Introduction To Investing

PART 1. Five Questions to Ask Before You Invest

Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.

Question 1: Is the seller licensed?

Research shows that con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims. Smart investors check the background of anyone promoting an investment opportunity, even before learning about opportunity itself.

  • Researching brokers: Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website.
  • Researching investment advisers: The Investment Adviser Public Disclosure website provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms.
  • Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.

If you are not sure who to contact or have any questions regarding checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 2: Is the investment registered?

Any offer or sale of securities must be registered with the SEC or exempt from registration. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

Smart investors always check whether an investment is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 3: How do the risks compare with the potential rewards?

The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes.

Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds.

Many investment frauds are pitched as high return opportunities with little or no risk. Ignore these so-called opportunities or, better yet, report them to the SEC.

Question 4: Do you understand the investment?

Many successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.

Question 5: Where can you turn for help?

Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ websites. If you have a question or concern about an investment, please contact the SEC, FINRA, or your state securities regulator for help.

PART 2. Understanding Fees

As with anything you buy, there are fees and costs associated with investment products and services. These fees may seem small, but over time they can have a major impact on your investment portfolio. Understanding the fees you pay is important to investing wisely.

The best advice we can give you about understanding fees and investing wisely is to ask questions. For example:

  • What are the total fees to purchase, maintain, and sell this investment?
  • Are there ways that I can reduce or avoid some of the fees I’ll pay, such as by purchasing the investment directly?
  • How much does this investment have to increase in value before I break even?
  • What are the ongoing fees to maintain my account?
  • For mutual funds: How much will the fund charge me when I buy and/or sell shares?
  • For the investment professional: How do you get paid? By commission? By the amount of assets you manage? By another method? Do I have any choice on how to pay you? Should I pay you by the transaction, or pay a flat fee regardless of how many transactions I have?

Common types of fees include:

Mutual Fund Fees and Expenses
12b-1 Fees
Distribution Fees
Sales Charge (Or Load)
Redemption Fee
Exchange Fee
Account Fee
Purchase Fee
Management Fee
Shareholder Service Fees
Total Annual Fund Operating Expense

PART 3. Asset Allocation

Asset allocation involves dividing your investments among different assets, such as stocks, bonds, and cash. The asset allocation decision is a personal one. The allocation that works best for you changes at different times in your life, depending on how long you have to invest and your ability to tolerate risk.

Factors to consider include your:

Time Horizon. Your time horizon is the number of months, years, or decades you need to invest to achieve your financial goal. Investors with a longer time horizon may feel comfortable taking on riskier or more volatile investments. Those with a shorter time horizon may prefer to take on less risk.

Risk Tolerance. Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for potentially greater returns.

What is diversification? The practice of spreading money among different investments to reduce risk is known as diversification. Diversification is a strategy that can be neatly summed up as “Don’t put all your eggs in one basket.”

One way to diversify is to allocate your investments among different kinds of assets. Historically, stocks, bonds, and cash have not moved up and down at the same time. Factors that may cause one asset class to perform poorly may improve returns for another asset class. People invest in various asset classes in the hope that if one is losing money, the others make up for those losses.

You’ll also be better diversified if you spread your investments within each asset class. That means holding a number of different stocks or bonds, and investing in different industry sectors, such as consumer goods, health care, and technology. That way, if one sector is doing poorly, you may offset it with other holdings in sectors that are doing well.

Some investors find it easier to diversify by owning mutual funds. A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, and other financial products. Mutual funds make it easy for investors to own a small portion of many investments. A total stock market index fund, for example, owns stock in thousands of companies, providing a lot of diversification for one investment.

A mutual fund won’t necessarily provide diversification, especially if it focuses on only one industry sector. If you invest in narrowly focused mutual funds, you may need to invest in several to be diversified. As you add more investments to your portfolio, you’ll likely pay additional fees and expenses, which will lower your investment returns. So you’ll need to consider these costs when deciding the best way to diversify your portfolio.

What is rebalancing? Rebalancing is what investors do to bring their portfolio back to its original asset allocation mix. Rebalancing is needed because over time, some investments will grow faster than others. This may push your holdings out of alignment with your investment goals. By rebalancing, you will ensure that your portfolio does not overweight a particular asset category, and you’ll return your portfolio to a comfortable level of risk.

For example, you might start with 60% of your portfolio invested in stocks, but see that rise to 80% due to market gains. To reestablish your original asset allocation mix, you’ll either need to sell some of your stocks or invest in other asset categories.

There are three ways you can rebalance your portfolio:

  1. You can sell investments where your holdings are over weighted and use the proceeds to buy investments for underweighted asset categories.
  2. You can buy new investments for underweighted asset categories.
  3. If you are continuing to add to your investments, you can alter your contributions so that more goes to underweighted asset categories until your portfolio is back into balance.

Before you rebalance your portfolio, you should consider whether the method of rebalancing you decide to use would entail transaction fees or tax consequences. Your financial professional or tax adviser can help you identify ways that you can minimize these potential costs.

Some financial experts advise rebalancing at regular intervals, such as every six or 12 months. Others recommend rebalancing when your holdings of an asset class increase or decrease more than a certain pre-set percentage. In either case, rebalancing tends to work best when done on a relatively infrequent basis.

Shifting money away from an asset class when it is doing well in favor of an asset category that is doing poorly may not be easy. But it can be a wise move. By cutting back on current “winners” and adding more current “losers,” rebalancing forces you to buy low and sell high.

