2.2. Buying a New Vehicle

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1 Adapted from Grade 12 Essential Mathematics (40S) A course for independent study. Manitoba Education Buying a New Vehicle Along with deciding which type of vehicle to purchase, you will need to decide if you would like to buy a new vehicle, a used vehicle, or choose to lease a vehicle. By the end of the lesson you will know the vocabulary associated with purchasing a new vehicle, how much a new vehicle will cost, your financing options, and how to determine how much each option will cost. Trade-In Allowance If you already own a vehicle, you may want to use your old vehicle as part of the payment for the new one. The dealer may give you a trade-in allowance if you decide to trade your older vehicle for a newer one. For example, the dealer may decided that your current vehicle has a trade-in value of $5000, and so when you buy the new vehicle, the amount you pay for it is reduced by $5000. This amount is called the trade-in allowance. Manufacturer s Suggested Retail Price (MSRP) The Manufacturer s Suggested Retail Price (MSRP) of a vehicle is the selling price, or sticker price, that the manufacturer recommends to the dealership. Each new vehicle comes with a MSRP, and it is placed on a window of the vehicle when the vehicle leaves the factory. The sticker includes the base price, any optional equipment, an air-conditioning tax, and a destination or fright charge. The sticker price does not include taxes and additional fees.

2 Base Price The suggested price of the vehicle without any additional features. Optional Equipment Includes any of the options listed on the Vehicle Features Chart. These may be part of a package. For example, the manufacturer may offer a Sun and Sound package that includes a sunroof and a sound system for one charge. Air-Conditioning Excise Tax- A $100 payment required for vehicles with air conditioning that are purchased in Canada or imported form the United States. Destination Charge The cost that a dealership must pay to transport the vehicle from the manufacturing facility to the dealership. The MSRP of a particular vehicle will be exactly the same at all dealerships, but the actual sale price may vary by dealership. This is due to the markups or markdowns imposed by the dealerships. A dealer may increase the price of a car to earn more money, or reduce the price to encourage a sale. Therefore, it is important that you shop around before you decide to purchase a vehicle. Example 1 Find the Manufacturer s Suggested Retail Price for the following two-door convertible. The base price is $ and it has the following optional equipment: a preferred equipment package group costing $1260, a four-speed automatic transmission costing $995, and an AM/FM stereo with CD player costing $200. In addition, there is an air-conditioning excise tax of $100 and a destination charge of $620. Solution We need to add the base price, the price of all of the optional equipment, the airconditioning excise tax, and the destination charge = The MSRP for this vehicle is $ Purchase Price of a New Vehicle The purchase price of a new vehicle will include a documentation fee, a tire tax, the Provincial Sales Tax (PST), and the Goods and Services Tax (GST). As of 2014, the GST is 5% and the PST in Manitoba is 8%. Together the PST and GST add to 13% in Manitoba. Note: The values for PST and GST may change, but the process of computing these answers remains the same. To calculate the purchase price of a new vehicle, use the following steps: 1. Add together the MSRP, the documentation fee, and the tire tax 2. Subtract the trade-in allowance (if applicable) from the amount you found in step one

3 3. Multiply the amount in step 2 by This will apply the 13% tax to the purchase price. Alternatively, you could multiply the amount in step 2 by 0.13 (or ) and then add it to the amount in step 2. Either way, you should obtain the same answer. Example 2 Dena Klassen plans to purchase a new Ford Fusion from a local dealership. The vehicle has a MSRP of $22 998, and Dena receives a trade-in allowance of $5000 for her old vehicle. She will need to pay the $149 documentation fee, and the $14 tire tax. Calculate the total purchase price of her new vehicle. Solution Following the steps: 1. MSRP + documentation fee + tire tax = = $ amount from step 1 trade in allowance = = $ amount from step = = $ OR 3. amount from step = = Then, amount from step 2 + amount of tax = = $ The total purchase price is $ ***Take note that there is no tax paid on the trade-in allowance. It is very important to subtract the trade-in allowance BEFORE applying the tax. *** Purchasing a New Vehicle If you have saved up enough money, you may choose to purchase a new vehicle outright. This means that you will not have monthly payments. Instead, you will pay for the total purchase price of the vehicle. Alternatively, you may choose to finance the purchase with a loan from the dealership or from a financial institution. Vehicles are expensive, and many consumer cannot afford to pay for vehicle outright, it is very common for consumers to take out a loan in order to purchase a vehicle. When you take out a loan the total amount you pay is greater than if you were to pay for the vehicle outright at the time of purchase. Amortization Period the amount of time it will take to pay off the loan. This will be pre-decided when you take out a loan. Interest Rate The percent of interest of the loan that you pay to the lender.

