© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Automobiles
2nd most expensive purchase for most consumers
Purchased with Cash Loan / credit – very common
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Definitions Auto Loan – borrowed money to
purchase an automobile Terms of the loan will vary
Lender – a financial institution who offers loans to consumers
Credit Rating – evaluation of a person’s credit history Based on repayment patterns, prior
credit usage, credit history, length of employment
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Definitions continued Cosigner – a person who guarantees the
loan for the original borrower Responsible for paying the debt back if the
original borrower defaults• Borrower fails to make payments of principle or
interest when due and has not met other requirements of the legal contract
A cosigner may be required for a loan if the original borrower does not have a credit history or has a bad credit rating
Common for parents to cosign for young adults
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Definitions continued Secured Loan – requires a cosigner
or collateral A loan with collateral means the lender
has security interest in the property pledged as collateral
Automobile loans are secured because the automobile is typically the collateral
If the borrower fails to repay the loan, the lender can then seize the collateral by repossessing, or taking back, the property
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Lender Options Auto Dealers Commercial Banks Savings and Loans Credit Unions Online lenders Life Insurance Policies Auto Insurance Companies
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Lender Options continued
Credit Unions traditionally offer low APRs
Auto dealer financing may be easier, but not always the best deal
Remember – compare every variable to decide best option for consumer
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Consumer Rights The Truth in Lending Act - 1968
Part of the Consumer Protection Act Applies to all credit transactions
• Mortgages, credit cards, loans, etc.
Requires clear disclosure of key terms and all costs in lending agreements
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
The Truth in Lending ActThree basic rules for lenders:1. Lenders cannot advertise a good deal
which is not available to all consumers2. Advertisements must include all or none
of the terms3. If more than 4 installments are required
to pay for the good or service, the agreement must say “The cost of credit is included in the price quoted for goods and services”
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
The Truth in Lending Act continued
Lenders must disclose to consumers: Interest rate expressed as the APR Total finance charge
Allows consumers to easily compare credit offers
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Variables of a Loan Negotiated Price
Price being paid for the automobile agreed upon by the seller and buyer
Down Payment Amount of money being paid for the
automobile at time of purchase Usually required
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Variables continued Trade-In
Amount of money received for trading in an automobile
Trade-in amount is subtracted from the negotiated price of the automobile
Principle Loan Amount Amount of the loan for the automobile after
subtracting the down payment and/or trade-in price from the negotiated price
Without interest and fees
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Variables continued Annual Percentage Rate (APR)
Measure of the cost of credit on a yearly basis expressed as a percentage
Time Period Amount of time the loan will be repaid Usually expressed in months
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Variables continued Total Cost of the Loan
Total of the principal loan amount, interest paid, and other fees
Total Purchasing Cost Total of the down payment, trade-in
value, and total loan amount
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Rules of Thumb The larger the down payment on an
automobile, the lower the principle loan amount.
The longer the time period of the loan, the smaller the payments. However, more interest is paid.
The higher the APR, the more interest is paid and the larger the total loan amount.
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Calculating the Cost Three variables are required to
calculate the cost of a loan: Principal loan amount APR Time period
Using a standard calculator does not provide exact results, just estimates
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Equations To estimate the interest paid:
Principal loan amount * APR * Time period = Interest paid
To find the total loan amount: Interest paid + Principal loan amount =
Total loan amount To find the estimated monthly
payment: Total loan amount/number of payments =
Estimated monthly payment
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Calculating the Cost
Joe has decided to purchase an automobile Negotiated price - $7,500 Down payment - $2,500 APR – 8% Time Period – 3 years
What is it really going to cost?
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Calculating the Cost $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
$5,000 over 3 years at 8% APR Step 1: Estimate the Interest Paid
(Principal loan amount * APR * Time Period = Interest Paid Principal loan amount: 5,000 Time period: 3 years (3*12 = 36 payments) APR: 8% $5,000 *.08 * 3 = $1,200 Estimated interest paid: $1,200
Step 2: Find the total loan amount $1,200 + $5,000 = $6,200
(Interest paid + principal loan amount = Total loan amount)
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
What’s the Real cost? Total loan amount = $6,200 Total purchasing cost =
total loan amount + down payment $6,200+ $2,500 = $8,700
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Down Payments Calculate the cost of a $7,500 car
with an 8% APR over 36 months (3 years): $1,000 down payment $2,500 down payment
What are the monthly payments? How much interest is paid? What is the total purchasing cost?
