G1 (BAII Plus) 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 Auto Loan (BAII Plus) – 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 Automobiles 2 nd most expensive purchase for most consumers Purchased with Cash Loan / credit – very common

G1 (BAII Plus) Automobile Loans

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 Auto Loan (BAII Plus) – 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 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 Auto Loan (BAII Plus) – 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 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) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 Auto Dealers Commercial Banks Savings and Loans Credit Unions Online lenders Life Insurance Policies Auto Insurance Companies

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 Consumer Rights The Truth in Lending Act 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

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 Auto Loan (BAII Plus) – 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 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) What’s the Real Price?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 Auto Loan (BAII Plus) – 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 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 Auto Loan (BAII Plus) – 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 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 Auto Loan (BAII Plus) – 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 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 Auto Loan (BAII Plus) – 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 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) Calculating the Cost Using Financial Calculators Texas Instruments BAII Plus Solar Business Analyst

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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]

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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: [2 nd ] P/Y 12 [Enter] Standard-calculator mode: [2 nd ] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2 nd ] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] Answer: $ Step 2: Calculate interest paid $ * 36 = $5, (Monthly payment * Number of payments = Total loan amount) $5, – 5, = $ (Total loan amount – Principal loan amount = Interest paid)

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 What’s the Real cost? Total loan amount = $5, Total purchasing cost = total loan amount + down payment $5, $2, = $8,140.55

G1 (BAII Plus) Down Payment How does the cost change with different down payment amounts?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – Slide 24 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 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?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 $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: [2 nd ] P/Y 12 [Enter] Standard-calculator mode: [2 nd ] Quit Principal loan amount: 6,500 [PV] Time period: 3 [2 nd ] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $ Step 2: Calculate interest paid $ * 36 = $7, (Monthly payment * Number of payments = Total loan amount) $7, – $6,500 = $ (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost $7, $1,000 = $8, (Total loan amount + Down payment = Total purchasing cost)

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 Payments per year: [2 nd ] P/Y 12 [Enter] Standard-calculator mode: [2 nd ] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2 nd ] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $ Step 2: Calculate interest paid $ * 36 = $5, (Monthly payment * Number of payments = Total loan amount) $5, – $5,000 = $ (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost $5, $2,500 = $8, (Total loan amount + Down payment = Total purchasing cost)

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 Down Payments Example #1 - $1,000 down payment Principal loan amount: $6,500 Monthly payment: $ Interest paid: $ Total purchasing cost: $8, Example #2 - $2,500 down payment Principal loan amount: $5,000 Monthly payment: $ Interest paid: $ Total purchasing cost: $8, Price Difference - $ The higher the down payment, the lower the principal loan amount.

G1 (BAII Plus) Annual Percentage Rate (APR) How does the cost change with different APRs?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – Slide 29 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 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 What are the monthly payments? How much interest is paid? What is the total purchasing cost?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 compounded monthly Step 1: Calculate monthly payment Payments per year: [2 nd ] P/Y 12 [Enter] Standard-calculator mode: [2 nd ] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2 nd ] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $ Step 2: Calculate interest paid $ * 36 = $5, (Monthly payment * Number of payments = Total loan amount) $5, – $5,000 = $ (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost $5, $2,500 = $8, (Total loan amount + Down payment = Total purchasing cost)

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 compounded monthly Step 1: Calculate monthly payment Payments per year: [2 nd ] P/Y 12 [Enter] Standard-calculator mode: [2 nd ] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2 nd ] xP/Y [N] APR: 10 [I/Y] [CPT] [PMT] = $ Step 2: Calculate interest paid $ * 36 = $5, (Monthly payment * Number of payments = Total loan amount) $5, – $5,000 = $ (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost $5, $2,500 = $8, (Total loan amount + Down payment = Total purchasing cost)

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 APRs Example #3 – 8% APR Monthly payments: $ Interest paid: $ Total purchasing cost: $8, Example #4 – 10% APR Monthly payments: $ Interest paid: $ Total purchasing cost: $8, Price Difference – $ The higher the APR, the more interest paid.

G1 (BAII Plus) Time Period How does the cost change with different time periods?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – Slide 34 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 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 What are the monthly payments? How much interest is paid? What is the total purchasing cost?

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 compounded monthly Step 1: Calculate monthly payment Payments per year: [2 nd ] 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] = $ Step 2: Calculate interest paid $ * 36 = $5, ( Monthly payment * Number of payments = Total loan amount) $5, – $5,000 = $ (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost $5, $2,500 = $8, (Total loan amount + Down payment = Total purchasing cost)

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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 compounded monthly Step 1: Calculate monthly payment Payments per year: [2 nd ] P/Y 12 [Enter] Standard-calculator mode: [2 nd ] Quit Principal loan amount: 5,000 [PV] Time period: 5 [2 nd ] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $ Step 2: Calculate interest paid $ * 60 = $6, (Monthly payment * Number of payments = Total loan amount) $6, – $5,000 = $1, (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost $6, $2,500 = $8, (Total loan amount + Down payment = Total purchasing cost)

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 Time Periods Example #5 – 3 years Monthly payment: $ Interest paid: $ Total purchasing cost = $8, Example #6 – 5 years Monthly payment: $ Interest paid: $1, Total purchasing cost: $8, Price Difference – $ The longer the time period of the loan, the smaller the payments. However, more interest is paid.

G1 (BAII Plus) © Family Economics & Financial Education – June 2006 – Transportation Unit – Shopping for an Auto Loan (BAII Plus) – 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 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!