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

2. 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 2 nd most expensive purchase for most consumers Purchased with Cash Loan / credit – very common When using someone else's money, it comes with a charge. This charge is called interest.

3. 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 Definitions 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

4. 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 Definitions Continued Auto Loan – borrowed money to purchase an automobile Terms of the loan will vary, usually expressed in months. (4 years=48 months) 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. 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 Lender Options Auto Dealers Commercial Banks Savings and Loans Credit Unions Online lenders Life Insurance Policies Auto Insurance Companies

6. 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 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. 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 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

8. 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 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

9. 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 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”

10. 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 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

11. What’s the Real Price?

12. 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 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

13. 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 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

14. 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 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

15. 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 Variables continued Total Cost of the Loan Total of the principal loan amount, interest paid, and other fees, expressed in months. Total Purchasing Cost Total of the down payment, trade-in value, and total loan amount

16. 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 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.

17. 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 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? $5,000 borrowed Total Purchasing Price=$5640.48 WHY!

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

19. 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 Down Payments Calculate the cost of a $7,500 car with an 8% APR over 36 months (3 years): A. $1,000 down payment B. $2,500 down payment Down PaymentPayment Total Principal Purchase Price of Car /Cost of $ A. $1,000$203.69 $7332.84 $6500/$832.84 B. $2500$156.68 $5640.48 $5000/$640.48

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

21. 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 APRs Calculate the cost of a $7,500 car with a $2,500 down payment over 36 months (3 years) at: 8% APR vs. 10% APR Interest RatePaymentTotal Purchase Price 8% on $5,000156.68 $5640.48 10% on $5,000161.34$5808.24 Cost of Borrowed $ at 10% $4.66 a Month$203.76 Extra at 10%

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

23. 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 Time Period - Comparisions Calculate the cost of a $7,500 car with a $2,500 down payment over….: 8% APR 3 yrs. Vs. 5 yrs Time PeriodPayment per MonthTotal Purchase Price 3 yrs/36 months$156.68$5640.48 5 yrs/60 months$101.38$6082.80 Adding yrs to loan-$55.30 per month+442.32 in Interest

24. 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 Illinois Lemon Law on new Cars Is My Vehicle a Lemon? In order to be covered by the Illinois Lemon Law, a vehicle must: Have a nonconformity that both substantially impairs the use, market value or safety of the vehicle and is not repairable by the dealer or manufacturer in at least four attempts for the same repair, or Be out of service for a total of 30 or more business days. The Lemon Law DOES Cover: New Cars (purchased or leased) Light Trucks and vans under 8,000 pounds Recreational vehicles (excluding trailers) Vehicles in their first 12 months or 12,000 miles, whichever occurs first.

25. 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 What if I have a Lemon! Lemon Law claims cannot be initiated directly through the dealer. Many consumers have lost their Lemon Law remedy because they waited longer than 12 months from the purchase date, the time period in which Lemon Law complaints must be filed, all the while believing they were proceeding under the Lemon Law through their dealer. If the Dispute Board rules in your favor, you can expect one of the following compensations: You will receive a replacement vehicle of like or similar value. The manufacturer will buy your vehicle back from you, less the value for miles driven.

26. 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 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! Know what you sign and your consumer rights. BE AN INFORMED CONSUMER, NOT UNPREPARED VICTIM OF CHOICE.