PF

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

2. 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

3. Automobile
Loans

4. 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
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 person’s credit
history
 Based on repayment patterns, prior credit usage, credit
history, length of employment

5. 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
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 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

6. 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
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

7. 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
Lender Options
 Auto Dealers
 Commercial Banks
 Savings and Loans
 Credit Unions
 Online lenders
 Life Insurance Policies
 Auto Insurance Companies

8. 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
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

9. 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
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

10. 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
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”

11. 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
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

12. What’s the
Real Price?

13. 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
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

14. 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
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

15. 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
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

16. 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
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

17. 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
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.

18. Calculating
the Cost
Using Financial
Calculators

19. 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
Calculating the Cost
 Three variables are required to calculate the cost of
a loan:
 Principal loan amount [PV]
 APR [%I]
 Time period [N]

20. 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
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?

21. 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
Calculating the Cost
 $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
 $5,000 over 3 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [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)

22. 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
What’s 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

23. Down Payment
How does the
cost change with
different down
payment
amounts?

24. 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
Down Payments
 Calculate the cost of a $7,500 car with an 8%
APR over 36 months (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?

25. 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
Example #1 –
$1,000 Down Payment
 $7,500 - $1,000 = $6,500
(Negotiated price – Down payment = Principal loan amount)
 $6,500 over 3 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 6,500 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $203.69
 Step 2: Calculate interest paid
 $203.69 * 36 = $7,332.71
(Monthly payment * Number of payments = Total loan amount)
 $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)

26. 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
Example #2 –
$2,500 Down Payment
 $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
 $5,000 over 3 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $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 = $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)

27. 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
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
• Monthly payment - $156.68
• Interest paid - $640.55
• Total purchasing cost - $8,140.55
 Price Difference - $192.16
 The higher the down payment, the lower the principal loan amount.

28. Annual Percentage
Rate (APR)
How does the
cost change with
different APRs?

29. 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
APRs
 Calculate the cost of a $7,500 car with a $2,500
down payment over 36 months (3 years) at:
 8% APR
 10% APR
 What are the monthly payments?
 How much interest is paid?
 What is the total purchasing cost?

30. 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
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
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $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 = $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)

31. 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
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
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 10 2nd
[%i] [%i]
 [CPT] [PMT] = $161.34
 Step 2: Calculate interest paid
 $161.34 * 36 = $5,808.09
(Monthly payment * Number of payments = Total loan amount)
 $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)

32. 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
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.

33. Time Period
How does the
cost change with
different time
periods?

34. 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
Time Periods
 Calculate the cost of a $7,500 car with a $2,500
down payment with an 8% APR over:
 36 months (3 years)
 60 months (5 years)
 What are the monthly payments?
 How much interest is paid?
 What is the total purchasing cost?

35. 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
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
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $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 = $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)

36. 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
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
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 5 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $101.38
 Step 2: Calculate interest paid
 $101.38 * 60 = $6,082.92
(Monthly payment * Number of payments = Total loan amount)
 $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)

37. 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
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.

38. 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
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!