PART 4. Assessing Your Risk Tolerance

When it comes to investing, risk and reward go hand in hand. The phrase “no pain, no gain” – comes close to summing up the relationship between risk and reward. Don’t let anyone tell you otherwise: all investments involve some degree of risk. If you plan to buy securities – such as stocks, bonds, mutual funds, or ETFs – it’s important that you understand that you could lose some or all of the money you invest.

The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you may make more money by carefully investing in higher risk assets, such as stocks or bonds, than if limit yourself to less risky assets. On the other hand, lower risk cash investments may be appropriate for short-term financial goals.

An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to get potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain his or her original investment.

Many investment websites offer free online questionnaires to help you assess your risk tolerance. Some of the websites will even estimate asset allocations based on responses to the questionnaires. While the suggested asset allocations may be a useful starting point, keep in mind that the results may be biased towards financial products or services sold by companies or individuals sponsoring the websites.

PART 5. Investing on Your Own

The first step to investing, especially investing on your own, is to make sure you have a financial plan. How much are you going to invest? For how long? What are your financial goals? Do you understand your tolerance for risk? All investments carry some risk.

The next step is research, research, research. When investing on your own, you are responsible for your decisions. How will you select one stock, bond, or mutual fund over others? Always make sure that all securities are registered with the SEC, using the SEC’s EDGAR database. Don’t purchase solely on stock tips from others.

There are several ways you can invest on your own, including Online Investing, Direct Investing, and Dividend Reinvestment Plans.

Online Investing… Online trading is quick and easy, but online investing takes time. With the click of a mouse, you can buy and sell stocks from one of the many online brokers offering low-cost trades. Although online trading saves investors time and money, it does not take the homework out of making investment decisions. You may be able to make a fast trade, but making wise investment decisions takes time. Before you trade, know why you are buying or selling, and the risk of your investment.

Set your price limits… To avoid buying or selling a stock at a price higher or lower than you wanted, you should place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Your limit order will not be executed if the market price quickly surpasses your limit before your order can be filled. But, by using a limit order, you protect yourself from buying the stock at too high a price or selling it at too low a price.

If you place an order, check to make sure it was executed… Some investors mistakenly assume that their orders have not been executed and place the order again. They end up buying or selling twice, which can be a costly mistake. Talk with your financial services firm about how you should handle a situation where you are unsure if your original order was executed.

If you cancel an order, make sure the cancellation worked before placing another trade… When you cancel an online trade, make sure that your original transaction was not executed. Although you may receive an electronic receipt for the cancellation, don’t assume the trade was cancelled. Orders can only be cancelled if they have not been executed. Ask your financial services firm about how you can confirm that a cancellation order worked.

If you purchase a security in a cash account, you must pay for it before you can sell it… In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are freeriding. Freeriding violates the credit extension provisions of the Federal Reserve Board’s Regulation T. If you freeride, your broker must “freeze” your account for 90 days. You can still trade but you must pay in full for any purchases on the date you buy them as long as the freeze is in effect.

You can avoid the freeze if you pay for the stock in full by the settlement date, using funds that do not come from the sale of the stock. You can always ask your broker for an extension or waiver, but you may not get it.

Direct Investing

You may be able to invest directly using direct stock plans (DSP) or dividend reinvestment plans (DRIP). Here’s how they work:

Direct stock plans (DSP). Some companies allow you to buy or sell their stock directly through them without using a broker. This saves on commissions, but you may have to pay other fees to the plan, such as fees incurred if you transfer shares to a broker to sell them. Some companies limit direct stock plans to employees of the company or existing shareholders. Some require minimum amounts for purchases or account levels. You’ll want to read and understand the plan’s rules before investing.

Direct stock plans usually will not allow you to buy or sell shares at a specific market price or at a specific time. Instead, the company will buy or sell shares for the plan at set times — such as daily, weekly, or monthly — and at an average market price. Depending on the plan, you may be able to automate your purchases and have the cost deducted automatically from your savings account.

Dividend reinvestment plans (DRIP). These plans allow you to buy more shares of a stock you already own by reinvesting dividend payments into the company. You must sign an agreement with the company to have this done. Check with the company or your brokerage firm to see if you will be charged for this service.

PART 6. Working with an Investment Professional

Are you the type of person who will read as much as possible about potential investments and ask questions about them? If so, maybe you don’t need investment advice.

But if you’re busy with your job, your children, or other responsibilities, or feel you don’t know enough about investing on your own, then you may need some help.

Brokers and investment advisers offer a variety of services at a variety of prices. It pays to comparison shop.

You can hire a broker, an investment adviser, or a financial planner to help you make investment decisions. You can also get investment advice from most financial institutions that sell investments, including brokerages, banks, mutual fund companies, and insurance companies.

There is no such thing as a free lunch. Investment advisers and brokers do not perform their services as an act of charity. If they are working for you, they are getting paid for their efforts. Some of their fees are easier to see immediately than are others. But, in all cases, you should always feel free to ask questions about how and how much your adviser is being paid. And if the fee is quoted to you as a percentage, make sure that you understand what that translates to in dollars.

Check out your Investment Professional

Choosing whether to work with a professional – and deciding which type is best for you – is a very important decision.  The most important question that you should consider before hiring an investment professional is whether the person is registered with us or with a state securities regulator.  It is really risky to invest with someone who isn’t licensed and we urge you not to do it.  Investor.gov has a free and simple search tool that allows you to find out if your investment professional is licensed and registered.

