The process of applying for a student loan, an auto loan, and eventually a mortgage is a significant financial commitment most people make without understanding how much these loans can impact their long-term finances. Debt is very easy to accrue yet extremely difficult to pay down.
The average student loan borrower takes twenty years to pay off their loans, but depending on loan rates and financing plans, it could take over thirty years. One in five borrowers even sees their loan balance increase in the first five years despite making consistent monthly payments.
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TheStreet met with Kyla Scanlon, the 27-year-old founder of financial services company Bread, and author of “In this Economy? How Money & Markets Really Work,” to discuss how to equip younger generations with the right tools to make smart financial decisions.
Scanlon believes that explaining what interest will mean in the long term — in basic terms and real dollars — will help young consumers make informed choices about major life decisions.
Understanding the terms and hidden costs of mortgages and auto loans
Most home buyers sign up for thirty-year mortgage loans, making them the most consequential financial decision consumers will make. However, auto loans can accrue interest quickly — despite the rapid depreciation of car values — leaving many borrowers in a bind.
Understanding how these purchases will affect your current financial situation is essential to determining whether you can afford monthly payments in the near term and the long term.
“Awareness around finances is crucial,” she said. “When dealing with interest rates, I think there’s a little bit of confusion around what an 84-month payment plan actually costs. Often, having such extended payments can be very painful for people.”
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Scanlon warns of factoring in all costs of home ownership before making a multi-decade commitment.
“I think the second thing to be conscious of is housing,” she continued. “Mortgages are great, but you have all these other costs that often surprise homeowners, like property taxes, insurance, and home maintenance.”
She argues that increasing transparency around significant financial commitments will help prepare younger generations to plan for long-term payments — or forego the decision altogether.
“Buying a car and buying a house is a core part of the economic experience, but there could be much more education around it,” Scanlon said. “It’s not people’s fault that they don’t know it. It’s not something we’re necessarily taught, but it’s important to understand.”
A new homeowner receives the key to their home.
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Student loan debt is adding to financial insecurity
An interesting paradox has formed over the past decade among millennial and Gen Z consumers: They are more confident in their ability to understand finances yet feel more financially insecure than their older counterparts.
Scanlon believes snowballing student loan debt may be the culprit.
“I think that the lack of financial confidence among younger generations probably comes from student loan debt,” she said. “You’re 18 years old and signing a huge loan for $100,000 or more.”
Related: Cash is king: High mortgage rates are changing home-buying trends
Scanlon highlights that explaining how loans will impact debt and finances down the line will help younger generations understand the enormity of the decision — and if the payoff is worth it.
“The way to address the ambiguity is by walking people through what student loan debt is and the impact it can have,” she explained. “I’m a big advocate of public policy. I think that setting people up with some sort of stock market account from a young age, like baby bonds, would be helpful.”
One way to instill financial confidence in younger generations is to establish a financial foundation at an early age.
“I think that having a financial foundation would help reduce some of this uncertainty that we see,” Scanlon said. “Many people worry about the lack of safety nets because if something happens, where do you go? What do you do? The more we help people establish a financial foundation, the less uncertainty we will see.”
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