4 In order to calculate monthly payments based on a loan, you need to consult an amortization table. The amortization table indicates the monthly payment required to pay a $1000 loan for a given time period and at a given interest rate. The following examples will walk you through the steps to use an amortization table to calculate monthly loan payment amounts. Example 3 Maven wishes to purchase a car for $ She has a down payment of $3000, and will finance the remainder of the cost through her bank at 5% annually for 4 years. Calculate the total amount she will pay for her car and the total amount she paid in interest over 4 years. Solution Step one: Locate the interest rate along the left. Step two: Follow the row until you are in the correct column for the number of years for the loan. Step Two Step One Step Three: Determine how much Maven needs to borrow. total purchase price down payment = = $16 950

5 Step Four: Notice that under the title of the table it reads per $1000 borrowed. This means that $23.03 is the amount that would need to be repaid if Maven borrowed $1000 from the bank. However, Maven is borrowing $ Calculate the total monthly payment by multiplying the total amount borrowed by the number you found on the chart divided by This is because the number you found is per Monthly payment = $ x Monthly Payment = $ x Monthly payment = $ Step Five: Calculate the total loan amount Maven will need to repay after the four years. Multiply the total monthly payment by the number of months in a year and by the number of years it will take to repay the loan. Total loan amount = monthly payment 12 number of years to repay loan Total loan amount = = $ The total amount to repay is $ Step Six: To calculate the total amount paid, also known as the deferred payment, we must add the total amount paid for the loan with the amount paid towards the down payment. Deferred payment = total loan amount + down payment Deferred payment = = $ Maven s deferred payment is $ This means is the amount that she paid in total for Step Seven: To calculate the total amount of interest paid, we need to take the total loan amount and subtract the amount borrowed. Remember the amount borrowed is the amount of the vehicle minus the down payment. Interest paid = = $ Maven will pay a total of $ in interest, this means that it will cost her $ more to purchase this vehicle by taking a loan instead of purchasing it outright. As we can see, the cost of purchasing a vehicle outright is considerably less than purchasing it through financing. This is the end of the learning portion for this section. Following this lesson are practice questions for this section along with a corresponding answer key. These questions are intended for you to gain confidence with the skills from this lesson and do not need to be handed-in.

6 2.2 Buying a New Vehicle Practice Problems * Complete these questions and check your answers with the answer key. Do not hand in the solutions to these problems. Please ask for assistance if your answers do not match the answer key. 1. Shane wishes to buy a car. He is considering to purchase a new car through a dealership for a total of $ The dealership offers financing at 4.5% annually over 3 years. There is a five-year warranty on this vehicle. Shane has a down payment of $4500. a. Calculate the monthly payment for the loan b. Calculate the deferred payment c. Calculate the amount of interest to be paid 2. Jocelyn has decided to buy a truck for $ from a dealership. The dealership offers financing at 6% over 5 years or 5.5% over 4 years. Jocelyn is able to make a down payment of $5000. a. Calculate the monthly payment for the each of the financing option. b. Jocelyn chooses to pay 5.5% over 4 years. Calculate the total amount paid or deferred payment, and calculate the total interest paid. 3. The following applies to a new pickup truck Base price - $ Optional Equipment: - Preferred equipment group - $ Electronic auto overdrive - $ Tilt steering wheel and electronic speed control - $500 - Heavy-duty trailering equipment - $215 - AM/FM stereo with CD player - $190 Air-conditioning excise tax - $100 Destination charge - $790 a. Calculate the Manufacturer s Suggested Retail Price for the pickup b. Calculate the purchase price of the pickup. A documentation fee of $100 and a tire tax of $14 must be paid. 4. Otto Mobile decides to purchase the pickup truck from question three. He is able to make a down payment of $3500 on the truck, and takes out a two-year car loan at a fixed interest rate of 8.0%. a. Calculate his monthly payment for the truck b. Calculate his deferred payment for the truck c. Calculate the interest paid for the truck

7 2.2 Buying a New Vehicle Practice Problem Solutions 1a. Amount to borrow = = $ Monthly payment= Monthly payment=$ b. Total loan amount= =$ Deferred payment= =$ c. Total interest paid= =$ a. Amount to borrow= =$ Monthly payment option one= = $ Monthly payment option two= =$ b. Total loan amount= =$ Deferred payment= =$ Total interest= =$ a. MSRP= =$ b. Purchase price= =$ Purchase price= =$ a. Amount to borrow= =$ Monthly payment= =$ b. Total loan amount= =$ Deferred payment= =$ c. Total interest paid= =$

8 Reference Amortization Table Monthly Vehicle Loan Payments Cost per $1000 of principal per month Interest Rate % Years to Repay Loans