Learning Target

• I will demonstrate my understanding of buying/leasing car and the cost of a car payment.

Things that relate to the costs of buying a car:

• Loan payments (if financed)

• Insurance

•Gas

•Registration

• Service/repairs

Key Terms to Know When Buying a Car

•Principal: the original amount of money borrowed or still owed on which interest is charged

• Interest: the price of using someone else’s money

• Secured loan: a loan backed by collateral

Key Terms to Know When Buying a Car

•Contract: an exchange, promise or agreementbetween parties that is enforceable by law.•Under the terms of a financing contract, a car buyer

agrees to pay the amount financed, at an agreed-upon interest rate, for the length of the contract

Key Terms to Know When Buying a Car

• Factors affect the total price of a car: interest rate, length of contract and size of down payment

• Truth in Lending Act: a federal law that requires disclosure of information about the cost of credit• Finance charges and the annual percentage rate

(APR) must be displayed prominently on forms and statements used by creditors

Key Terms to Know When Buying a Car•Gross pay: the amount earned before any taxes or

other deductions are subtracted; always less than net pay

•Net pay: the amount received after all deductions(Social Security tax, Medicare tax, and income tax) have been subtracted from a paycheck.

•Maximum percent of net pay that should be spent on a monthly car payment: 20 percent

Benefits of Leasing a Car

•When you are purchasing a car, the loan value is based on the entire cost of the vehicle, minus your down payment and/or trade-in value

•When leasing, you are only financing the depreciationthat occurs during the lease term (most commonly three years), plus fees

Benefits of Leasing a Car

•Generally, a monthly lease payment will be lower than a monthly loan payment•With the car lease, you only pay the difference

between the car’s price and what it is expected to be worth at the end of the lease, which is known as its residual value

Benefits of Leasing a Car

• If you only have a small down payment saved up, leasing may be a good option•Car leases require anywhere from zero to several

thousand dollars up front

Benefits of Leasing a Car• Leases are a good way to have a predictable total cost

of ownership•Many leases last about three years, or the length of

a typical new-car bumper-to-bumper warranty• That means the car is usually covered under

warranty for unexpected repairs during the lease

• If you enjoy having the newest high-tech and safety features, leasing could also be the better choice for you

Drawbacks of Leasing a Car• Lease contracts strictly limit the number of miles you

can drive

•Dealers require that the vehicle be returned in original condition, less normal wear and tear

Drawbacks of Leasing a Car•At the end of the lease, you will have no equity in the

car, and no value to apply as a down payment on your next car• If you like the car and want to buy it, you will have

to take out a loan, and that loan will incur a higher interest rate, since you will be financing a used car

Benefits of Buying a Car

• If you tend to keep your vehicle for a long time, buying is probably a better option for you •Once the loan is paid off, you own the car

• Throughout the length of the loan, you gain equity in the car as long as your payments outpace the depreciation of the vehicle

•As opposed to leasing, there are no mileagerestrictions

Drawbacks of Buying a Car

•When you buy a new car, you are open to fluctuationsin its market value when you decide to sell or trade it in

•Another potential drawback of buying is a sizeable down payment

•Many lenders require 10 to 20 percent down when taking out a car loan

Drawbacks of Buying a Car

•Another disadvantage of buying is extending the length of the loan to have lower monthly payments• Longer loan terms give more time for interest to

compound, and the interest rates tend to be higher• You will end up paying more in total payments

for the car than if you had a shorter loan term

The Basics of Car Loans

• The amount you borrow is called the loan principal or financed balance

• Lenders almost always charge interest (sometimes, there are special zero percent financing rates)

The Basics of Car Loans

• The interest rate is a percentage of the loan that you must pay back in addition to the loan principal• Interest rates are presented as an annual

percentage rate (APR)

•

• You can use a finance calculator to determine how the interest rate affects your monthly payment

The Car Loan Term

• The length of the loan, or loan term, simply refers to the amount of time that it will take to pay the lender back

• If you sign up for a five-year term, over the next 60 months you will pay the money back and then own the car

Your Credit Score• When it comes to how much interest is charged on a car

loan, some people get charged more interest and some get charged less

• The interest rate lenders charge is based on a number of factors, one of which is your credit score• Lenders use the score to predict your ability and

likelihood to pay them back• If your score is low, lenders will assume that you are a

higher risk for not paying the loan back• You will also pay a higher interest rate

Financing and Monthly Payments

• Use http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx to figure out the monthly payments for the charts that follow

• Then, figure out the total price of the car• Take the monthly payment amount X the number of

payments (length of contract)

• Finally, figure out the total finance charges• Subtract the total price of the car from the amount

financed ($20,000)

Amount Financed: $20,000

APR Length of

Contract

Monthly

Payment

Total Price

of Car

Total

Finance

Charge

9.75% 36 months

9.75% 48 months

9.75% 60 months

9.75% 72 months

Amount Financed: $20,000

APR Length of

Contract

Monthly

Payment

Total Price

of Car

Total

Finance

Charge

9.75% 36 months $643 $23,148 $3,148

9.75% 48 months $505 $24,240 $4,240

9.75% 60 months $422 $25,320 $5,320

9.75% 72 months $368 $26,496 $6,496

Amount Financed: $20,000

APR Length of

Contract

Monthly

Payment

Total Price

of Car

Total

Finance

Charge

5.00% 36 months

5.00% 48 months

5.00% 60 months

5.00% 72 months

Amount Financed: $20,000

APR Length of

Contract

Monthly

Payment

Total Price

of Car

Total

Finance

Charge

5.00% 36 months $599 $21,564 $1,564

5.00% 48 months $461 $22,128 $2,128

5.00% 60 months $377 $22,620 $2,620

5.00% 72 months $322 $23,184 $3,184

•1. Based on the charts, explain the importance of APR.

