auto loans

Shopping for an Automobile Loan

What Do I Need to Know?

Using Financial Calculators

1.16.3.G1

© 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 Department of Health and Human Development at Montana State University – Bozeman

Automobiles 2nd most expensive

purchase for most consumers

Purchased with Cash Loan / credit – very common

Automobile Loans

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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”

1.16.3.G1



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?

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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.

Calculating the Cost

Using Financial

Calculators

1.16.3.G1



Calculating the Cost Three variables are required to

calculate the cost of a loan: Principal loan amount [PV] APR [%I] Time period [N]

1.16.3.G1



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?

1.16.3.G1



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

Principal loan amount: 5,000 [PV] Time period: 3 2nd [N] [N] APR: 8 2nd [%i] [%i] [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)

1.16.3.G1



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 PaymentHow does the cost

change with different

down payment amounts?

1.16.3.G1



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?

1.16.3.G1



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: Calculate monthly payment

Principal loan amount: 6,500 [PV] Time period: 3 2nd [N] [N] APR: 8 2nd [%i] [%i] [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)

1.16.3.G1



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: Calculate monthly payment






1.16.3.G1



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 - $192.16 The higher the down payment, the lower the principal

loan amount.

Annual Percentage Rate (APR)

How does the cost


APRs?

1.16.3.G1



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


1.16.3.G1



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







1.16.3.G1



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







1.16.3.G1



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

Time PeriodHow does the cost


time periods?

1.16.3.G1



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)


1.16.3.G1



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







1.16.3.G1



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



1.16.3.G1



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 - $442.37 The longer the time period of the loan, the

smaller the payments. However, more interest is paid.

1.16.3.G1



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!