Debt As of April 2013 Average Credit Card Debt: $15,000+ Average Mortgage Debt: $150,000+ Average Student Debt: $33,000+

Auto Loan Auto Loan is debt incurred for the purpose of purchasing a car, truck or vehicle. This can be used to purchase a vehicle for personal or commercial use. This sometimes include motorcycles. Loans for boats, ATV’s, RV’s and the like are in a separate class of loan. They will work in a similar manner.

Auto Loan No part of an auto loan is tax deductible. The depreciation of the vehicle is tax deductible IF AND ONLY IF the vehicle is used primarily for business purposes. In general, the debt is secured with the vehicle itself and the vehicle (or asset) will depreciate in value over the life of the loan.

Auto Loan Terms Dealer or Private Party – the person or entity selling the vehicle Buyer – the person or entity purchasing the vehicle Lender – the person or entity lending the money or the purchase of the vehicle

Auto Loan Terms Auto Title – a legal document that details the ownership of the vehicle and any liens against it. Like a mortgage, the owner of the vehicle will give the title to the lender in exchange for the loan. Once the loan is paid off, the title is returned to the owner

Auto Loan Terms Auto Insurance – insurance that protects the owner of the vehicle from losses in the event an accident. Note that it in NO way protects the lender and in the event of an accident in which the vehicle is destroyed, the owner will STILL BE REQUIRED TO REPAY THE LOAN. Some insurance policies will pay off a loan in the event of an accident but it will depend on the individual policy. What a policy covers ranges greatly.

Auto Loan Terms Cosigner – a person or entity that signs the note and agrees to repay the debt in the event that you do not. It is mostly agreed upon among financial planners that if you need a cosigner, you should not get the loan and that it is rarely if ever a good idea to be a cosigner.

Types of Auto Loan In general, most auto loans are fixed rate installment debt similar to the P&I for a mortgage Terms on rates and repayment range greatly depending on the age of the car, mileage, amount of the loan, and credit. Typically, an auto loan is for 36 to 48 months. Most recently, 72 to 100 month loans have become available.

Calculating an Auto Loan Payment Like a mortgage, you will need to pay both principal and interest Formula: C is the monthly payments, r is the rate, P is the principal, and n is the number of MONTHLY payments

Calculating an Auto Loan Payment You will need to pay taxes on the vehicle when you purchase it and sell it but not in between. The payment on an auto loan is strictly P&I.

Calculating an Auto Loan Payment Insurance payments will need to be made but that is the responsibility of owner of the car. It should be noted that some lenders will require a certain level of insurance on the vehicle and reserve the right to call the loan due (meaning you must repay in full on demand) should you not maintain that level of insurance.

Calculating the Value of a Car New Car All auto manufacturers sell their cars to dealer who will try to sell it to you. With the car, the manufacturers will give the dealer a manufacturer’s suggested retail price (MSRP). The MSRP is what the car should be sold for and any amount greater than that gets to be retained by the dealer. Most dealers will offer incentives (a year of gas or a cash back deal, etc) in order to bring consumers in and distract from the price they are then charged Most dealers also offer financing which may or may not be a good deal. Read the terms carefully.

Calculating the Value of a Car Used Car Kelley Blue Book is the most widely used and trust resource for pricing a used car. Used cars can be purchase through a dealer or with a private party and the price should reflect an amount similar to the “Blue Book” value. It should be noted that used car, while cheaper, also carry a greater risk as they are outside the warranty and their maintenance record tends to be unknown.

Calculating the Value of a Car Depreciation A vehicle will, in general, begin to lose value the second you purchase it. The rate of depreciation will vary with the type of vehicle. Personal use vehicles have an average depreciation rate of 20% give or take 5%. Again, there are a number of factors that will affect this including mileage, make and model of the vehicle, accidents, etc. The above rate is a rough estimate.

Homework #9 In Homework #3, you had to select a car and get an insurance quote for it. You should have those records. If assume that you bought this year’s model and find the MSRP for that car. If you bought a used car, find the Kelley Blue Book Value for that car. For mileage, consider that the average American drives about 14,000 miles a year. The manufacturer’s website, Criagslist and the Daily Sun are great sources for finding auto prices and what you can expect. You will then get a loan on that car. Assume that you put a 5% down payment on that car and calculate your payment based on a reasonable interest rate and repayment schedule. Loans beyond 60 months are not allowed. Assuming a 20% depreciation in the value of the vehicle, find the value of the vehicle after 1, 3, 5 and 10 years. You will update your budget to include your car payment.