Auto Loan

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

Price?
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
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
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
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
Payments per Year
Number of payments that are due each year
Usually monthly (12 times per year)
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
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.
Calculating the
Cost
Using Financial
Calculators
Texas Instruments BAII Plus
Solar Business Analyst
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]

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?

$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)
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
Down Payment
How does the cost
change with
different down
payment amounts?
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?
Example #1
$1,000 Down Payment
$7,500 - $1,000 = $6,500
APR: 8 [I/Y]
[CPT] [PMT] = $203.69
$203.69 * 36 = $7,332.71
$7,332.71 $6,500 = $832.71
Step 3: Calculate total purchasing cost
$7,332.71 + $1,000 = $8,332.71
(Total loan amount + Down payment = Total purchasing cost)
Example #2
$2,500 Down Payment
$7,500 - $2,500 = $5,000
APR: 8 [I/Y]
[CPT] [PMT] = $156.68
$156.68 * 36 = $5,640.55
$5,640.55 $5,000 = $640.55
$5,640.55 + $2,500 = $8,140.55
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
Price Difference - $192.16
The higher the down payment, the lower the principal loan amount.
Annual Percentage
Rate (APR)
How does the cost
change with
different APRs?
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

Example #3 APR 8%
$7,500 - $2,500 = $5,000
APR: 8 [I/Y]
[CPT] [PMT] = $156.68
$156.68 * 36 = $5,640.55
$5,640.55 $5,000 = $640.55
$5,640.55 + $2,500 = $8,140.55
Example #4 - APR 10%

$7,500 - $2,500 = $5,000
APR: 10 [I/Y]
[CPT] [PMT] = $161.34
$161.34 * 36 = $5,808.09
$5,808.09 $5,000 = $808.09
$5,808.09 + $2,500 = $8,308.09
APRs
Example #3 8% APR
Monthly payments: $156.68
Example #4 10% APR
Monthly payments: $161.34
Price Difference $167.54
The higher the APR, the more interest paid.
Time Period
How does the cost
change with
different time
periods?
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

Example #5 3 years
$7,500 - $2,500 = $5,000
APR: 8 [I/Y]
[CPT] [PMT] = $156.68
$156.68 * 36 = $5,640.55
$5,640.55 $5,000 = $640.55
$5,640.55 + $2,500 = $8,140.55
Example #6 5 years
$7,500 - $2,500 = $5,000
APR: 8 [I/Y]
[CPT] [PMT] = $101.38
$101.38 * 60 = $6,082.92
$6,082.92 $5,000 = $1,082.92
$6,082.92 + $2,500 = $8,582.92
Time Periods
Example #5 3 years
Total purchasing cost = $8,140.55
Example #6 5 years
Interest paid: $1,082.92
Price Difference $442.37
The longer the time period of the loan, the smaller the
payments. However, more interest is paid.
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!

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Using Financial Calculators 1.16.3.

2nd most expensive purchase for most

The Truth in Lending Act

The Truth in Lending Act

Whats the Real

Calculating the Cost

Time period of loan [N]

Calculating the Cost

Down payment: $2,500

Time Period: 3 years

What is it really going to cost?

Calculating the Cost

Whats the Real cost?

Total purchasing cost = total loan amount +

What are the monthly payments?

What are the monthly payments?

Example #4 - APR 10%

What are the monthly payments?

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