1.16.3.g1 (baii plus) © family economics & financial education – june 2006 – transportation...

1.16.3.G1 (BAII Plus)

© Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Automobile Loan (BAII Plus)

Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Shopping for an Automobile Loan

What Do I Need to Know?

Using Financial Calculators




Automobiles

2nd most expensive purchase for most consumers

Purchased with Cash Loan / credit – very common




Automobile Loans




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




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 principal 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




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




Lender Options Auto Dealers Commercial Banks Savings and Loans Credit Unions Online lenders Life Insurance Policies Auto Insurance Companies




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




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




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”




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?




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




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

Principal 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




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

Payments per Year Number of payments that are due each

year Usually monthly (12 times per year)




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




Rules of Thumb 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.




Calculating the Cost

Using Financial

CalculatorsTexas Instruments

BAII Plus Solar Business Analyst




Calculating the Cost Four variables are required to

calculate the cost of a loan: Number of payments per year [P/Y] Principal loan amount [PV] APR [I/Y] Time period of loan [N]




Calculating the Cost

Joe has decided to purchase an automobile Payments per year: 12 Negotiated price: $7,500 Down payment: $2,500 APR: 8% Time Period: 3 years

What is it really going to cost?




Calculating the Cost $7,500 - $2,500 = $5,000

(Negotiated price – Down payment = Principal loan amount) $5,000 over 3 years at 8% APR compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2nd] xP/Y [N] APR: 8 [I/Y] [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)




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 Payment

How does the cost

change with different

down payment amounts?




Down Payments Calculate the cost of a $7,500 car

with an 8% APR compounded monthly over 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?




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 compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 6,500 [PV] Time period: 3 [2nd] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $203.69


(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)




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 compounded monthly Step 1: Calculate monthly payment









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 - $192.16The higher the down payment, the lower the principal loan amount.




Annual Percentage Rate (APR)

How does the cost


APRs?




APRs Calculate the cost of a $7,500 car

with a $2,500 down payment over 3 years at: 8% APR compounded monthly 10% APR compounded monthly





Example #3 – APR 8% $7,500 - $2,500 = $5,000










Example #4 - APR 10% $7,500 - $2,500 = $5,000










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 – $167.54The higher the APR, the more interest paid.




Time Period

How does the cost


time periods?




Time Periods Calculate the cost of a $7,500 car

with a $2,500 down payment with an 8% APR compounded monthly over: 3 years 5 years





Example #5 – 3 years $7,500 - $2,500 = $5,000










Example #6 – 5 years $7,500 - $2,500 = $5,000




(Monthly payment * Number of payments = Total loan amount) $6,082.92 – $5,000 = $1,082.92






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 – $442.37The longer the time period of the loan, the smaller the payments. However, more interest is paid.




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!

1.16.3.g1 (baii plus) © family economics & financial education – june 2006 – transportation...

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