Shopping for an Automobile Loan

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

2. Automobiles • An automobile is the second most expensive purchase for most consumers (home purchase is most expensive) • Consumers will buy multiple cars during their lifetimes • Cars can be purchased with • Cash • Car loan is more common, especially for new cars

3. Automobile Loans

4. Definitions • Auto Loan – money is borrowed to purchase an automobile • Lender– a financial institution which offers loans to consumers • Before lender the money, the lender will check the borrower’s credit rating – evaluation of a person’s credit history

5. Definitions continued • Cosigner – a person who guarantees the loan for the original borrower • Responsible for paying the debt back if the original borrower does not pay (defaults) • A cosigner may be required for a loan if • The primary borrower does not have a credit history • The primary borrower has a bad credit rating • It is common for parents to cosign for their children who are young adults and do not have a credit history

6. Definitions continued • Secured Loan– collateral • A loan with collateral means the loan is secured, or backed up by, an asset • Automobile loans are secured by the automobile itself • If the borrower fails to repay the loan, the lender can repossess, or take back, the property

7. Lender Options – Where do I Get a Loan? • Auto Dealers • Commercial Banks • Savings and Loans • Credit Unions • Online lenders • Life Insurance Policies

8. Consumer Rights • The Truth in Lending Act - 1968 • Applies to all credit transactions • Requires clear disclosure of key terms and all costs in lending agreements

9. The Truth in Lending Act continued • Lenders must disclose to consumers: • Interest rate expressed as the APR in large bold numbers • Total finance charge (total cost of the loan) • Allows consumers to easily compare credit offers

10. What’s the Real Price?

11. Variables of a Loan • MSRP – Manufacturer’s Suggested Retail Price, or Sticker Price • Negotiated Price – the final agreed price of the automobile, after negotiations between buyer and seller • Down Payment - Amount of money being paid for the automobile at time of purchase, usually required

12. Variables continued • Trade-In – If an older car is traded for the new car • Trade-in amount is subtracted from the negotiated price of the automobile • Principal Loan Amount - Amount of money borrowed, not including interest and fees

13. Variables continued • Annual Percentage Rate (APR) – The percentage rate of the loan, expressed as an annual amount • Time Period • Amount of time the loan will be repaid • Usually expressed in months • Most common for auto loans: 36 to 72 months

14. Rules of Thumb onAuto Loans • 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 monthly payments. However, more interest is paid. • The higher the APR, the more interest is paid and the larger the monthly payment and the total loan amount.

15. Should You Buy New or Used? • Advantages of buying a new car: • It’s new and shiny! • Fewer mechanical problems • More reliable • You are the sole owner • Disadvantages of buying a new car: • More expensive – as soon as you drive it off the lot, it becomes a used car, and the value decreases substantially • Higher monthly car payments as compared to used • Higher insurance rates

16. Should You Buy New or Used? • Advantages of buying a used car: • Much lower cost • Lower monthly car payments; may be able to pay off sooner, or pay cash up front • Fits better in budget • Lower insurance rates • Disadvantages of buying a used car: • Not as reliable • More maintenance and repair costs • Doesn’t look as nice as a new car