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

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 Automobiles 2 nd most expensive purchase for most consumers Purchased with Cash Loan / credit – very common

G1 (BAII Plus) Types of Loans Single – payment loans Short – term loans paid off in one lump sum Installment loans Repaid at regularly scheduled intervals, or instalments, usually monthly. © 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

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 Automobile Loans

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 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

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 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

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 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

G1 (BAII Plus) FINANCING The act of obtaining or furnishing money or capital for a purchase or enterprise © 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

G1 (BAII Plus) DOWN PAYMENT An initial payment made when something is bought on credit. The more money you can put down, the less you have to borrow. © 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

G1 (BAII Plus) APR VS INTEREST © 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

G1 (BAII Plus) APR (ANNUAL PERCENTAGE RATE) Higher of the two rates and reflects your total cost of financing your vehicle per year including fees and interest accrued to the day of your first payment (APRs are useful for comparing loan offers from different lenders because they reflect the total cost of financing) © 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

G1 (BAII Plus) INTEREST Lower of the two rates and represents your cost of borrowing per year not including fees or interest accrued to the day of your first payment (it is simply the cost of borrowing money) © 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

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 Lender Options 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

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 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”

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 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

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 What’s the Real Price?

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 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

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 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

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 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)

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 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

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 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.

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 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!