Read the Firm’s Relationship Summary… Beginning in summer 2020, registered broker-dealers and registered investment advisers will be required to provide a customer or client relationship summary (also called Form CRS) to retail investors. A firm’s relationship summary tells you about:

  • the types of services a firm offers;
  • the fees and costs you will have to pay for those services;
  • conflicts of interest a broker or adviser may have;
  • the required standard of conduct associated with the services a firm offers;  
  • whether a firm and its financial professionals have reportable legal or disciplinary history; and
  • key questions (conversation starters) to ask your financial professional.

Each firm’s relationship summary uses similar headings and order of topics to make it easy for you to compare firms. You can find more about the relationship summary at Investor.gov/CRS.

Tricky Titles… If a broker or adviser has initials after their name, don’t assume that makes that individual more qualified than another. These titles are not all the same and do not necessarily mean better service for you. In fact, the initials may mean that the adviser or broker can only sell certain products. Check the titles to see if there are limits on what that adviser or broker can sell. For instance, if someone can only sell fixed annuities, he or she may be inclined to recommend them for every customer.

Check out this list from FINRA. It shows how some credentials can be obtained easily, and how others are hard-earned.

Tip: If you have a brokerage or advisory account, read every statement promptly — it may not be fun to look at it when the market is down, but it is your most important protection against unauthorized transactions. If you do not object promptly after receiving notification of a transaction, you might not be able to contest it later. You should object in writing to better protect your rights. That’s why it’s important to read your statement and object right away if something is wrong.

PART 7. Researching Investments

Researching investments is part of an investor’s due diligence. Companies must provide certain information when they initially offer stocks or bonds for sale to the public. Companies and bond issuers must also must provide certain information to the public periodically. These disclosures provide investors with information to judge whether a particular security is a good investment. If a company is not registered with the SEC, or a bond issuer is not registered with the Municipal Securities Rulemaking Board (MSRB), it could be a red flag. Scams often involve unregistered companies.

The EDGAR database provides free public access to corporate information, allowing you to research a public company’s financial information and operations by reviewing the filings the company makes with the SEC. You can also research information provided by mutual funds (including money market funds), exchange-traded funds (ETFs), and variable annuities.

Where to begin?

In addition to this link, you have two ways of accessing EDGAR from the SEC.gov home page:

To search for a public company, type the company’s name or ticker symbol in the search bar at the top of the home page.
To search for a mutual fund, ETF, or variable annuity, click on Company Filings under the search bar at the top of the home page to get to the EDGAR search page. On the left side, you’ll find tools optimized to search for Mutual Funds and Variable Annuities. You can use the Mutual Funds tool to also search for ETFs. You can search for other types of funds as you would search for public companies.

Using EMMA – Researching Municipal Securities and 529 Plans
The Electronic Municipal Market Access (EMMA) is a free website that provides investors with key information about municipal bonds and 529 college savings plans.

Information available to investors on the EMMA website includes:

Municipal disclosure documents, including a bond’s Official Statement (a disclosure document similar to a prospectus) as well as annual financial reports, audited financial statements, material event notices and other continuing disclosures such as any ratings changes, principal and interest payment delinquencies and non-payment related defaults,
Free real-time access to bond prices and yields, including when the bond was sold or purchased…
Market data for municipal bonds, including interest rates and credit ratings…
An Education Center, which helps investors better understand market data and disclosure documents for municipal bonds and 529 College Savings Plans…
Information and disclosures on 529 College Savings Plans…
A video showing what is on the website and how to access it…


EMMA is the website of the Municipal Services Rulemaking Board (MSRB). The MSRB is the self-regulatory organization (SRO) for brokers, dealers, banks and municipal advisors that engage in municipal securities and advisory activities. An SRO is an entity that regulates its industry through the adoption of rules governing the conduct of its members. The MSRB has operated under Congressional mandate with oversight by the Securities and Exchange Commission since 1975.

How to Read a 10-K… An investor can find a wealth of information in a company’s Form 10-K. Filed annually, the 10-K offers a detailed picture of what the company does, and the risks it faces. It also includes the company’s financial report. The 10-K includes these sections:

  • “Business” describes the company’s main products and services. This is a good place to start to understand the company.
  • “Risk Factors” includes information about significant risks that the company faces, generally listed in order of importance.
  • “Selected Financial Data” provides certain financial information about the company for the last five years. You can find much more detailed financial information on the past three years in a separate section called, “Financial Statements and Supplementary Data.”
  • “Management’s Discussion and Analysis of Financial Condition and Results of Operations” gives the company’s view on the business results of the past fiscal year. This section, known as the MD&A for short, allows company management to tell its story in its own words.
  • “Financial Statements and Supplementary Data” contains the company’s audited financial statements, including the income statement, balance sheets, and statement of cash flows.

To make money in the stock market, you don’t have to start with big money. You can begin with as little as $500 to $1,000 and add to it as your earning grow.

Buying A Car – Closing The Deal

Closing the deal… You’ve now negotiated your auto loan. Before you drive away, make sure everything matches what you agreed to. You are almost finished! The hard part is done and now comes an important final step. You have to review the paperwork, check the final terms and numbers against the auto loan worksheet, and be fully satisfied that the written deal is what you want.

