Using Standard Calculators Shopping for an Automobile Loan

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Using Standard Calculators Shopping for an Automobile Loan What Do I Need to Know?

Using Standard Calculators Shopping for an Automobile Loan What Do I Need to Know?

1. 16. 3. G 2 Automobiles n n 2 nd most expensive purchase for

1. 16. 3. G 2 Automobiles n n 2 nd most expensive purchase for most consumers Purchased with n n Cash Loan / credit – very common © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 2 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Automobile Loans

Automobile Loans

1. 16. 3. G 2 Definitions n Auto Loan – borrowed money to purchase

1. 16. 3. G 2 Definitions n Auto Loan – borrowed money to purchase an automobile n Terms of the loan will vary Lender – a financial institution who offers loans to consumers n Credit Rating – evaluation of a person’s credit history n n Based on repayment patterns, prior credit usage, credit history, length of employment © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 4 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. G 2 Definitions continued n Cosigner – a person who guarantees

1. 16. 3. G 2 Definitions continued n Cosigner – a person who guarantees the loan for the original borrower n Responsible for paying the debt back if the original borrower defaults • Borrower fails to make payments of principal or interest when due and has not met other requirements of the legal contract n n 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 – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 5 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. G 2 Definitions continued n Secured Loan – requires a cosigner

1. 16. 3. G 2 Definitions continued n Secured Loan – requires a cosigner or collateral A loan with collateral means the lender has security interest in the property pledged as collateral n Automobile loans are secured because the automobile is typically the collateral n If the borrower fails to repay the loan, the lender can then seize the collateral by repossessing, or taking back, the property n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 6 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. G 2 Lender Options n n n n Auto Dealers Commercial

1. 16. 3. G 2 Lender Options n n n n Auto Dealers Commercial Banks Savings and Loans Credit Unions Online lenders Life Insurance Policies Auto Insurance Companies © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 7 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Lender Options continued 1. 16. 3. G 2 Credit Unions traditionally offer low APRs

Lender Options continued 1. 16. 3. G 2 Credit Unions traditionally offer low APRs n Auto dealer financing may be easier, but not always the best deal n Remember – compare every variable to decide best option for consumer n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 8 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. G 2 Consumer Rights n The Truth in Lending Act -

1. 16. 3. G 2 Consumer Rights n The Truth in Lending Act - 1968 Part of the Consumer Protection Act n Applies to all credit transactions n • Mortgages, credit cards, loans, etc. n Requires clear disclosure of key terms and all costs in lending agreements © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 9 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. G 2 The Truth in Lending Act Three basic rules for

1. 16. 3. G 2 The Truth in Lending Act Three basic rules for lenders: 1. Lenders cannot advertise a good deal which is not available to all consumers 2. Advertisements must include all or none of the terms 3. 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 – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 10 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. G 2 The Truth in Lending Act continued n Lenders must

1. 16. 3. G 2 The Truth in Lending Act continued n Lenders must disclose to consumers: n n n Interest rate expressed as the APR Total finance charge Allows consumers to easily compare credit offers © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 11 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

What’s the Real Price?

What’s the Real Price?

1. 16. 3. G 2 Variables of a Loan n Negotiated Price n n

1. 16. 3. G 2 Variables of a Loan n Negotiated Price n n 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 n Usually required n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 13 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. G 2 Variables continued n Trade-In n Amount of money received

1. 16. 3. G 2 Variables continued n Trade-In n Amount of money received for trading in an automobile Trade-in amount is subtracted from the negotiated price of the automobile Principal Loan Amount n n 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 – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 14 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. G 2 Variables continued n Annual Percentage Rate (APR) n n

1. 16. 3. G 2 Variables continued n Annual Percentage Rate (APR) n n Measure of the cost of credit on a yearly basis expressed as a percentage Time Period Amount of time the loan will be repaid n Usually expressed in months n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 15 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. G 2 Variables continued n Total Cost of the Loan n

1. 16. 3. G 2 Variables continued n Total Cost of the Loan n n Total of the principal loan amount, interest paid, and other fees Total Purchasing Cost n Total of the down payment, trade-in value, and total loan amount © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 16 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. G 2 Rules of Thumb n n n The larger the

1. 16. 3. G 2 Rules of Thumb n n n The larger the down payment on an automobile, the lower the principal 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 – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 17 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Calculating the Cost Using Standard Calculators

