1. Shopping for an Automobile Loan What Do I Need to Know? Using Standard Calculators

2. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona Shopping for an Automobile Loan Lesson Objectives: Compare different variables which affect the cost of a loan Understand consumer rights as defined in the Truth-in-Lending Act Understand how to calculate the cost of an automobile loan Compare loan/finance agreements for automobiles

3. 1.16.3.G2 © 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 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

4. Automobile Loans

5. 1.16.3.G2 © 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 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

6. 1.16.3.G2 © 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 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 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

7. 1.16.3.G2 © 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 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

8. 1.16.3.G2 © 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 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

9. 1.16.3.G2 © 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 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

10. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona 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

11. 1.16.3.G2 © 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 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”

12. 1.16.3.G2 © 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 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

13. What’s the Real Price?

14. 1.16.3.G2 © 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 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

15. 1.16.3.G2 © 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 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 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

16. 1.16.3.G2 © 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 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

17. 1.16.3.G2 © 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 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

18. 1.16.3.G2 © 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 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 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.

19. Calculating the Cost Using Standard Calculators

20. 1.16.3.G2 © 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 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 Using a standard calculator does not provide exact results, just estimates

21. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona Equations To estimate the interest paid: Principal loan amount * APR * Time period = Interest paid To find the total loan amount: Interest paid + Principal loan amount = Total loan amount To find the estimated monthly payment: Total loan amount/number of payments = Estimated monthly payment

22. 1.16.3.G2 © 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 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?

23. 1.16.3.G2 © 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 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: Estimate the Interest Paid (Principal loan amount * APR * Time Period = Interest Paid Principal loan amount: 5,000 Time period: 3 years (3*12 = 36 payments) APR: 8% $5,000 *.08 * 3 = $1,200 Estimated interest paid: $1,200 Step 2: Find the total loan amount $1,200 + $5,000 = $6,200 (Interest paid + principal loan amount = Total loan amount)

24. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona What’s the Real cost? Total loan amount = $6,200 Total purchasing cost = total loan amount + down payment $6,200+ $2,500 = $8,700

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

26. 1.16.3.G2 © 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 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?

27. 1.16.3.G2 © 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 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 Step 1: Estimate the interest paid Principal loan amount: $6,500 Time period: 36 months (3 years) APR: 8% $6,500 *.08 * 3 = $1,560 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) Step 2: Find the total loan amount $1,560 + $6,500 = $8,060 (Interest paid + Principal loan amount = total loan amount) Step 3: Find the estimated monthly payment $8,060 / 36 = $223 (Total loan amount / Number of payments = Estimated monthly payment)

28. 1.16.3.G2 © 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 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 Step 1: Estimate the interest paid Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 8% $5,000 *.08 * 3 = $1,200 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) Step 2: Find the total loan amount $1,200 + $5,000 = $6,200 (Interest paid + Principal loan amount = total loan amount) Step 3: Find the estimated monthly payment $6,200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment)

29. 1.16.3.G2 © 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 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 - $223 Interest paid - $1,560 Total purchasing cost - $9,060 Example #2 - $2,500 down payment Principal loan amount - $5,000 Monthly payment - $172 Interest paid - $1,200 Total purchasing cost - $8,700 Price Difference - $360 The higher the down payment, the lower the principal loan amount.

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

31. 1.16.3.G2 © 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 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?

32. 1.16.3.G2 © 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 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 Step 1: Estimate the interest paid Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 8% $5,000 *.08 * 3 = $1,200 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) Step 2: Find the total loan amount $1,200 + $5,000 = $6,200 (Interest paid + Principal loan amount = total loan amount) Step 3: Find the estimated monthly payment $6,200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment)

33. 1.16.3.G2 © 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 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 Step 1: Estimate the interest paid Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 10% $5,000 *.10 * 3 = $1,500 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) Step 2: Find the total loan amount $1,500 + $5,000 = $6,500 (Interest paid + Principal loan amount = total loan amount) Step 3: Find the estimated monthly payment $6,500 / 36 = $180 (Total loan amount / Number of payments = Estimated monthly payment)

34. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona APRs Example #3 – 8% APR Monthly payments - $172 Interest paid - $1,200 Total purchasing cost - $8,700 Example #4 - 10% APR Monthly payments - $180 Interest paid - $1,500 Total purchasing cost - $9,000 Price Difference - $300 The higher the APR, the more interest paid.

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

36. 1.16.3.G2 © 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 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? How much interest is paid? What is the total purchasing cost?

37. 1.16.3.G2 © 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 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 Step 1: Estimate the interest paid Principal loan amount: $5,000 Time period: 36 months (3 years) APR: 8% $5,000 *.08 * 3 = $1,200 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) Step 2: Find the total loan amount $1,200 + $5,000 = $6,200 (Interest paid + Principal loan amount = total loan amount) Step 3: Find the estimated monthly payment $6,200 / 36 = $172 (Total loan amount / Number of payments = Estimated monthly payment)

38. 1.16.3.G2 © 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 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 Step 1: Estimate the interest paid Principal loan amount: $5,000 Time period: 60 months (5 years) APR: 8% $5,000 *.08 * 5 = $2,000 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid) Step 2: Find the total loan amount $2,000 + $5,000 = $7,000 (Interest paid + Principal loan amount = total loan amount) Step 3: Find the estimated monthly payment $7,000 / 60 = $116 (Total loan amount / Number of payments = Estimated monthly payment)

39. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona Time Periods Example #5 - 3 years Monthly payment - $172 Interest paid - $1,200 Total purchasing cost = $8,700 Example #6 - 5 years Monthly payment - $116 Interest paid - $2,500 Total purchasing cost - $9,500 Price Difference - $800 The longer the time period of the loan, the smaller the payments. However, more interest is paid.

40. 1.16.3.G2 © 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 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!

41. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona Shopping for an Automobile Loan Lesson Objectives – Review Compare different variables which affect the cost of a loan Understand consumer rights as defined in the Truth-in-Lending Act Understand how to calculate the cost of an automobile loan Compare loan/finance agreements for automobiles

42. 1.16.3.G2 © 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 Norton School of Family and Consumer Sciences at The University of Arizona Shopping for an Automobile Loan Assignments: Automobile Loans – What Do I Need To Know? worksheet 1.16.3.A1 Calculating the Cost of a Loan worksheet 1.16.3.A2 Shopping for an Automobile Loan (Using Standard Calculators) worksheet 1.16.3.A4