•2. What did you notice happened to the monthly payment as the length of payments increased?• a. What did you notice about the amount of

finance charges?

•1. Based on the charts, explain the importance of APR.

•A lower APR results in less finance charges paid over the course of the loan

•2. What did you notice happened to the monthly payment as the length of payments increased?

• The monthly payment decreases

• a. What did you notice about the amount of finance charges?• The amount of finance charges increased

Making a Down Payment• How would these numbers change with a $2,000 down payment?

• Amount Financed: $18,000 (Total price of car=$20,000; $2,000 down payment)

APR Length of

Contract

Monthly

Payment

Total Cost

of

Payments

Total

Finance

Charge

Total Price

of Car

(w/down

payment)

5.00% 36 months $539

5.00% 48 months $415

5.00% 60 months $340

5.00% 72 months $290

Making a Down Payment• How would these numbers change with a $2,000 down payment?

• Amount Financed: $18,000 (Total price of car=$20,000; $2,000 down payment)

APR Length of

Contract

Monthly

Payment

Total Cost

of

Payments

Total

Finance

Charge

Total Price

of Car

(w/down

payment)

5.00% 36 months $539 $19,404 $1,404 $21,404

5.00% 48 months $415 $19,920 $1,920 $21,920

5.00% 60 months $340 $20,400 $2,400 $22,400

5.00% 72 months $290 $20,880 $2,880 $22,880

Making a Down Payment•How would these numbers change with a $2,000

down payment?•Calculate the total cost of payments.•Calculate the total finance charge.•Calculate the total price of the car with the $2,000

down payment.

•Amount Financed: $18,000 (Total price of car=$20,000; $2,000 down payment)

Making a Down Payment•3. Compared to the previous chart, how much is

saved by making a $2,000 down payment for a 60 month contract?

•4. Is a down payment worth it? Explain.

Making a Down Payment•3. Compared to the previous chart, how much is

saved by making a $2,000 down payment for a 60 month contract?

•$220

•4. Is a down payment worth it? Explain.

•Depends; it can significantly reduce the cost of your monthly payment but it depends on if one can same a sizeable down payment

The Income Test• Your vehicle payment should be no more than 20

percent of your net pay after subtracting monthlybills such as credit card payments and home equity payments

•Calculate the minimum net pay required to afford each monthly car payment.• If $599 = 20% of your net pay, then 100% = $2,995

(5 x $599 equals the amount of monthly net pay needed)

Amount Financed: $20,000

APR Length of

Contract

Monthly

Payment

Minimum

Monthly Net Pay

5.00% 36 months $599

5.00% 48 months $461

5.00% 60 months $377

5.00% 72 months $322

Amount Financed: $20,000

APR Length of

Contract

Monthly

Payment

Minimum

Monthly Net Pay

5.00% 36 months $599 $2,995

5.00% 48 months $461 $2,305

5.00% 60 months $377 $1,885

5.00% 72 months $322 $1,610

Applying What You Have Learned: Which is the Better Deal?

• You are in the market for a new car and will need to finance $20,000. You have a good job with a monthly net pay of $3,000 and want to make an informed decision. The dealer has presented different options as listed in the chart below. Use a calculator to complete the chart and help determine which deal to choose. Round your answers to the nearest dollar.

Applying What You Have Learned: Which is the Better Deal?

Deal 1 Deal 2 Deal 3 Deal 4Amount of Loan $20,000 $20,000 $20,000 $20,000APR 5% 6% 8% 9%Length of Loan 48 months 36 months 72 months 60 monthsMonthly Payment $461 $608 $351 $415Total Price of Car

Total Paid in Interest

Applying What You Have Learned: Which is the Better Deal?

Deal 1 Deal 2 Deal 3 Deal 4Amount of Loan $20,000 $20,000 $20,000 $20,000APR 5% 6% 8% 9%Length of Loan 48 months 36 months 72 months 60 monthsMonthly Payment $461 $608 $351 $415Total Price of Car $22,128 $21,888 $25,272 $24,900Total Paid in Interest $2,128 $1,888 $5,272 $4,900

Applying What You Have Learned: Which is the Better Deal?

• Based on the completed chart, which deal would you choose? Keep the 20% of your net pay rule in mind.

• Deal choice: ____________________

• Reasons for choosing this deal:

Sources

• Federal Reserve Bank of St. Louis

• https://cars.usnews.com/cars-trucks/buying-vs-leasing

• https://cars.usnews.com/cars-trucks/how-to-finance-a-car

• http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx