At the start of every spring semester, banks and other financial institutions present junior-year cadets and midshipmen at the military academies with a once-in-a-lifetime financial opportunity: “The Car Loan.”

Although not officially called “The Car Loan,” this career-starter, non-secured loan has very attractive terms, perfect for funding a new set of wheels. Last year’s offer to West Point juniors, for example, was a loan up to $36,000 at 0.75% interest, payable over 60 months. Borrowers had immediate access to the funds even though they didn’t begin payments until their commissioning.

You might want to consider these offers if you need money for a car or another major expenditure. Whether or not to accept the loan offer, however, depends upon your individual circumstances.

Here are some considerations before signing on the dotted line:

1. Whether or not you need a loan at all.

Even with the lowest interest rates and the most attractive terms, a loan is still a long term financial commitment. If you need a car, you should only take “The Car Loan” if you don’t have enough money in savings or if you don’t otherwise have a car available. Remember that a $36,000 loan will translate to payments of about $600 per month for five years. You most likely WILL need a car, but if you can avoid this significant monthly expense, consider using what you already have – whether that means using your savings to purchase one, or settling for the vehicle you already have the keys to.

2. You don’t need to borrow the maximum amount.

Spend $18,000 for your car instead of $36,000. Your monthly payment would be cut in half. A certified pre-owned vehicle with a manufacturer’s warranty may be far more affordable than a brand-new one. Not only will this reduce your monthly loan payments, but purchasing a reliable used car will also save you the immediate depreciation that comes with driving a brand new car off the lot.

3. Factor in every cost that will come with your new car.

Your monthly loan payments won’t be the only recurring debits from your bank account. You’ll have to think about insurance, fuel, and other regular maintenance costs, as well as unplanned repairs. Can you afford all of these potential expenses on your income?

4. Identify every source of income, and lay out a payment plan before you use a cent.

Create a budget, complete with a plan for paying back your loan, before you accept any of the funds. As a newly commissioned officer, your base pay will be about $3,000 per month. Be realistic about how big a loan you can afford to pay off while still covering the costs of everything else in life. Add up every expense you’ll have and see if you have the funding to cover it all. Even with its attractive terms, the “Car Loan” will mean significant debt for you.

Decide how much you are willing to sacrifice financially.  Will you have to limit your savings, investments and favorite activities to cover the cost of the loan? Writing everything down will help you determine how much of a loan, if at all, you can reasonably manage with your expected income.

5. If you decide to use the “Car Loan” to invest, think about the risks of investing.

There is no guarantee that you’ll ever make a profit on what you invest. You should only invest the proceeds of a signature loan if you can cover the loan payments strictly out of your income, leaving the borrowed funds invested. If you can afford to do that, though, you might also consider simply investing the $600 per month without taking on the obligation of the car loan. You won’t be able to invest as much up front, but you will also avoid some significant risk. 

Learn more about Military Car Loans and Budgeting

Unless you move to a city with reliable and extensive public transit, you will need a car after commissioning. Taking “The Car Loan” and using it for a necessary purchase doesn’t have to mean life-limiting debt for you, though. As long as you have a plan for paying off your loan, and know how your new debt will limit your spending, using this low-interest signature loan can be a smart move.

You may wonder if there’s a “catch” to these loans. Banks and financial institutions offer them because they hope that you’ll become their life-long customer and use other financial services and products that they provide. They know that you, as a military officer, will have a reliable income and secure job.

These offers aren’t gimmicks.  If used properly, the “Car Loan” can benefit you as long as you are responsible and realistic about your financial situation.

For useful budgeting tools, investment calculators, and other educational material, visit http://wealth.aafmaa.com. Or, simply email [email protected] and tell us what you need.