Download - Auto loans
Shopping for an Automobile Loan
What Do I Need to Know?
Using Financial Calculators
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
Automobiles 2nd most expensive
purchase for most consumers
Purchased with Cash Loan / credit – very common
Automobile Loans
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
Lender Options Auto Dealers Commercial Banks Savings and Loans Credit Unions Online lenders Life Insurance Policies Auto Insurance Companies
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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”
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
What’s the Real Price?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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.
Calculating the Cost
Using Financial
Calculators
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
Calculating the Cost Three variables are required to
calculate the cost of a loan: Principal loan amount [PV] APR [%I] Time period [N]
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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: Calculate monthly payment
Principal loan amount: 5,000 [PV] Time period: 3 2nd [N] [N] APR: 8 2nd [%i] [%i] [CPT] [PMT] Answer: $156.68
Step 2: Calculate interest paid $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount) $5,640.55 – 5,000.00 = $640.55
(Total loan amount – Principal loan amount = Interest paid)
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
What’s the Real cost? Total loan amount = $5,640.55 Total purchasing cost =
total loan amount + down payment $5,640.55 + $2,500.00 = $8,140.55
Down PaymentHow does the cost
change with different
down payment amounts?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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: Calculate monthly payment
Principal loan amount: 6,500 [PV] Time period: 3 2nd [N] [N] APR: 8 2nd [%i] [%i] [CPT] [PMT] = $203.69
Step 2: Calculate interest paid $203.69 * 36 = $7,332.71
(Monthly payment * Number of payments = Total loan amount) $7,332.71 – $6,500 = $832.71
(Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost
$7,332.71 + $1,000 = $8,332.71(Total loan amount + Down payment = Total purchasing cost)
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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: Calculate monthly payment
Principal loan amount: 5,000 [PV] Time period: 3 2nd [N] [N] APR: 8 2nd [%i] [%i] [CPT] [PMT] = $156.68
Step 2: Calculate interest paid $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount) $5,640.55 – $5,000 = $640.55
(Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost
$5,640.55 + $2,500 = $8,140.55(Total loan amount + Down payment = Total purchasing cost)
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
Down Payments Example #1 - $1,000 down payment
• Principal loan amount - $6,500• Monthly payment - $203.69• Interest paid - $832.71• Total purchasing cost - $8,332.71
Example #2 - $2,500 down payment• Principal loan amount - $5,000• Monthly payment - $156.68• Interest paid - $640.55• Total purchasing cost - $8,140.55
Price Difference - $192.16 The higher the down payment, the lower the principal
loan amount.
Annual Percentage Rate (APR)
How does the cost
change with different
APRs?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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: Calculate monthly payment
Principal loan amount: 5,000 [PV] Time period: 3 2nd [N] [N] APR: 8 2nd [%i] [%i] [CPT] [PMT] = $156.68
Step 2: Calculate interest paid $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount) $5,640.55 – $5,000 = $640.55
(Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost
$5,640.55 + $2,500 = $8,140.55(Total loan amount + Down payment = Total purchasing cost)
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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: Calculate monthly payment
Principal loan amount: 5,000 [PV] Time period: 3 2nd [N] [N] APR: 10 2nd [%i] [%i] [CPT] [PMT] = $161.34
Step 2: Calculate interest paid $161.34 * 36 = $5,808.09
(Monthly payment * Number of payments = Total loan amount) $5,808.09 – $5,000 = $808.09
(Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost
$5,808.09 + $2,500 = $8,308.09(Total loan amount + Down payment = Total purchasing cost)
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
APRs Example #3 – 8% APR
• Monthly payments - $156.68• Interest paid - $640.55• Total purchasing cost - $8,140.55
Example #4 - 10% APR• Monthly payments - $161.34• Interest paid - $808.09• Total purchasing cost - $8,308.09
Price Difference - $167.54 The higher the APR, the more interest paid.
Time PeriodHow does the cost
change with different
time periods?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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?
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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: Calculate monthly payment
Principal loan amount: 5,000 [PV] Time period: 3 2nd [N] [N] APR: 8 2nd [%i] [%i] [CPT] [PMT] = $156.68
Step 2: Calculate interest paid $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount) $5,640.55 – $5,000 = $640.55
(Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost
$5,640.55 + $2,500 = $8,140.55(Total loan amount + Down payment = Total purchasing cost)
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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: Calculate monthly payment
Principal loan amount: 5,000 [PV] Time period: 5 2nd [N] [N] APR: 8 2nd [%i] [%i] [CPT] [PMT] = $101.38
Step 2: Calculate interest paid $101.38 * 60 = $6,082.92
(Monthly payment * Number of payments = Total loan amount) $6,082.92 – $5,000 = $1,082.92
(Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost
$6,082.92 + $2,500 = $8,582.92(Total loan amount + Down payment = Total purchasing cost)
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
Time Periods Example #5 - 3 years
• Monthly payment - $156.68• Interest paid - $640.55• Total purchasing cost = $8,140.55
Example #6 - 5 years• Monthly payment - $101.38• Interest paid - $1,082.92• Total purchasing cost - $8,582.92
Price Difference - $442.37 The longer the time period of the loan, the
smaller the payments. However, more interest is paid.
1.16.3.G1
© 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 Department of Health and Human Development at Montana State University – Bozeman
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!