lesson eight cars and loans teacher s guide

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1 lesson eight cars and loans teacher s guide

2 cars and loans web sites web sites for cars and loans The Internet is probably the most extensive and dynamic source of information in our society. The following Web sites can provide students and others with current information, assistance, and data related to this lesson. Web addresses ending in.com are commercial sites;.org are non-profit sites; and.gov are government sites. Consumer Reports Online Crash Test and Insurance-Related Data Consumer.gov: Consumer Information from the Federal Government Current Loan and Credit Card Rates Highway Loss Data Institute Insurance Institute for Highway Safety Prices of New and Used Cars RAM Research Group Note: Addresses and content of Web sites change, and new sites are created daily. Use search engines such as Yahoo, Google, AltaVista, Infoseek, Lycos, or Hotbot, to update and locate Web sites related to this topic. cars and loans teacher s guide

3 cars and loans lesson outline lesson 8 overview Should I buy a new car or a used car? Where can I find the best car loan to finance my purchase? These are typical questions asked by people in the market for a new car. Lesson 8 begins by helping students identify the costs associated with owning and operating a motor vehicle. Students will research car-buying and car maintenance expenses. The lesson then moves to the question, What actions should a person take when buying a car? Students explore decisions related to quality, cost, and where to shop for a car. They also consider factors related to the purchase of used and new cars, as well as warranties and service contracts. The lesson then moves to a discussion of how to finance a car. Financing a car is an important consideration for teenagers. Students learn how to shop for a loan and how to calculate the cost of various loans. Aspects of auto insurance also are covered. Students learn about types of coverage and factors affecting insurance costs. Lastly, students apply information from this lesson to two different scenarios. They will incorporate the costs of owning and operating a car to create a budget for two fictitious car-buyers. In this lesson, the word car, which is part of most students everyday vocabulary, refers to motor vehicles of all types, including trucks, vans, SUVs and jeeps. Suggested teaching strategies, teaching notes, activities, overheads, and short quizzes are linked to student objectives. Additional ideas to help students practice and generalize skills related to understanding credit to real life situations are included at the end of the lesson. lesson 8 student performance goal: The student will investigate the financial responsibilities of buying, maintaining, insuring, and operating a car, and translate those responsibilities into a monthly budget. lesson 8 objectives: The student will 8-1 identify costs of owning and operating a car. 8-2 identify factors to consider when shopping for a car. 8-3 identify factors to consider when shopping for a car loan and car insurance. 8-4 determine how much money can safely be spent each month to own, operate, and maintain a car within a given budget. cars and loans teacher s guide

4 cars and loans teaching notes 8-1 The student will identify costs of owning and operating a car. what does it cost to own a car? Discuss questions that students should ask themselves when making the decision whether or not to buy a car: (ex. Do I really need a car? Is it worth the time I spend making the money to buy it? Is there a better use for my money right now?) Ask students to select the make, model, and model year of a car they would reasonably like to own. In advance of the lesson, collect service maintenance price lists and advertisements. Help students use these advertisements and the Internet to obtain information on the cost of (a) an oil change, (b) a tune-up, (c) new brakes, (d) tires. Have students complete the worksheet that lists annual costs and the cost per mile of owning and operating the car they selected. (activity 8-1a) discussion internet student activity 8-1: the operating costs of a car costs of a car costs of owning a car: Purchase price Sales tax Registration fee, title, and license Financing costs Insurance overhead 8-1: the costs of owning and operating a car costs of operating a car: Gasoline Oil and other fluids Tires Maintenance and repairs (Keep a maintenance record of these expenses.) Parking and tolls lesson 8 quiz: the costs of a car quiz 8-1 quiz key cars and loans teacher s guide 8-1

5 the costs of owning and operating a car Ownership (fixed) costs: Purchase price Sales tax Registration fee, title, and license Financing costs Insurance Operating (flexible) costs: Gasoline Oil and other fluids Tires Maintenance and repairs Parking and tolls cars and loans overhead 8-1

