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

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

3. Automobile Loans

4. 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

5. 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

6. 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

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

8. 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

9. 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

10. The Truth in Lending Act
Three basic rules for lenders:
Lenders cannot advertise a good deal which is not available to all consumers
Advertisements must include all or none of the terms
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”

11. 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

12. What’s the Real Price?

13. Variables of a Loan Negotiated Price Down Payment
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

14. Variables continued Trade-In Principal Loan Amount
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

15. Variables continued Annual Percentage Rate (APR) Time Period
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

16. Variables continued Total Cost of the Loan Total Purchasing Cost
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

17. 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.

18. Using Financial Calculators
Calculating the Cost
Using Financial Calculators

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

20. 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?

21. 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

22. Calculating the Cost Step 2: Calculate interest paid
$ * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount)
$5, – 5, = $640.55
(Total loan amount – principal loan amount = interest paid)

23. What’s the Real cost? Total loan amount = $5,640.55
Total purchasing cost = total loan amount + down payment
$5, $2, = $8,140.55

24. How does the cost change with different down payment amounts?

25. 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?

26. 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)

27. 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)

28. Down Payments Price Difference in Total purchasing costs- __________
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.

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

30. 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?

31. 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- _________________

32. How does the cost change with different time periods?

33. 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)

34. 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!