1. Verify that you get what you agreed to… Before you are legally obligated under the loan, lenders are required to give you specific disclosures in writing about important terms. This requirement is contained in the federal Truth in Lending Act (T.I.L.A.). One purpose of T.I.L.A. is to help consumers make apples-to-apples comparisons between loans. The important terms include:

Term 1. Annual Percentage Rate (APR): The APR is the cost of credit expressed as a yearly rate in a percentage.

Term 2. Finance charge: Cost of credit expressed as a dollar amount (this is the total amount of interest and certain fees you will pay over the life of the loan if you make every payment when due).

Term 3. Amount financed: The dollar amount of credit provided to you (this is normally the amount you are borrowing).

Term 4. Total of payments: The sum of all the payments that you will have made at the end of the loan (this includes repayment of the principal amount of the loan plus all of the finance charges).

You can always learn more at consumerfinance.gov.

The T.I.L.A. disclosure will also include other important terms such as the number of payments, the monthly payment, late fees, whether the loan has a variable rate, and whether you can prepay your loan without a penalty.

It’s ok to walk away if you feel uncomfortable… If you are not comfortable with any aspects of the loan or the process, you can always leave without completing the deal. Take time to think it over and come back another time. No one can make you accept financing or a vehicle that you are not satisfied with.

Check the paperwork… Once you have finalized the negotiations, examine all of the paperwork before signing the loan documents. Make sure all the loan costs and terms are what you agreed to during the negotiations.

Ask questions…, lots of questions. If there are things you don’t understand, ask. There are no dumb questions when your hard earned money is involved. Don’t sign until you are completely satisfied. Since you are signing a contract, and this is a major purchase, it’s important that you understand what you are signing.

Make sure you have a copy of all the documents… Before you drive off with your new vehicle, make sure that you have a copy of all documents that both you and the dealer have signed and that all blanks are filled in. Some dealers will allow the customer to take possession of the new vehicle before the loan is approved by the lender. This practice, called spot delivery, could put the deal that you thought you had at risk. By having a signed contract with all terms finalized, you can avoid potential problems.

Nail down the financing before you sign the contract… Make sure that the financing is nailed down before you sign the contract. If you don’t have the financing nailed down, the dealer may ask you to come back in and sign for a higher interest rate, add a co-signer, or make some other change different from what was agreed. You don’t have to agree to a second deal. If this happens and you don’t agree to a second deal, the dealer will have to unwind the sale and give you back your trade-in and down payment. In some cases you may want to seek legal assistance and file a complaint with your state attorney general or consumer protection office. To file a complaint with your state attorney general visit naag.org. To file a complaint with your state consumer protection office visit usa.gov/state-consumer.

Lastly, pay attention to the details after you drive away… After you take out a loan, you should receive an introductory letter from the lender that provided the financing. This letter will include important information related to your loan such as where to send your payments and payment due dates. Make sure to make your monthly payments on time to avoid the cost of late fees and the possible repossession of your vehicle, as well as negative entries on your credit report.

Buying A Car – Negotiating Your Auto Loan

You’ve shopped for your auto loan. Now it’s time to negotiate your loan terms. When you look for a vehicle, you may know that you can negotiate the vehicle’s price, but did you know that you can also shop around for and negotiate the terms of your auto loan? Shopping for loans and trying to get the best rates and terms, while complicated, is like other types of comparison shopping. Shopping and negotiating can save you hundreds or even thousands of dollars over the life of your loan.

Know what is negotiable… While you may know that you can negotiate over the price of the vehicle and the interest rate, it’s also important to know all the factors that you can negotiate over that may impact the cost of your auto loan. You should consider all these factors when you buy and finance a vehicle. In addition to the price of the vehicle, here are some other terms or costs that you can negotiate:

Cost 1. Trade-in value (if you trade in your vehicle) and down payment amount

Cost 2.  Annual Percentage Rate (APR) and interest rate

Cost 3.  Length of loan

Cost 4.  Whether or not there will be a prepayment penalty

Cost 5.  Price of optional features and services for the vehicle or the loan such as extended warranties, credit life insurance, GAP insurance, alarm systems, tire and wheel protection, window tinting, and other products

Item 6.  Fees charged by the dealer such as dealer preparation fees, delivery charges, and document fees

 However, you cannot negotiate taxes, vehicle title, and registration fees. These fees are set by your local or state government…

Be very cautious of some biweekly payment plans… It is possible to be offered an auto loan with biweekly payments instead of monthly payments. This may make the loan look more affordable than it really is because of the smaller payment. There also may be additional fees charged for enrolling in a biweekly payment plan. If your loan has biweekly payments, there will be some months when you will have three payments instead of two. This is because there are 26 biweekly payment periods every year, the same as if you were making 13 monthly payments instead of 12. Make sure that you know whether your loan payments are monthly or biweekly, and factor the extra biweekly payments into your budgeting if you make this choice.

Negotiate to lower the total cost, not just the monthly payment… When you are looking for a loan, you may find it easy to focus just on the monthly payment or the price of the vehicle. But looking at just one factor doesn’t give you the whole picture. A lower payment doesn’t necessarily mean a lower interest rate; it might just mean that you are paying for a longer time. The best way to compare auto loans is by using the total cost of the loan. Use the auto loan worksheet at the end of this guide to help you calculate and compare the total cost.

