Loan To Own. Loan To Own 2 What is an Installment Loan? A loan that is repaid in equal monthly...

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What is an Installment Loan?• A loan that is repaid in equal

monthly payments/installments for a specific period of time

• What items can be purchased with an installment loan?• Cars• Homes• Student Loan• Motorcycle

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Secured Installment Loans• Requires collateral or co-signer

• Usually has lower interest rates than unsecured loans

• A loan with collateral means the lender has security interest in the property pledged until loan paid in full

• If the borrower fails to repay the loan, the lender can then seize the collateral by repossessing the collateral

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Secured Installment Loans• If you are unable to repay the loan

and the sale of the collateral is insufficient to cover the balance, you are still responsible for:• The remaining balance • Any fees and interest associated with

the loan

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Unsecured Installment Loan• NOT secured by collateral

• Tougher lending standards than secured loans

• Personal Loans

• Private Student Loans

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Cost of Installment Loans

1. Dollar amount the loan will cost, including: interest, service charges, and loan feesAnswer: Finance charges

2. Loan with interest rate that might change during any period of the loanAnswer: Variable-rate loan

APR Fixed-rate loan Finance Charges Variable-rate loan


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Cost of Installment Loans

3. Cost of borrowing money on a yearly basis Answer: APR

4. Loan with interest rate that stays the same throughout the term of the loanAnswer: Fixed-rate loan



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Why Do Borrowers Prefer Installment Loans?

• Equal monthly payment amount • Fixed repayment period

• 12, 14, 36, 48, 60 or 72 months (Vehicle Loans)

• 180 months or 360 months (Mortgage Loans)

• Lower rates than revolving credit• Decreasing balance during loan term

because payment includes principal• Simple Interest Loan• Amortization Chart (BANKRATE.COM)

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Purchasing or Leasing a Car• Second most expensive purchase

for most consumers• What are some questions to ask

yourself when looking for a car?• Should I get a new or used car?• Should I lease or buy?• How much can I afford?• Should I trade in my old car?

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Car Loans Versus Car Leases

• Consider:• Ownership potential• Wear and tear• Monthly payments• Mileage limitations• Auto insurance• Cost

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Financing a Car• The car is the collateral for the loan

• The title indicates who owns the car

• When considering a car loan:• Know the costs and how much you need to borrow• Shop for the best deal• Get Pre-Approved financing to make sure you

don’t buy more car than you can afford• Negotiate with dealer for the best price• Know the amount of down payment required• Investigate trade-in allowance (KBB.COM)

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Where to Obtain Car Loans

• Banks

• Credit Unions

• Finance Companies

• Car Dealerships

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Buying A CarThings to avoid while shopping for a car: 1. Do not show enthusiasm! Dealers take

advantage 2. Never buy a car in a hurry! 3. Avoid being switched to a lease without

doing your homework 5. Do not trade in your car without knowing

its value in advance 6. Avoid financing automatically at a

dealership

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When Dealers Offer Low Interest Rates

• The best deal may require:• Large down payment• Short loan term (3 years or less)• Excellent credit history• Participation fee

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Low Interest Rates

• Ask about:• Price of low-rate financing • Advantages of paying with cash/using

your own financing• Down payment required• Limits on the length of the loan• Balloon payments, if due at the end of

the loan

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Special Promotions

• Ask about:• Trade-in allowance• Limits on special offers • Meaning of dealer’s invoice

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Buying a Used CarBenefits of Used Cars• Used cars do not depreciate as rapidly

compared to new cars.• One year old vehicles are about 20-30%

cheaper than new ones.• Used vehicles are sometimes still covered by

extended warranties.• You can trace the history of the car using the

Vehicle Identification Number (VIN).• Some CU’s offer new car rates on used

vehicles.

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Buying a Used Card• Have an independent mechanic

check out a used car before you buy it.

• Ask questions – pay attention to road noise, handling, brakes, seating comfort, etc.

• Order report on used vehicle from carfax.com

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Using the WebWeb sites make car shopping a

little easier. Do your homework on sites such as KellyBlueBook.com.

Check online customer satisfaction and safety ratings.

Web sites are good for researching, but not necessarily for car buying. Be careful, and only deal with people you can trust.

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Auto Dealer Extras Extended Warranties (Can run at same time

as New Car Warranties) Fabric and Paint Protection Rustproofing Maintenance Plans Ding Protection GAP Insurance

Gap insurance covers the difference between what the car is worth and what you owe on the car. It comes into play if the car is stolen or totaled (damaged to the point that repair would cost more than the car is worth) while the owner is still making payments. $300-$700

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Auto Service Contracts• A promise to perform (or pay for)

certain repairs or services

• Ask questions before buying auto service contracts.

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Used Car: Warranty Protection• Look for the Buyer’s Guide sticker

to indicate whether the vehicle is being sold:• With a warranty• With implied warranties • “As Is”

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Alternative Fueled Vehicles

• Before buying or leasing, consider:• Fuel type and availability• Operating costs• Performance/convenience• Energy security/renewability• Emissions• Tax breaks

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Structuring a Car Loan• Make as large a down payment as

possible

• Consider the total cost of the loan

• Be cautious about taking on an auto loan term of 5 years or more

Activity 1: Calculating the Cost Worksheet

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Calculating the CostUsing Standard Calculators•Three variables are required to calculate the cost of a loan:

• Principal loan amount• APR • Time period

•Using a standard calculator does not provide exact results, just estimates

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Equations• To estimate the interest paid:

• Principal loan amount * APR * Time period = Interest paid

• To find the total loan amount:• Interest paid + Principal loan amount = Total

loan amount

• To find the estimated monthly payment:• Total loan amount/number of payments =

Estimated monthly payment

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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?

