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Using Financial Calculators

1.16.3.G1 (BAII Plus)

Shopping for an Automobile Loan


What Do I Need to Know?

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Automobiles

2nd most expensive purchase for most consumers Purchased with


Cash Loan / credit very common

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Automobile Loans

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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 persons credit history

Based on repayment patterns, prior credit usage, credit history, length of employment
Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Lender Options

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Whats the Real Price?

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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 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

Principal Loan Amount

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Variables continued

Annual Percentage Rate (APR)

Measure of the cost of credit on a yearly basis expressed as a percentage Amount of time the loan will be repaid

Time Period

Payments per Year


Number of payments that are due each year Usually monthly (12 times per year)

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Variables continued

Total Cost of the Loan

Total of the principal loan amount, interest paid, and other fees Total of the down payment, trade-in value, and total loan amount

Total Purchasing Cost

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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.

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Calculating the Cost


Using Financial Calculators
Texas Instruments BAII Plus Solar Business Analyst

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Calculating the Cost

Four variables are required to calculate the cost of a loan:


Number of payments per year [P/Y] Principal loan amount [PV] APR [I/Y] Time period of loan [N]

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Calculating the Cost

Joe has decided to purchase an automobile


Payments per year: 12 Negotiated price: $7,500 Down payment: $2,500 APR: 8% Time Period: 3 years

What is it really going to cost?


Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Calculating the Cost


$7,500 - $2,500 = $5,000


(Negotiated price Down payment = Principal loan amount)

$5,000 over 3 years at 8% APR compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2nd] xP/Y [N] APR: 8 [I/Y] [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)

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Whats 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

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Down Payment
How does the cost change with different down payment amounts?
Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Down Payments

Calculate the cost of a $7,500 car with an 8% APR compounded monthly over 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?

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) 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


1.16.3.G1 (BAII Plus)

$7,500 - $1,000 = $6,500


(Negotiated price Down payment = Principal loan amount)

$6,500 over 3 years at 8% APR compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 6,500 [PV] Time period: 3 [2nd] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $203.69 $203.69 * 36 = $7,332.71
(Monthly payment * Number of payments = Total loan amount)

Step 2: Calculate interest paid

$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)
Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) 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


1.16.3.G1 (BAII Plus)

$7,500 - $2,500 = $5,000

(Negotiated price Down payment = Principal loan amount)

$5,000 over 3 years at 8% APR compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2nd] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $156.68 $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount)

Step 2: Calculate interest paid

$5,640.55 $5,000 = $640.55


(Total loan amount Principal loan amount = Interest paid)

Step 3: Calculate total purchasing cost

$5,640.55 + $2,500 = $8,140.55


(Total loan amount + Down payment = Total purchasing cost)
Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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 Principal loan amount: $5,000 Monthly payment: $156.68 Interest paid: $640.55 Total purchasing cost: $8,140.55

Example #2 - $2,500 down payment


Price Difference - $192.16


The higher the down payment, the lower the principal loan amount.
Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Annual Percentage Rate (APR)


How does the cost change with different APRs?

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

APRs

Calculate the cost of a $7,500 car with a $2,500 down payment over 3 years at:
8% APR compounded monthly 10% APR compounded monthly

What are the monthly payments? How much interest is paid? What is the total purchasing cost?

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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 compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit

Principal loan amount: 5,000 [PV] Time period: 3 [2nd] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $156.68 $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount)

Step 2: Calculate interest paid


$5,640.55 $5,000 = $640.55


(Total loan amount Principal loan amount = Interest paid)

Step 3: Calculate total purchasing cost

$5,640.55 + $2,500 = $8,140.55


(Total loan amount + Down payment = Total purchasing cost)

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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 compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2nd] xP/Y [N] APR: 10 [I/Y] [CPT] [PMT] = $161.34 $161.34 * 36 = $5,808.09
(Monthly payment * Number of payments = Total loan amount)

Step 2: Calculate interest paid


$5,808.09 $5,000 = $808.09


(Total loan amount Principal loan amount = Interest paid)

Step 3: Calculate total purchasing cost

$5,808.09 + $2,500 = $8,308.09

(Total loan amount + Down payment = Total purchasing cost)

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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.


Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Time Period
How does the cost change with different time periods?
Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

Time Periods

Calculate the cost of a $7,500 car with a $2,500 down payment with an 8% APR compounded monthly over:
3 years 5 years

What are the monthly payments? How much interest is paid? What is the total purchasing cost?

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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 compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 5,000 [PV] Time period: 3 [2nd] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $156.68 $156.68 * 36 = $5,640.55

Step 2: Calculate interest paid


(Monthly payment * Number of payments = Total loan amount)


$5,640.55 $5,000 = $640.55
(Total loan amount Principal loan amount = Interest paid)

Step 3: Calculate total purchasing cost

$5,640.55 + $2,500 = $8,140.55

(Total loan amount + Down payment = Total purchasing cost)


Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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 compounded monthly Step 1: Calculate monthly payment

Payments per year: [2nd] P/Y 12 [Enter] Standard-calculator mode: [2nd] Quit Principal loan amount: 5,000 [PV] Time period: 5 [2nd] xP/Y [N] APR: 8 [I/Y] [CPT] [PMT] = $101.38 $101.38 * 60 = $6,082.92
(Monthly payment * Number of payments = Total loan amount)

Step 2: Calculate interest paid


$6,082.92 $5,000 = $1,082.92


(Total loan amount Principal loan amount = Interest paid)

Step 3: Calculate total purchasing cost

$6,082.92 + $2,500 = $8,582.92

(Total loan amount + Down payment = Total purchasing cost)


Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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.
Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.16.3.G1 (BAII Plus)

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!

Family Economics & Financial Education June 2006 Transportation Unit Shopping for an Automobile Loan (BAII Plus) Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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