Your total loan cost starts with the amount financed. The amount financed is the amount of money you are borrowing. It includes the price of the vehicle, taxes and other government fees, as well as any optional add-ons like extended warranties and optional credit insurance, minus your down payment and any trade-in amount. The amount financed does not include the cost to borrow the money. That cost is known as the finance charge and includes interest and certain fees over the life of the loan. Your total loan cost is the amount financed plus the finance charge. By negotiating for better terms on your loan, you can reduce the total amount of money you pay over time. For example:

1. Getting a lower interest rate means you will pay less to borrow money. The total cost of your loan will be lower.

2. A shorter loan term (in which you make monthly payments for fewer months) will lower your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan.

3. A higher down payment, or a higher price for your trade-in, will reduce the total amount financed because you will have to borrow less money.

4. Optional add-on products like extended warranties, GAP insurance or credit insurance that are added into your loan amount will increase your total cost because you will be borrowing more money…

While a lower monthly payment for a longer period of time may look like the way to go, consider the total interest cost over the term of the loan. Let’s assume you paid off a $20,000 loan in 3 years at a 4.75% interest rate, you will pay $1,498 in interest. For a 6 year loan, you will pay $3,024 in interest–more than twice as much. Some financial advisers recommend keeping the length of your auto loan to 5 years or less, reasoning that the longer the loan, the more likely you will owe more than the vehicle is worth. On the auto loan worksheet enter the amounts on several loans you are comparing to see your estimated monthly payments, total interest cost, and the total cost that you will pay over the life of the loan. For additional help, there are a number of auto loan calculators available online. For example, Consumer Reports (consumerreports.org) and the NADA Guides (nadaguides.com/Cars/Payment-Calculator) provide online auto loan calculators that may be helpful in evaluating and comparing the costs and terms of various auto loans.

Keep track of multiple factors while negotiating… When you are negotiating for financing with a lender or at a dealership, make sure you are keeping track of all the factors that go into the total cost of the loan. If you are negotiating the interest rate, make sure that you also know the length of the loan and other terms. Comparing total loan cost will help you keep an eye on these multiple factors. Use the auto loan worksheet to help keep track of the different factors.

Ask the dealer to tell you the price, trade-in amount, interest rate, term of loan, estimated monthly payments, and write these numbers down on the auto loan worksheet. It’s best to get these numbers early in the process, so you can better compare and negotiate.

Just as the first price you are offered for the vehicle may not be the lowest price available to you, the first rate for a loan the lender or dealer offers you may not be the lowest rate you qualify for. If the lender or dealer agrees to a better loan feature (such as a lower APR or interest rate), check to make sure that the other factors like the length of the loan or the amount financed haven’t changed. A lower monthly payment doesn’t necessarily mean a lower interest rate; it might just mean that you are paying for a longer time. After you’ve agreed on the price of the vehicle, here are some additional tips to help you negotiate the best loan:

Tip 1. Know what your trade-in is worth and bargain over the amount you will get for your trade-in. This will reduce the amount you borrow.

Tip 2.  Negotiate over the interest rate for your loan, comparing interest rates obtained from your bank, credit union, or other lender with the rate you are offered by the dealer.

Tip 3.  If the dealer is arranging your financing, make sure you understand how the interest rate was determined and ask if your credit score qualifies you for a loan with better terms.

Strengthening your position at the bargaining table… You are not required to get a loan from a dealer or trade in a vehicle in order to purchase a car from a dealer. A bank, credit union, or other lender may offer you better loan terms than the dealer. Bringing a loan quote or preapproval from another lender to the dealer can place you in a stronger bargaining position to negotiate good financing terms with the dealer. Then you can decide which loan to accept.

Buying A Car – Shopping For Your Auto Loan

You know your loan options. Now it’s time to shop for your auto loan. Shopping for loans and trying to get the best rates and other terms, while complicated, is like other types of comparison shopping. Shopping ahead of time will get you ready for negotiating your auto loan and make the process less stressful.                                                                                                              

Prepare before you apply for an auto loan… You will be in a better position to shop and bargain for an auto loan if you follow these steps before you apply for a loan. Check your credit report… The information in your credit report determines your credit scores. Your credit score plays a large part in determining what kind of auto loan you can get, and how much interest you will pay for the loan.

To get a free copy of your credit report annually, from each of the three nationwide credit reporting agencies, visit annualcreditreport.com…  To learn how to check your credit report for errors and dispute any errors that you find, or just to learn more about credit reports and credit scores, visit consumerfinance.gov…

Do you need a co-signer? A co-signer is a person, such as a parent, family member, or friend, who is contractually obligated to pay back the loan just as you are. If your credit history is limited or needs improvement, and you have a low credit score (or no credit score), your interest rate could be significantly lower if you have a co-signer with good or excellent credit. That is because the lender will rely on the co-signer’s credit history and score in deciding to make the loan. If you are considering having a co-signer, you and the potential co-signer should think carefully about this decision. If you do not repay your loan, you and your co-signer will be responsible for repayment. The co-signer is responsible for the loan even though he or she has no right to possession of the vehicle. In addition, any late payments made on the loan would affect both your credit record and score and your co-signer’s credit record and score. Federal law generally prohibits a lender from requiring you to have a co-signer if you apply for a loan individually and you qualify under the lender’s standards for creditworthiness for the loan. For more information on co-signing visit consumerfinance.gov.

Check current auto loan interest rates… You can research rates by contacting several banks, credit unions, or other lenders. You can also look online at many commercial sites which may give you an estimate of interest rates nationwide and by your zip code. Some commercial sites will link you to specific lenders and dealers for estimates, so you may want to be careful about entering your personal information.