6 name: date: the operating costs of a car Model year Make, size, model Fixed costs Depreciation: Purchase price $ divided by estimated life of years $ Annual insurance costs $ License, registration, taxes $ Flexible costs Gasoline: Estimated miles per year divided by miles per gallon times the average price of $ per gallon $ Oil changes for the year $ Tires $ Maintenance, repairs $ Parking and tolls $ Total costs $ Divided by miles per year Equals cost per mile $ cars and loans activity 8-1

7 name date lesson 8 quiz: the costs of a car From the list below, can you find ten (10) costs of owning and operating a car? Put a check beside your choices. Registration fee Tolls Entertainment Car loan payment Credit card payments Utilities Title and license Bus fare Tuition School expenses Car insurance Clothing Maintenance and repairs Personal items Gasoline Electric bills Oil and other fluids Tires Parking Household items cars and loans quiz 8-1

8 name date lesson 8 quiz: the costs of a car From the list below, can you find ten (10) costs of owning and operating a car? Put a check beside your choices. Registration fee * Tolls * Entertainment Car loan payment * Credit card payments Utilities Title and license * Bus fare Tuition School expenses Car insurance * Clothing Maintenance and repairs * Personal items Gasoline * Electric bills Oil and other fluids * Tires * Parking * Household items cars and loans quiz key 8-1

9 cars and loans teaching notes 8-2 The student will identify factors to consider when shopping for a car. what should you know before buying a car? Have students look through copies of recent used car buying guides or Consumer Reports Buying Guide to consider the cost and type of car that interests them. Explain that buying a car involves decision-making based upon an individual s needs, finances, and preferences. Discuss the questions that should be considered when shopping for a car. (overhead 8-2a) Help students brainstorm the advantages and disadvantages of buying a new car. Repeat the process and brainstorm advantages and disadvantages of buying a used car. Discuss various considerations a buyer should investigate and questions that should be asked before purchasing a new car. (overhead 8-2b) Discuss the considerations a buyer should investigate and questions that should be asked before purchasing a used car. (overhead 8-2c) Talk to students about various sources for buying a used car. (overhead 8-2d) Discuss the comparative reliability of different sources. Introduce students to the Kelley Blue Book. Explain that this is a reliable source for determining a fair price for a used car, dependent upon the car s condition. Students can purchase Blue Books or borrow them from the library. They can also obtain the same information from the Internet site: Tell students not to be confused by the many prices associated with buying a car. Familiarize them with car pricing terms on overhead 8-2e. Define warranty and service contract. Collect examples of automobile warranties and service contracts for students to examine. Discuss how various warranties and service contracts differ. Buying through a dealer rather than a private party offers the advantage of dealer warranties and service contracts. Discuss what kind of questions to ask before purchasing a service contract. For a listing of automobile manufacturers warranty terms, have students go to: discussion overhead 8-2a: decisions, decisions... overhead 8-2b: shopping for a new car overhead 8-2c: shopping for a used car overhead 8-2d: sources of used cars overhead 8-2e: how many prices are there? internet cars and loans teacher s guide 8-2

10 cars and loans teaching notes To see a sample service contract, students can search under the auto section at: shopping for a car a new car: Read about new car features and prices. Shop around. Plan to negotiate price. Learn the terms. Consider the warranty and service contract. overhead 8-2b: shopping for a new car a used car from a dealer: Consider costs, reliability, dealer reputation Read the Buyer s Guide sticker Consider the warranty and the service contract overhead 8-2c: shopping for a used car a used car from a private party: Sometimes includes manufacturer s warranty Often will cost less than from a dealer how many prices are ther? List Price/Retail Price/Sticker Price The price the dealership is asking for a vehicle. This is the price the manufacturer has suggested be charged for the vehicle. Invoice Price/Dealer Invoice Price The price the dealer has paid the manufacturer. overhead 8-2e: how many prices are there? Base Price The price of the vehicle before buyer options are added to the cost. Book Value In the used vehicle market, it is the wholesale value of the vehicle listed in pricing books. Asking Price In the used vehicle market, it is the amount the seller wants to receive for the vehicle. The seller may actually accept an offer slightly lower than this price. Warranty A written guarantee to make needed repairs on a car within a limited period of time. as-is (no warranty) If you buy a car and have problems with it, you must pay for any repairs yourself. cars and loans teacher s guide 8-2

