Financing a Car

Installment Loan – a loan that you pay off with weekly or monthly payments (or other time period)

Pro: Consumer can use product immediately

Con: Interest can add a large amount to the cost of the product

Loan Payment

Loan Payment Ex. Suppose you decide to borrow $15,000 for a new car. You can select one of the

following loans, each requiring regular monthly payments.

Installment Loan A: four-year loan at 8%

Installment Loan B: six-year loan at 10%

a) Find the monthly payments and the total interest for Loan A

b) Find the monthly payments and the total interest for Loan B

c) Compare the monthly payments and total interest for the two loans.

Loan Payment Ex. Suppose you decide to borrow $15,000 for a new car. You can select one of the

following loans, each requiring regular monthly payments.

Installment Loan A: four-year loan at 8%

Installment Loan B: six-year loan at 10%

a) Find the monthly payments and the total interest for Loan A

Loan Payment Ex. Suppose you decide to borrow $15,000 for a new car. You can select one of the

following loans, each requiring regular monthly payments.

Installment Loan A: four-year loan at 8%

Installment Loan B: six-year loan at 10%

b) Find the monthly payments and the total interest for Loan B

Loan Payment Ex. Suppose you decide to borrow $15,000 for a new car. You can select one of the

following loans, each requiring regular monthly payments.

Installment Loan A: four-year loan at 8%

Installment Loan B: six-year loan at 10%

c) Compare the monthly payments and total interest for the two loans.

Monthly payments are lower with the longer-term loan, but there is more interest with this loan

Monthly Payment Total Interest

4-Year Loan at 8% $366.19 $2,577.12

6-Year Loan at 10% $277.89 $5,008.08

Leasing Alternative Leasing: paying a specific amount of money over a

specific time for the use of a product. It is essentially a long-term rental agreement.

2 Types

Closed-end Lease: Fixed payment each month based on estimated usage. After lease, you return car and pay for excess mileage.

Open-end Lease: Fixed payment each month based on Residual Value which is the estimated resale value of the car after lease.

Leasing Alternative Advantages of Leasing:

Little or no down payment

Lease payments less than loan payments

Can lease a more expensive car due to cheaper payments

After lease, you don’t have to worry about selling car

Disadvantages of Leasing: You do not own the car!

Exceeding mileages can produce large charges

Given penalties, leasing is more expensive then financing

Liable for damages / must keep up on maintenance

Penalties for ending lease early

Auto Insurance Insurance: protection against loss associated with

unexpected events. Required when you own or lease a car.

Required by all: Liability Coverage

Bodily Injury Liability

Property Damage Liability

Required by those with a loan or if leasing:

Collision Coverage

Comprehensive Coverage

New or Used A new car loses an average of 12% its value the moment

it is driven off the dealer’s lot.

Used cars are best purchased when they are two to three years old. Depreciation rate is highest during the first few years.

Let’s look at an example where we have two options: buying a new car or a used car.

New or UsedEx. Suppose that you are thinking about buying a car and have narrowed

down your choices to two options:

1) A new car that costs $19,000 and can be financed with a 3-year loan at 6.18%

2) A 2 year old car of the same model that costs $11,500 and can be financed with a 3-year loan at 7.5%

What is the difference in monthly payments between the two options?

New or Used1) A new car that costs $19,000 and can be financed with a 3-year loan at 6.18%

Loan Payment:

2) A 2 year old car of the same model that costs $11,500 and can be financed with a 3-year loan at 7.5%

What is the difference in monthly payments between the two options?

P = $19,000t = 3 yrn = 12 /yrr = 0.0618

P = $11,500t = 3 yrn = 12 /yrr = 0.075

Costs of Owning a Car

Costs of owning a car include: fuel, maintenance, tires, tolls, parking, cleaning, insurance, license fees, registration fees, taxes, and interest on loans. The following are average costs based on driving 15,000 miles a year:

Costs of Owning a Car

Largest cost is gasoline. We can determine the annual fuel cost if we know how many miles we typically drive per year, the miles per gallon of our vehicle, and the average price per gallon of gasoline:

Costs of Owning a CarEx. Suppose that you drive 36,000 miles per year and gas averages $3.50 per gallon.

a) What will you save in annual fuel expenses by owning a hybrid car averaging 40 miles per gallon rather than an SUV averaging 15 miles per gallon?

b) If you deposit your monthly fuel savings at the end of each month into an annuity that pays 7.25% compounded monthly, how much will you have saved at the end of seven years?

Costs of Owning a CarEx. Suppose that you drive 36,000 miles per year and gas averages $3.50 per gallon.

a) What will you save in annual fuel expenses by owning a hybrid car averaging 40 miles per gallon rather than an SUV averaging 15 miles per gallon?

Hybrid:

SUV:

Save: $5250

Costs of Owning a CarEx. Suppose that you drive 36,000 miles per year and gas averages $3.50 per gallon.

b) If you deposit your monthly fuel savings at the end of each month into an annuity that pays 7.25% compounded monthly, how much will you have saved at the end of seven years?

Save $5250 per year. Savings per month: $5250 / 12 = $437.50

Practice ProblemsPage 546

Payment: #1, 3, 5, 7, 9

Monthly Fuel Savings: #11, 13, 15