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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: Estimate the Interest Paid

(Principal loan amount * APR * Time Period = Interest Paid

• Principal loan amount: 5,000

• Time period: 3 years (3*12 = 36 payments)

• APR: 8%

• $5,000 *.08 * 3 = $1,200

• Estimated interest paid: $1,200

• Step 2: Find the total loan amount• $1,200 + $5,000 = $6,200

(Interest paid + principal loan amount = Total loan amount)

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What’s The Real Cost?

• Total loan amount = $6,200

• Total purchasing cost = total loan amount + down payment

• $6,200+ $2,500 = $8,700

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Down Payment

• How does the cost change with different down payment amounts?

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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?

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Example #1 – $1,000 Down Payment• $7,500 - $1,000 = $6,500


• $6,500 over 3 years at 8% APR• Step 1: Estimate the interest paid

• Principal loan amount: $6,500 • Time period: 36 months (3 years)• APR: 8%• $6,500 * .08 * 3 = $1,560 estimated interest paid (Principal loan amount * APR * Time period = Interest Paid)

• Step 2: Find the total loan amount• $1,560 + $6,500 = $8,060 (Interest paid + Principal loan amount = total loan amount)

• Step 3: Find the estimated monthly payment• $8,060 / 36 = $223 (Total loan amount / Number of payments = Estimated monthly

payment)

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Example #2 - $2,500 Down Payment• $7,500 - $2,500 = $5,000 (Negotiated price – Down payment = Principal loan amount)





payment)

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Down Payments• Example #1 - $1,000 down payment

• Principal loan amount - $6,500• Monthly payment - $223• Interest paid - $1,560• Total purchasing cost - $9,060

• Example #2 - $2,500 down payment• Principal loan amount - $5,000• Monthly payment - $172• Interest paid - $1,200• Total purchasing cost - $8,700

• Price Difference - $360• The higher the down payment, the lower the

principal loan amount.

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Annual Percentage Rate (APR)• How does the cost change with

different APRs?

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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?

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Example #3 – APR 8%• $7,500 - $2,500 = $5,000






payment)

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Example #4 – APR 10%• $7,500 - $2,500 = $5,000






payment)

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APRs• Example #3 – 8% APR

• Monthly payments - $172

• Interest paid - $1,200

• Total purchasing cost - $8,700

• Example #4 - 10% APR

• Monthly payments - $180



• Price Difference - $300• The higher the APR, the more interest

paid.

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Time Period• How does the cost change with

different time periods?

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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?

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Example #5 – 3 Years• $7,500 - $2,500 = $5,000






payment)

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Example #6 – 5 Years• $7,500 - $2,500 = $5,000






payment)

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Time Periods• Example #5 - 3 years

• Monthly payment - $172


• Total purchasing cost = $8,700

• Example #6 - 5 years• Monthly payment - $116



• Price Difference - $800• The longer the time period of the loan, the

smaller the payments. However, more interest is paid.

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Beware of “Bait and Switch” TacticsIt’s not unusual for dealerships to use “bait and

switch” tactics to get consumers in the door, only to find that what they thought was true, isn’t.Bait-and-switch is a form of fraud used in retail sales but also employed in other contexts. First, customers are "baited" by merchants' advertising products or services at a low price, but when customers visit the store, they discover that the advertised goods are not available, or the customers are pressured by sales people to consider similar, but higher priced items ("switching").

Things to watch for:• 0% Financing• Manufacturer Rebate• Outstanding prices

If it sounds too good to be true, it most likely is…

$2,500 VIN# 21465758741263

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Equity• The value of the car minus the

debt

Purchase Price of Car $25,000- Amount Owed - 18,000 Equity $ 7,000

Purchase Price of Car $25,000- Amount Owed - 18,000 Equity $ 7,000

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How Home Loans Work• Mortgage is a loan secured by real

property• Buyer obtains financing (loan) to

purchase from lending institutionsuch as bank, mortgage company or federal government• Ginnie Mae (Government National

Mortgage Association)• Fannie Mae: Provides money for home

purchase• Freddie Mac

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How Home Loans Work• Down-Payment

• Usually 20% of appraised value• If not enough down payment may have to

take out Mortgage Insurance

• Closing Costs• Payment to lender for costs incurred in

the origination of a new home loan

• Prepaid Expenses (Savings Account)• Property Taxes• Home Insurance

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Borrowing Against Your Home• What are the advantages of taking

out a home equity loan?• Lower interest rates• Tax-deductible interest

• What is the danger of borrowing against your home?• Losing your home• Owing more than your home is worth

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Right to Rescind/Right to Cancel• You have 3 days to reconsider a

signed home equity loan agreement and cancel the loan without a penalty when you use your primary home as collateral.

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Is a Line of Credit Right for You?• Can you afford the increased monthly

payments after the introductory period ends or when interest rates rise?

• Are you comfortable with fluctuating monthly mortgage payments?

• Will you be investing your home equity in another asset of long-term value?

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Refund Anticipation Loans• Short-term loans secured by

your income tax refund (H & R Block)

• Example: • Refund: $1,500• Fees: - $300• Check to you: $1,200

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Borrow From Yourself First

• Establish an emergency savings account

• Save at least 6 months of living expenses

• Consider making small, simple changes in your habits or banking practices to save

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Activity 2: Beware of Dealer-Lender Relationships

Activity 3: Purchasing an Automobile

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Activity 3: Purchasing an Auto

Loan To Own. Loan To Own 2 What is an Installment Loan? A loan that is repaid in equal monthly...

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