Calculating the Cost Using Standard Calculators

1. 16. 3. G 2 Calculating the Cost n Three variables are required to

1. 16. 3. G 2 Calculating the Cost n Three variables are required to calculate the cost of a loan: Principal loan amount n APR n Time period n n Using a standard calculator does not provide exact results, just estimates © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 19 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. G 2 Equations n To estimate the interest paid: n n

1. 16. 3. G 2 Equations n To estimate the interest paid: n n To find the total loan amount: n n Principal loan amount * APR * Time period = Interest paid + Principal loan amount = Total loan amount To find the estimated monthly payment: n Total loan amount/number of payments = Estimated monthly payment © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 20 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. G 2 Calculating the Cost n Joe has decided to purchase

1. 16. 3. G 2 Calculating the Cost n Joe has decided to purchase an automobile Negotiated price - $7, 500 n Down payment - $2, 500 n APR – 8% n Time Period – 3 years n n What is it really going to cost? © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 21 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. G 2 Calculating the Cost n $7, 500 - $2, 500

1. 16. 3. G 2 Calculating the Cost n $7, 500 - $2, 500 = $5, 000 (Negotiated price – Down payment = Principal loan amount) n n $5, 000 over 3 years at 8% APR Step 1: Estimate the Interest Paid (Principal loan amount * APR * Time Period = Interest Paid n n n 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 n $1, 200 + $5, 000 = $6, 200 (Interest paid + principal loan amount = Total loan amount) © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 22 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. G 2 What’s the Real cost? Total loan amount = $6,

1. 16. 3. G 2 What’s the Real cost? Total loan amount = $6, 200 n Total purchasing cost = total loan amount + down payment n n $6, 200+ $2, 500 = $8, 700 © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 23 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Down Payment How does the cost change with different down payment amounts?

Down Payment How does the cost change with different down payment amounts?

1. 16. 3. G 2 Down Payments n Calculate the cost of a $7,

1. 16. 3. G 2 Down Payments n Calculate the cost of a $7, 500 car with an 8% APR over 36 months (3 years): $1, 000 down payment n $2, 500 down payment n What are the monthly payments? n How much interest is paid? n What is the total purchasing cost? n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 25 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Example #1 – $1, 000 Down Payment n $7, 500 - $1, 000 =

Example #1 – $1, 000 Down Payment n $7, 500 - $1, 000 = $6, 500 (Negotiated price – Down payment = Principal loan amount) n n $6, 500 over 3 years at 8% APR Step 1: Estimate the interest paid n n 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) n Step 2: Find the total loan amount n $1, 560 + $6, 500 = $8, 060 (Interest paid + Principal loan amount = total loan amount) n Step 3: Find the estimated monthly payment n $8, 060 / 36 = $223 (Total loan amount / Number of payments = Estimated monthly payment) © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 26 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. G 2

Example #2 – $2, 500 Down Payment n $7, 500 - $2, 500 =

Example #2 – $2, 500 Down Payment n $7, 500 - $2, 500 = $5, 000 (Negotiated price – Down payment = Principal loan amount) n n $5, 000 over 3 years at 8% APR Step 1: Estimate the interest paid n n 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) n Step 2: Find the total loan amount n $1, 200 + $5, 000 = $6, 200 (Interest paid + Principal loan amount = total loan amount) n Step 3: Find the estimated monthly payment n $6, 200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment) © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 27 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. G 2

1. 16. 3. G 2 Down Payments n Example #1 - $1, 000 down

1. 16. 3. G 2 Down Payments n Example #1 - $1, 000 down payment • • n Example #2 - $2, 500 down payment • • n Principal loan amount - $6, 500 Monthly payment - $223 Interest paid - $1, 560 Total purchasing cost - $9, 060 Principal loan amount - $5, 000 Monthly payment - $172 Interest paid - $1, 200 Total purchasing cost - $8, 700 Price Difference - $360 n The higher the down payment, the lower the principal loan amount. © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 28 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Annual Percentage Rate (APR) How does the cost change with different APRs?

Annual Percentage Rate (APR) How does the cost change with different APRs?

