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

G1 © 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 Automobiles 2 nd most expensive purchase for most consumers Purchased with Cash Loan / credit – very common

Automobile Loans

G1 © 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 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 © 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 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 © 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 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 © 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 Auto Dealers Commercial Banks Savings and Loans Credit Unions Online lenders Life Insurance Policies Auto Insurance Companies

G1 © 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 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 © 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 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 © 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 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 © 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 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?

G1 © 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 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 © 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 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 © 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 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

G1 © 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 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 © 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 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 Calculators

G1 © 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 Calculating the Cost Three variables are required to calculate the cost of a loan: Principal loan amount APR Time period

G1 © 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 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?

G1 © 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 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 Go to the financial calculator for autos Key in the following variables Auto loan amount = $5,000 Auto loan term = 3 years or 36 months Interest rate = 3 years Auto loan start date: use today’s date Press calculate Auto loan monthly payment = $156.68

G1 © 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 Calculating the Cost 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 © 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 What’s the Real cost? Total loan amount = $5, Total purchasing cost = total loan amount + down payment $5, $2, = $8,140.55

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

G1 © 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 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?

G1 © 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 Calculate with $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 at Principal loan amount: 6,500 Time period: 3 years APR: 8 % Monthly payment = ___________ Step 2: Calculate interest paid Monthly payment * 36 = ___________ (Monthly payment * Number of payments = Total loan amount) _________ – $6,500 = __________ (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost __________ + $1,000 = ____________ (Total loan amount + Down payment = Total purchasing cost)

G1 © 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 Calculate with $2,500 Down Payment $7,500 - $2,500 = __________ (Negotiated price – Down payment = Principal loan amount) ___________ (principal loan amount) over 3 years at 8% APR Step 1: Calculate monthly payment Principal loan amount: ____________ Time period: 3 years APR: 8 % Monthly payment = ___________ Step 2: Calculate interest paid Monthly payment * 36 = ___________ (Monthly payment * Number of payments = Total loan amount) _________ – ____________ = __________ (Total loan amount – Principal loan amount = Interest paid) Step 3: Calculate total purchasing cost __________ + $2,500 = ____________ (Total loan amount + Down payment = Total purchasing cost)

G1 © 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 Down Payments Example #1 - $1,000 down payment Principal loan amount - ________ Monthly payment - ___________ Interest paid - ___________ Total purchasing cost - ___________ Example #2 - $2,500 down payment Principal loan amount - __________ Monthly payment - __________ Interest paid - __________ Total purchasing cost - ____________ Price Difference in Total purchasing costs- __________ The higher the down payment, the lower the principal loan amount.

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

G1 © 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 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?

G1 © 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 APRs $7,500 car with 8% APR, $2,500 Down payment, Time period 3 years. Monthly payments Interest paid – Total purchasing cost – Example - 10% APR Monthly payments - _________ Interest paid - _________ (Monthly payment * 36 – Principal loan amount = Interest paid) Total purchasing cost - ________ (Total loan amount + Down payment = Total purchasing cost) Price Difference in total purchasing cost- _________________

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

G1 © 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 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? __________(36 months) __________(60 months) How much interest is paid ?____________(36 months) __________(60 months) (Monthly payment * 36 – Principal loan amount = Interest paid) What is the total purchasing cost? ___________(36 months) and __________(60 months) (Total loan amount + Down payment = Total purchasing cost)

G1 © Family Economics & Financial Education – December 2004 – Transportation Unit – Shopping for an Auto Loan – 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 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!