Consider a down payment… A down payment will reduce the total amount that you finance because you will have to borrow less money. The larger the down payment, the lower the total cost of the loan. Decide if you want to trade in your current vehicle If you already own a vehicle, research its value to see how much you might get from a trade-in or private sale. You can look up the approximate value using online commercial websites such as Consumer Reports, Edmunds, Kelley Blue Book, NADA Guides, and online classifieds. These resources may also be available at your local library. Finding examples of similar vehicles that have sold recently in your area will help you know a fair price. Once you know approximately how much your current vehicle is worth, you can decide whether to trade it in or sell it yourself. If you trade it in at a dealership, you and the dealer will decide on the value that will be credited towards the purchase price of your next vehicle. If you sell it yourself, you can use the money you get as a down payment.

If you have an existing auto loan on your trade-in, consider your situation carefully… Carefully consider whether to take on new debt in addition to your existing debt. Here are some considerations and steps: 1. Get the payoff amount, which is the amount to pay off the existing loan, from your current lender before going to the dealership. 2. Decide if you are going to pay off your existing loan now, or wait until you pay off your old auto loan before you borrow for another vehicle, or if you want to include the amount that you still owe on your current vehicle into your new auto loan. 3. If you owe more on your current vehicle than it is worth, referred to as being upside down, then you have negative equity. If you roll the balance of your existing auto loan into your new auto loan, this could make the new auto loan much more expensive. Your total loan cost will be higher because you will be borrowing more than just the price of your new vehicle. 4. After you research your trade-in’s value, if the amount you still owe on your trade-in is less than it is worth, make sure during any negotiations that you consider whether you are getting fair value for your trade-in and you are able to fully pay off the old auto loan.

Do you still owe money on your trade-in? If you are considering rolling the balance of the old loan into your new loan, make sure you understand how this will affect the total cost of your new loan. Carefully look at the total cost of the new loan including the amount borrowed, the annual percentage rate (APR), the interest rate, the loan term (in months), and the monthly payment – before you agree to anything. If you don’t roll the amount you still owe on your old vehicle into the new loan, and keep your current vehicle while buying a new one, then you will have two loans and two monthly payments to make. Either way, you may want to consider whether it makes sense to go through with the transaction and purchase the next vehicle if you still owe money on your trade-in. For more information visit consumerfinance.gov.

Think about optional add-ons ahead of time When you go to an auto dealer, you will likely be offered add-on products and services for the vehicle or for the loan. It’s a good idea to think about these add-ons ahead of time, so that you have less to worry about at the dealership, and have your answers ready when you are asked to buy these extras. Common add-ons include: Service contracts or extended warranties… Guaranteed Auto Protection (GAP) insurance… Credit insurance… And additional features for the vehicle, such as alarm systems, window tinting, tire and wheel protection, and other products… These products and services, which you may finance, are optional. If you buy them the price is negotiable. If you think you want to buy these products or services, shop around. For example, your own auto insurance company may offer GAP insurance, credit insurance, or other alternatives. If you finance optional add-ons as part of your loan, the amount you borrow and pay will increase.

Now that you’ve done your homework, you’re ready to take the next step: shopping for your auto loan. First, use the auto loan worksheet at the end of this guide to keep track of the loan terms and compare your choices. Take the worksheet with you to the bank, credit union, other lender, and dealership so you can compare your loan choices and get the best deal for you.

Shopping for an auto loan… Now you are ready to start shopping for a loan. Before you head to the dealership, gather your personal information and consider getting preapproved for a loan. Shopping ahead of time will get you ready for negotiating your auto loan and make the process less stressful.

Gather your personal information… When you’re heading over to a bank, credit union, or dealership make sure to gather all the information you will need. Because they want to know a lot. Lenders will generally ask for this information in a loan application like your name, social security number, date of birth, current and previous addresses, length of stay at those addresses, current and previous employers and length of employment, occupation, sources of income, total gross monthly income, financial information on current credit accounts, including other debts, and the soul of your unborn child.

Get preapproved for a loan… Getting a preapproved loan offer or quote with a maximum loan amount and rate from a bank, credit union, or other lender is a good place to start. If you bring a loan quote from a lender to the dealer, you may be in a stronger bargaining position to get a better deal, whether you stick with the offer you brought in or you decide to accept the dealer’s financing offer. Preapproval also helps you stay within your budget and allows you to compare interest rates without the time pressure you may feel once you are at the dealership. Then at the dealership you can focus more on the actual price of the vehicle and your trade-in because you will already know about the loan terms that you could get. You will still have the choice to negotiate a better loan at the dealership and not use your preapproval. If your application is preapproved, the lender will give you documents to take to the dealership. Once you are ready to buy, the dealer will make final arrangements with your lender.

Understand how shopping for a loan impacts your credit score… Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Depending on the credit scoring model used, generally any requests or inquiries by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry. This means shopping around for an auto loan during that time span will count the same as applying for just one loan. You can minimize any negative impact on your credit score by doing all your rate shopping in a short amount of time.

Know your rights… A lender cannot discourage or deny your application for credit, or offer different prices or other terms and conditions of the loan, based on your race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, or good faith exercise of any right under the Consumer Credit Protection Act.

Buying A Car – Understanding Your Auto Financing Choices

You’ve determined how much you can afford to spend. Now it’s time to explore your loan choices.