1. 16. 3. G 2 APRs n Calculate the cost of a $7, 500

1. 16. 3. G 2 APRs n Calculate the cost of a $7, 500 car with a $2, 500 down payment over 36 months (3 years) at: 8% APR n 10% APR n What are the monthly payments? n How much interest is paid? n What is the total purchasing cost? n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 30 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. G 2 Example #3 – APR 8% n $7, 500 -

1. 16. 3. G 2 Example #3 – APR 8% n $7, 500 - $2, 500 = $5, 000 (Negotiated price – Down payment = Principal loan amount) n n $5, 000 over 3 years at 8% APR Step 1: Estimate the interest paid n n 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) n Step 2: Find the total loan amount n $1, 200 + $5, 000 = $6, 200 (Interest paid + Principal loan amount = total loan amount) n Step 3: Find the estimated monthly payment n $6, 200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment) © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 31 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. G 2 Example #4 - APR 10% n $7, 500 -

1. 16. 3. G 2 Example #4 - APR 10% n $7, 500 - $2, 500 = $5, 000 (Negotiated price – Down payment = Principal loan amount) n n $5, 000 over 3 years at 10% APR Step 1: Estimate the interest paid n Principal loan amount: $5, 000 n Time period: 36 months (3 years) n APR: 10% n $5, 000 *. 10 * 3 = $1, 500 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) n Step 2: Find the total loan amount n $1, 500 + $5, 000 = $6, 500 (Interest paid + Principal loan amount = total loan amount) n Step 3: Find the estimated monthly payment n $6, 500 / 36 = $180 (Total loan amount / Number of payments = Estimated monthly payment) © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 32 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. G 2 APRs n Example #3 – 8% APR • Monthly

1. 16. 3. G 2 APRs n Example #3 – 8% APR • Monthly payments - $172 • Interest paid - $1, 200 • Total purchasing cost - $8, 700 n Example #4 - 10% APR • Monthly payments - $180 • Interest paid - $1, 500 • Total purchasing cost - $9, 000 n Price Difference - $300 n The higher the APR, the more interest paid. © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 33 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Time Period How does the cost change with different time periods?

Time Period How does the cost change with different time periods?

1. 16. 3. G 2 Time Periods n Calculate the cost of a $7,

1. 16. 3. G 2 Time Periods n Calculate the cost of a $7, 500 car with a $2, 500 down payment with an 8% APR over: 36 months (3 years) n 60 months (5 years) n What are the monthly payments? n How much interest is paid? n What is the total purchasing cost? n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 35 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. G 2 Example #5 – 3 years n $7, 500 -

1. 16. 3. G 2 Example #5 – 3 years n $7, 500 - $2, 500 = $5, 000 (Negotiated price – Down payment = Principal loan amount) n n $5, 000 over 3 years at 8% APR Step 1: Estimate the interest paid n Principal loan amount: $5, 000 n Time period: 36 months (3 years) n APR: 8% n $5, 000 *. 08 * 3 = $1, 200 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) n Step 2: Find the total loan amount n $1, 200 + $5, 000 = $6, 200 (Interest paid + Principal loan amount = total loan amount) n Step 3: Find the estimated monthly payment n $6, 200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment) © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 36 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. G 2 Example #6 – 5 years n $7, 500 -

1. 16. 3. G 2 Example #6 – 5 years n $7, 500 - $2, 500 = $5, 000 (Negotiated price – Down payment = Principal loan amount) n n $5, 000 over 5 years at 8% APR Step 1: Estimate the interest paid n Principal loan amount: $5, 000 n Time period: 60 months (5 years) n APR: 8% n $5, 000 *. 08 * 5 = $2, 000 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) n Step 2: Find the total loan amount n $2, 000 + $5, 000 = $7, 000 (Interest paid + Principal loan amount = total loan amount) n Step 3: Find the estimated monthly payment n $7, 000 / 60 = $116 (Total loan amount / Number of payments = Estimated monthly payment) © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 37 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. G 2 Time Periods n Example #5 - 3 years •

1. 16. 3. G 2 Time Periods n Example #5 - 3 years • Monthly payment - $172 • Interest paid - $1, 200 • Total purchasing cost = $8, 700 n Example #6 - 5 years • Monthly payment - $116 • Interest paid - $2, 500 • Total purchasing cost - $9, 500 n Price Difference - $800 n The longer the time period of the loan, the smaller the payments. However, more interest is paid. © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 38 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. G 2 Conclusion Compare all offers and variables before signing an

1. 16. 3. G 2 Conclusion Compare all offers and variables before signing an agreement! n Changing a variable can either save the consumer money or he/she may end up paying much more than anticipated! n © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – Slide 39 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona