainy day. I'm not even talking investments. I'm talking about $500x12 = $6,000 in a year for your emergency fund. Now, when you have to pay that insurance deductible -- no big deal. Have to buy 4 new tires for your car? No big deal. I could go on and on. There is something liberating about funding expenses out of pocket that you lose when you have loan payments.

Brewskis, thanks for sharing in this thread. Best of luck to you. Like I said earlier, I did some of the very things early in my career that I am specifically saying not to do now. I got past it and so can you. Dave Ramsey's book and radio show were big helps but ultimately it took me realizing (after several years) what you have already figured out.

Edited November 2, 2011 by Champ Kind

[Pancake]

My $.02:

Use the loan to build wealth, not vanity. Buy property (land). Avoid expensive cars, nice TVs, extravagant trips. I speak from experience... probably have wasted $75-100K between the Cadet Loan, buying my BMW before leaving Germany in 2006, and making a minimal down payment on a $180K house. I now drive a used pickup and rent a house... and am much happier. Kids don't care what you drive, and neither does a loving spouse. I wish I had bought a $25K piece of land or invested in the market (there's a lot of money to be made... many companies are building their cash reserves and doing very well).

Don't be dumb with your money.

Edited November 3, 2011 by Pancake

[ThreeHoler]

Use the loan to build wealth

Don't be dumb with your money.

Mutually exclusive. You do not build wealth with loans.

[Odium]

Mutually exclusive. You do not build wealth with loans.

I'll agree this is effectively true for 99% of the masses who have no common sense but loans CAN be leveraged into building wealth if someone has a responsible and practical plan along with taking the effort to become financially educated.

If it was easy, everyone would do it...

Edited November 3, 2011 by Odium

[Pancake]

Mutually exclusive. You do not build wealth with loans.

Really? Effective Interest Rate ($$ you earn through an investment) > Cost of Capital (cost of the loan) = Profit. My cadet loan had a 15 or so month deferment; plenty of time to put that money to work.

All it takes to make money is about 5 finance equations and a few hours of research per week to find investments, such as stocks or property, that are undervalued (ie. FCF > Market Cap). Building wealth with loans is effectively the same as corporations selling bonds. After receiving your money, the company invests in a project with an NPV > 0, returns your money with interest, and pockets the remaining revenue (profit). This is the simple version of "How to Make Money with Loans," but it's basically the principles of Finance boiled down to 2-3 sentences.

Consistently investing on gut feeling ("I feel like company X has great potential") is dumb, although you may occasionally get lucky and make a decent profit. Using basic finance principles to determine the current price of the future value of free cash flow is how I invest. It's not difficult, and it's sort of fun, especially when you find a stock that that is undervalued.

Edited November 4, 2011 by Pancake

[Pancake]

If it was easy, everyone would do it...

It is easy. However, math intimidates most people. Everyone should have a financial mentor. Parents, be financial mentors to your children.

[Pancake]

Finally, the most valuable book (in my opinion, and no, I don't work for him, but I am a huge believer in his ideas) is Dave Ramsey's "Total Money Makeover". Go buy it off of Amazon. Yesterday. Seriously. It's the best thing you can read this early in your career.

IMO, that book is a total waste of your money and time. Let me boil it down for you: 1) Pay off your debt, working from smallest to largest, 2) Build an emergency fund equaling 6 months salary, 3) Save/invest for retirement, in that order. BL of Dave Ramsey's philosophy: Pay for everything in cash; if you can't pay in cash, don't buy it. That means buy used cars, don't go on vacations, buy store brands, be a frugal as possible, etc... It's common sense. On the other hand, I don't see a problem with occasionally splurging on trips, dinner, some decent clothes, etc... Just make sure value > cost.

Edited November 4, 2011 by Pancake

[nsplayr]

Really? Effective Interest Rate ($$ you earn through an investment) > Cost of Capital (cost of the loan) = Profit. My cadet loan had a 15 or so month deferment; plenty of time to put that money to work.

All it takes to make money is about 5 finance equations and a few hours of research per week to find investments, such as stocks or property, that are undervalued (ie. FCF > Market Cap). Building wealth with loans is effectively the same as corporations selling bonds. After receiving your money, the company invests in a project with an NPV > 0, returns your money with interest, and pockets the remaining revenue (profit). This is the simple version of "How to Make Money with Loans," but it's basically the principles of Finance boiled down to 2-3 sentences.

Yea, this.

Look, Dave Ramsey has some good advice for the vast majority of idiot Americans, but for those who are smart, there's absolutely no need to follow him like some kind of freaking cult. If you can borrow money at 2% interest, invest it at 3% interest, and pay everything back on time, guess what, you just made a profit! Why this makes people feel uncomfortable (oooo, the bank OWNS me) is beyond me. Just as pancake says here, this process is exactly what companies do when offering bonds...they are incuring debt commitments in order to receive cash up front, which they invest in something that will, by the end of the bond term, be more valuable to them than the money they lost in paying interest to bondholders. Finance 101.

Caveat that as everyone said, if you're gonna buy dumb shit that decreases in value with your money, don't take on a penny of debt. However, if you can smartly invest money, debt, credit cards, etc. can be used as tools toward building greater wealth.

To the direct question, take the loan, invest it somewhere where you will pull more interest than the rate on the loan, be done with it. Don't be irrationally scared that $500 is coming out of your paycheck because you know that money is going to work for you elsewhere as a lump sum.

Edited November 13, 2011 by nsplayr

[brabus]

On a parallel topic...my opinion is always take the month's advanced pay you get when PCSing (in addition to DLA, etc). It's an interest free loan from the government and is auto-deducted out of your paycheck. Use it smartly and there's no reason not to take it. Even investing in a CD at 1% will make you a profit, which you can then use to pay for moving expenses of course.

[Big Bear]

Pretty much everyone on here is correct in what they're saying, but "it depends" on your current situation on whether it's smart to take a loan like this or not. Basically - Don't take it if you don't need it. If you already have loans (student loans, a few credit cards, you still owe 7k on your college POS car, or whatever) it might make sense to use this loan as a consolidation/refinance/lower interest rate option. That's what I did. I am not out of debt yet. Working on it, but that's because I was dumb when I was 20, not because I took the loan. That loan has made my financial situation and credit score a lot better.

To reiterate: DO NOT use it to buy a car! (unless you don't have one) DO NOT use it unless you NEED it!

Poor financial planning and management is a quick way to screw up your military career and financial future.

My .02

[Danny Noonin]

To reiterate: DO NOT use it to buy a car! (unless you don't have one) DO NOT use it unless you NEED it!

Poor financial planning and management is a quick way to screw up your military career and financial future.

My .02

Oh for fuck's sake. Will you guys calm down? It's a low interest loan. So long as you can pay it off, it will not ruin your career or your financial future or keep you from banging hot chicks.

And how the fuck did all you guys buy your first car if you didn't take out a loan? Do you expect new college grads to pay in cash? If so, what kind of job did you have in college that left you so flush with cash at graduation? Or should they just be "that guy" riding his blue Schwinn 10-speed to work along the side of the road that you almost hit every day? Or maybe they should roll through the front gate dumb and dumber style on a classy moped? After all, that's economical.

Enough with the dramatic warnings. Take the fucking loan out. Just be smart about what you buy.

Edited December 1, 2011 by Danny Noonin