While some consumers are able to pay cash for their new vehicle, most consumers use financing. Understanding the loan process and knowing your choices will help you save money. For example, bringing a loan quote from a bank, credit union, or other lender to the dealer can place you in a stronger bargaining position to negotiate good financing terms with the dealer. Then you can choose whether you stick with the offer you brought in or accept the dealer’s financing.

Know the sources of auto financing… You can shop around for auto financing even before you shop for a vehicle. Banks, credit unions, and dealerships are the most common places to finance an auto loan. While shopping for auto loans is complicated, finding and comparing your choices can help you improve the deal that you will get. Consider getting one or more loan quotes from a bank, credit union or other lender before going to the dealership. It will put you in a better bargaining position and could save you hundreds or even thousands of dollars over the life of your loan.

Auto loans from a bank, credit union, or nonbank auto finance companies… You can obtain a quote or preapproval on an auto loan from a bank, credit union, or other lender before selecting a vehicle. You can also check out nonbank lenders and online lenders as potential lenders. Although it might be helpful if you already have an established relationship with a lender, you don’t have to have an account with these lenders in order to apply for an auto loan. These lenders can “preapprove” you. The preapproval will give you a loan quote with an interest rate, loan length, and maximum loan amount based on your creditworthiness, the terms of the loan, and the type of vehicle you have in mind. The rate and terms you are offered may be negotiable.

Dealer-arranged financing… Here you obtain financing from a lender through a dealership. With dealer arranged financing, the dealer collects information from you and forwards that information to one or more prospective auto lenders. If the lender(s) agrees to finance your loan, they may authorize or quote a rate to the dealer to finance the loan, referred to as the buy rate. The interest rate that you negotiate with the dealer may be higher than the buy rate because it may include an amount that compensates the dealer for handling the financing. Dealers may have discretion to charge you more than the buy rate they receive from a lender, so you may be able to negotiate the interest rate the dealer quotes to you. Ask or negotiate for a loan with better terms. After the auto purchase is finalized, a dealer-arranged loan may then be sold to a lender who has already indicated a willingness to extend the credit. That lender may own your loan and collect the monthly payments, or transfer those responsibilities and rights to other companies. Learn more about buy rate at consumerfinance.gov/askcfpb/727.

“Buy Here Pay Here” dealership financing…  Some types of dealerships finance auto loans “in-house” to borrowers with no credit or poor credit. At “Buy Here Pay Here” dealerships, you might see signs with messages like “No Credit, No Problem!” The interest rate on loans from these dealerships can be higher than loans from a bank, credit union, or other type of lender. You may want to consider whether the cost of the loan outweighs the benefit of buying the vehicle. Even if you have poor or no credit, it may be worth it to see if there is a bank, credit union, other lender, or another dealer that is willing to make a loan to you. A feature of this type of dealership is that your monthly payment is made to the dealership. Some “Buy Here Pay Here” dealerships, and some other lenders that lend to people with no credit or poor credit, may put devices in the vehicle that help them repossess or disable the vehicle if you miss a payment.

Negotiate interest rates… In general, lenders and dealers are not required to offer the best interest rates available. You may be able to save a lot of money over the life of the loan by negotiating the interest rate with the lender or dealer.

Understand how leasing works… Leasing is an alternative that some people choose. A lease is an agreement to pay to use a vehicle for an agreed number of months and/or miles. If you lease a vehicle, you do not own it and you will be required to return the vehicle after the lease ends, unless your contract includes a purchase option and you choose to pay to exercise that option. If you are considering leasing, carefully compare the costs of leasing and buying. Complete information about leasing a vehicle is outside the scope of this consumer guide on auto loans. Learn more about leasing at consumerfinance.gov/askcfpb or check out the Federal Reserve’s consumer guide, “Keys to Vehicle Leasing,” at federalreserve.gov/pubs/leasing.

Buying A Car – Budgeting For Your Auto Loan

You’ve decided it’s time to purchase a new or used vehicle. Now it’s time to figure out how much you can afford.

Make sure you have a realistic budget before shopping for an auto loan. If you have a realistic budget, you have a better chance of ending up with a loan you can afford and pay on time. You will also be more likely to account for ongoing costs, such as vehicle maintenance and insurance. You will want to be sure that your budget will support both the loan and the other costs of ownership. If you are having trouble coming up with a budget that works for you, think about ways that you can reduce the cost of your auto loan, such as: Saving for a larger down payment… Buying a less expensive vehicle… And getting fewer features or options.

Determine how much loan you can you afford…  Before you start the process of getting a loan, see how much you can afford. Make sure you have a realistic budget before shopping for an auto loan. The Federal Trade Commission’s “Make a Budget” worksheet is a good place to get started consumer.ftc.gov/articles/pdf-1020-make-budget-worksheet.pdf. For helpful information on making a budget visit consumer.gov/articles/1002-making-budget. While this consumer guide is focused on auto loans, you can also research what type of vehicle fits into your budget. There are numerous publications and websites that discuss features and prices. Consumer Reports, Edmunds, Kelley Blue Book, and NADA Guides are just a few examples. These sources may provide information on prices for specific models and options. The Federal Trade Commission (FTC) also provides helpful information on buying and owning an automobile at consumer.ftc.gov/topics/buying-owning-car.

