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

Shopping for an Automobile Loan

What Do I Need to Know?

Using Financial Calculators

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

2nd 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.

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



The Truth in Lending ActThree basic rules for lenders:1. Lenders cannot advertise a good deal

which is not available to all consumers2. Advertisements must include all or none

of the terms3. 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”

1.16.3.G1



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

What’s the Real Price?

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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

1.16.3.G1



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.

1.16.3.G1



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!

Down Payment

How does the cost

change with different

down payment amounts?

1.16.3.G1



Down Payments Calculate the cost of a $7,500 car

with an 8% APR over 36 months (3 years):A. $1,000 down paymentB. $2,500 down paymentDown

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

Annual Percentage Rate (APR)

How does the cost


APRs?

1.16.3.G1



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 Rate Payment Total Purchase Price

8% on $5,000 156.68 $5640.48

10% on $5,000

161.34 $5808.24

Cost of Borrowed $ at 10%

$4.66 a Month

$203.76 Extra at 10%

Time Period

How does the cost


time periods?

1.16.3.G1



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 Period Payment per Month

Total 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

1.16.3.G1



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 .

1.16.3.G1



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.

1.16.3.G1



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.

Documents

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