Ch. 10.2 Equity and Depreciation:

New Cars and Used CarsObjective:

1.Learn how to select a used car2.Estimate the value of a used car

3.Understand equity and depreciation

Imagine

You worked very hard for three years and managed to save a few thousand dollars, just enough for a used car. You search online for a used car at the price range that you can afford. You find your car, you like it, and buy it! A few weeks later you notice that the car odometer had been tampered with. Throughout the first year the car needed a new radiator, an alternator, a fuel pump, and a rebuilt transmission.

1. Equity and Depreciation

When you buy a car and finance it, the bank owns the car until you finish paying for it.

As one pays the car off, they increase their equity in the car.

Equity – your gain in the financial worth of the car. Ex: If your car is worth $8000 but you owe the bank

$3000, your equity is $5000.Ex: Or, if your car is worth $15,000, and you owe $20,000,

you have negative equity.

1. Equity and Depreciation

But what is the car worth at any time?Well, a car loses value as a it gets older, until it is

worth nothing. Unless, it is a classic.Depreciation – the loss of value in a car.Depreciation begins immediately for a new car

and it is more gradual in a used car. *some cars retain value better than others.

2. Where to buy

A great place to start is the internet. Kelley Blue Book and Auto Trader are fast and easy.

Dealers- new car dealers usually keep the best cars that have been traded in, so you can expect a to find a good used car at a new car dealership. The problem is that they are fairly expensive!FTC (Federal Trade Commission)- encourages buyers to have all claims to be put in writing and to have a mechanic check the car.

2. Where to buy?

Private Sales – are always more risky. The FTC regulations do not apply. Private sells are “as is”. You have no guarantee.

*it might be a good idea to take a mechanic Car Rental Companies and Auctions – rentals

are usually kept in good condition. But, always think twice about buying a car that has been driven by many people. Cars bought at auctions are “like a box o’ chocolate”.

2. Where to buy?

Inspecting a car – a good inspections will cover three types of inspections: on the lot, on the road, and in the garage.

* Hire a mechanic if you don’t know @#$& about cars, even if you do hire one.

Example 1

Records for one standard model of car indicate that during 10 years it depreciates by the following percent of the original cost. 25%, 20%, 12%, 10%, 8%, 7%, 6%, 5%, 4%, 3%

Form a table and a graph to represent the depreciation.

Year % of Depreciation Amount of Depreciation Resale Value

0 -------------- -------------- 20,000

1 25%

2 20%

3 12%

4 10%

5 8%

6 7%

7 6%

8 5%

9 4%

10 3%

MONTHLY PAYMENT FORMULA

r(1 )

(1 ) 1

n

n

P rM

r

Example 2

Bryan decided to buy a Mitsubishi “Spyder” Eclipse for $19,490. He makes a down payment of 20% and obtains a 3 year loan at an APR of 6%. Make a table to compare the equity of the car to the amount owed.

Payment Number

Payment Amount

Interest Due

Note Reduction

Unpaid Balance

Value of Car

Equity

0 15592.00 19490.00 3898.00

1 474.34 77.96 396.38 15195.62 19327.58 4131.96

2 474.34 75.98 398.36 14797.26 19165.16 4367.90

3 474.34 73.99 400.35 14396.91 19002.74 4605.83

4 474.34 71.98 402.36 13994.55 18840.32 4845.77

5 474.34 69.97 404.37 13590.18 18677.90 5087.72

6 474.34 67.95 406.39 13183.79 18515.48 5331.69

7 474.34 65.92 408.42 12775.37 18353.06 5577.69

8 474.34 63.88 410.46 12364.91 18190.64 5825.73

9 474.34 61.82 412.52 11952.39 18028.22 6075.83

10 474.34 59.76 414.58 11537.81 17865.80 6327.99

11 474.34 57.69 416.65 11121.16 17703.38 6582.22

12 474.34 55.61 418.73 10702.43 17540.96 6838.53

Payment Number

Payment Amount

Interest Due

Note Reduction

Unpaid Balance

Depreciate Value

Equity

13 474.34 53.51 420.83 10281.60 17378.54 7096.94

14 474.34

15 474.34

16 474.34

17 474.34

18 474.34

19 474.34

20 474.34

21 474.34

22 474.34

23 474.34

24 474.34

Payment Number

Payment Amount

Interest Due

Note Reduction

Unpaid Balance

Depreciate Value

Equity

0 20,400 24,000 3600

1 620.61

2 620.61

3 620.61

4 620.61

5 620.61

6 620.61

7 620.61

8 620.61

9 620.61

10 620.61

11 620.61

12 620.61