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Example #1 –$1,000 Down Payment
$7,500 - $1,000 = $6,500(Negotiated price – Down payment = Principal loan amount)
$6,500 over 3 years at 8% APR Step 1: Estimate the interest paid
Principal loan amount: $6,500 Time period: 36 months (3 years) APR: 8% $6,500 * .08 * 3 = $1,560 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid)
Step 2: Find the total loan amount $1,560 + $6,500 = $8,060 (Interest paid + Principal loan amount = total loan amount)
Step 3: Find the estimated monthly payment $8,060 / 36 = $223 (Total loan amount / Number of payments = Estimated monthly payment)
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Example #2 –$2,500 Down Payment
$7,500 - $2,500 = $5,000 (Negotiated price – Down payment = Principal loan amount) $5,000 over 3 years at 8% APR Step 1: Estimate the interest paid
Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 8% $5,000 * .08 * 3 = $1,200 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid)
Step 2: Find the total loan amount $1,200 + $5,000 = $6,200 (Interest paid + Principal loan amount = total loan amount)
Step 3: Find the estimated monthly payment $6,200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment)
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Down Payments Example #1 - $1,000 down payment
• Principal loan amount - $6,500• Monthly payment - $223• Interest paid - $1,560• Total purchasing cost - $9,060
Example #2 - $2,500 down payment• Principal loan amount - $5,000• Monthly payment - $172• Interest paid - $1,200• Total purchasing cost - $8,700
Price Difference - $360 The higher the down payment, the lower the principal
loan amount.
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
APRs Calculate the cost of a $7,500 car
with a $2,500 down payment over 36 months (3 years) at: 8% APR 10% APR
What are the monthly payments? How much interest is paid? What is the total purchasing cost?
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Example #3 – APR 8% $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount) $5,000 over 3 years at 8% APR Step 1: Estimate the interest paid
Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 8% $5,000 * .08 * 3 = $1,200 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid)
Step 2: Find the total loan amount $1,200 + $5,000 = $6,200 (Interest paid + Principal loan amount = total loan amount)
Step 3: Find the estimated monthly payment $6,200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment)
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Example #4 - APR 10% $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount) $5,000 over 3 years at 10% APR Step 1: Estimate the interest paid
Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 10% $5,000 * .10 * 3 = $1,500 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid)
Step 2: Find the total loan amount $1,500 + $5,000 = $6,500 (Interest paid + Principal loan amount = total loan amount)
Step 3: Find the estimated monthly payment $6,500 / 36 = $180 (Total loan amount / Number of payments = Estimated monthly payment)
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
APRs Example #3 – 8% APR
• Monthly payments - $172• Interest paid - $1,200• Total purchasing cost - $8,700
Example #4 - 10% APR• Monthly payments - $180• Interest paid - $1,500• Total purchasing cost - $9,000
Price Difference - $300 The higher the APR, the more interest paid.
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Time Periods Calculate the cost of a $7,500 car
with a $2,500 down payment with an 8% APR over: 36 months (3 years) 60 months (5 years)
What are the monthly payments? How much interest is paid? What is the total purchasing cost?
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Example #5 – 3 years $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount) $5,000 over 3 years at 8% APR Step 1: Estimate the interest paid
Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 8% $5,000 * .08 * 3 = $1,200 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid)
Step 2: Find the total loan amount $1,200 + $5,000 = $6,200 (Interest paid + Principal loan amount = total loan amount)
Step 3: Find the estimated monthly payment $6,200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly
payment)
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Example #6 – 5 years $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount) $5,000 over 5 years at 8% APR Step 1: Estimate the interest paid
Principal loan amount: $5,000 Time period: 60 months (5 years) APR: 8% $5,000 * .08 * 5 = $2,000 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid)
Step 2: Find the total loan amount $2,000 + $5,000 = $7,000 (Interest paid + Principal loan amount = total loan amount)
Step 3: Find the estimated monthly payment $7,000 / 60 = $116 (Total loan amount / Number of payments = Estimated monthly
payment)
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Time Periods Example #5 - 3 years
• Monthly payment - $172• Interest paid - $1,200• Total purchasing cost = $8,700
Example #6 - 5 years• Monthly payment - $116• Interest paid - $2,500• Total purchasing cost - $9,500
Price Difference - $800 The longer the time period of the loan, the
smaller the payments. However, more interest is paid.
© Family Economics & Financial Education – Revised December 2004 – Transportation Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at The University of Arizona
1.16.3.G2
Conclusion
Compare all offers and variables before signing an agreement!
Changing a variable can either save the consumer money or he/she may end up paying much more than anticipated!