Look beyond the monthly payment… Many people think about a loan in terms of the monthly payment. Be careful here. The total cost of the vehicle financing matters. If you lower the monthly payment by taking out a longer loan, you pay more in interest. A longer loan also puts you at risk for negative equity over a longer period of time, which is when you owe more on the vehicle than the vehicle is worth. To learn more about auto trade-ins and negative equity check out the Federal Trade Commission’s article at consumer.ftc.gov/articles/0257-auto-trade-ins-and-negative-equity.

Factor in all the costs of ownership…  Remember to factor in the other costs of ownership, such as:  Additional costs at the time of purchase (state taxes, title fees, and dealer fees).   Ongoing costs throughout the time you own the vehicle (insurance, gas, annual registration fees, maintenance, and repairs)

Consider the resale value of your new vehicle… Another factor in your budgeting is the resale value of the vehicle that you are considering purchasing. A vehicle loses value over time. If you sell or trade in this vehicle in the future, the value of the vehicle and whether you have paid off the loan before you want to sell it or trade it in will be an important factor in what you can afford.

Financial Well-Being: From Adolescence To Adulthood

What is financial well-being? Financial well-being is a continuum, ranging from critical financial stress to being highly satisfied with one’s financial situation. Surprisingly, it is not purely associated with income level. For example, some people seem to have, and feel they have, a high level of financial well-being, even though they may be far from rich. On the other hand, some people with much higher incomes do not appear to have or feel they have a high level of financial well-being at all. Moreover, through learning and effort, and given reasonable opportunity and supports, it appears that people can move along the continuum to greater financial well-being.
To summarize, financial well-being can be defined as a state of being in which people can fully meet ongoing and future financial obligations. They can feel secure in their financial outlook  and are able to make choices that allow enjoyment of life.


The definition of financial well-being proposed is based on the consumer perspective and flows from the open-ended interviews research teams conducted with a broadly diverse set of consumers across the United States, reinforced by interviews with financial practitioners. The specific individual goals and vision of a satisfying life differed greatly among respondents, yet there are two common themes that’s consistent. Those themes are security and freedom of choice, in the present and in the future.
More specifically, analysis of the interview transcripts and discussion with the panel of experts suggests that the concept of financial well-being has four central elements:

  1. Having control over day-to-day, month-to-month finances.
  2. Having the capacity to absorb a financial shock.
  3. Being on track to meet your financial goals; and
  4. Having the financial freedom to make the choices that allow you to enjoy life.

These elements of financial well-being have strong time-frame dimensions: the first and fourth pertain mainly to one’s present situation, and the second and third elements pertain to securing the future. Let’s look at each of the four elements in greater detail.


Having control over day-to-day, month-to-month finances…
Individuals who have a relatively high level of financial well-being feel in control of their day-to- day financial lives. These individuals manage their finances; their finances do not manage them. Such individuals are able to cover expenses and pay bills on time, and do not worry about having enough money to get by. This is the aspect of financial well-being that was mentioned most frequently during the qualitative interviews.

Having the capacity to absorb a financial shock…
Individuals who have a relatively high level of financial well-being also have the capacity to absorb a financial shock. Because of a combination of factors such as having a support system of family and friends, owning personal savings, and holding insurance of various types, their lives would not be up-ended if their car or home needed an emergency repair or if they were laid off temporarily from their job. They are able to cope with the financial challenges of unforeseen life events

Being on track to meet your financial goals… Individuals experiencing financial well-being also say they are on track to meet their financial goals. They have a formal or informal financial plan, and they are actively working toward goals such as saving to buy a car or home, paying off student loans, or saving for retirement.

Having the financial freedom to make choices that allow you to enjoy life…
Finally, individuals experiencing financial well-being perceive that they are able to make choices that allow them to enjoy life. They can splurge once in a while. They can afford “wants,” such as being able to go out to dinner or take a vacation, in addition to meeting their “needs,” and they are able to make choices such as to be generous toward their friends, family and community.

This fourth element came through strongly in the interviews, and was notable in the variety of ways it was expressed. For example, financial freedom might mean being able to be generous with family, friends and community, or having the ability to go back to school or leave one job to look for a better one, or to go out to dinner or on vacation, or to work less to spend time with family. Because individuals value such different things, traditional measures such as income or net worth, while important, do not fully capture this aspect of the concept of financial well-being. It is these deeply personal preferences and aspirations that give meaning and purpose to the often challenging day-to-day financial decisions and tradeoffs we all must make to achieve it.


Overall, thoughts expressed by working-age and older consumers about the meaning of financial well-being were remarkably similar. Older consumers, when they mentioned being on track to meet financial goals, were most often focused on end-of-life expenses or the related issue of whether their savings would last them to the end of their lives. Working-age consumers, on the other hand, were most often focused on preparing for retirement or paying off debt. The two themes that ranked highly only among the working-age cohort but not the older cohort were “home ownership (or lack thereof)” and “lifestyle.” Conversely, the older cohort mentioned the themes of “having a financial plan” and “provide for family” more frequently than the working-age cohort did.

Differences in focus between working-age and older consumers were revealed in how often they mentioned the various themes. Access to healthcare and health insurance was brought up more often by the older group, as was the importance of having a financial plan. When family was mentioned in older respondents’ interviews, it was generally in the context of avoiding the need for support from the family for the older consumer. Older consumers brought up quality employment somewhat less frequently than working-age consumers did, but it was still one of their most common themes. For example, older consumers often mentioned paid employment in the context of providing a financial cushion (being able to go back to work if their investments performed poorly), or alternatively as a strategy for providing resources to be able to afford vacations and other wants.

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