11 cars and loans teaching notes implied warranties Always in effect unless the product is sold as-is or the seller says in writing that there is no warranty. dealer warranties Offered and specifically written by the dealer. Terms and conditions can vary greatly, so it is useful to compare warranty terms on similar cars or negotiate warranty coverage. unexpired manufacturer s warranties The manufacturer s warranty can sometimes be transferred to the new owner for a fee. service contract ( extended warranty ) A car warranty that goes into effect after the basic warranty coverage provided by the car manufacturer or dealer expires. A service contract is designed to avoid costly repairs, as a motor vehicle gets older. service contracts Before deciding to buy a service contract, find out: the cost. which repairs the contract covers. whether the warranty already covers the same repairs. whether the vehicle is likely to need repairs and at what cost. whether there is a deductible and, if so, what it is. whether repairs and service are limited to the dealership location. whether the contract covers expenses such as towing. whether there is a cancellation or refund policy. whether the dealer or company offering the service is reputable. whether you can purchase the service contract later. lesson 8 quiz: shopping for a car quiz 8-2 quiz key cars and loans teacher s guide 8-2

12 decisions, decisions... Quality What level of quality do I want? What level of quality do I need? Cost How much do I want to spend? Car Model Should I choose a car with a well-known name even if it costs more? Research What do consumer magazines say about the kind of car I want? Recommendation Do I know anyone who owns the kind of car I want? Timing Should I wait until there s a sale on the kind of car I want? New or Used Should I buy a new or a used car? Where to Buy If I buy a used car, should I buy it from a dealer or a private party? cars and loans overhead 8-2a

13 shopping for a new car Before you shop, ask yourself: Which car model and options do I want? What is the invoice price? What is the true cost to the dealer? How much am I willing to pay the dealer above the invoice price? What is the value of my present car that I will be trading in? Before you buy, be sure you: take the car for a test drive. make your offer to as many dealers as possible. compare final sales prices and buying services. compare financing costs from various sources. try to sell your old car yourself (dealers usually give better deals without a trade-in). decide whether you need an optional service contract. cars and loans overhead 8-2b

14 shopping for a used car Before you shop, ask yourself: How much can I afford to spend? Which car models and options interest me? What is the cost of car maintenance? Where is the nearest shop that services the kind of car I want? Are parts readily available for the kind of car I want? What price can I expect to pay? (Check recent prices in used-car blue books, on the Internet, in newspaper ads, consumer magazines, etc.) What kind of financing is available? What are the costs of a loan? Do I know how to read a Buyer s Guide sticker? cars and loans overhead 8-2c

15 shopping for a used car Before you buy, be sure you: know the reputation of the dealer. know what type of warranty comes with the car. know what type of service contract comes with the car. ask about the maintenance history. take the car for a test drive. have the car inspected by an independent service maintenance person. cars and loans overhead 8-2c, cont.

16 sources of used cars New-car dealers: provide quality used vehicles. have a service department available. ask higher prices than other sources. Used car dealers: specialize in previously owned vehicles. offer only limited warranty (if any). may sell vehicles in poor condition. Private parties: can offer a good buy if the vehicle was well maintained. offer little consumer protection. Other sources: sell vehicles that have been driven many miles. examples: auctions or sales by government agencies, auto rental companies, the Internet cars and loans overhead 8-2d

17 how many prices are there? List Price/Retail Price/Sticker Price: The price the dealership is asking for a new car. Invoice Price/Dealer Invoice Price: The price the dealer has paid the manufacturer for the car. Base Price: The price of the car before any options are added. Book Value: The value of a used car listed in pricing books (Kelley Blue Book). Asking Price: The amount a seller wants for his/her used car. You may be able to buy the car for a slightly lower price than this. cars and loans overhead 8-2e

18 name date lesson 8 quiz: shopping for a car choose the correct answer. 1. Kelley Blue Book is a good source for researching: a. current interest rates. b. service contracts. c. used car prices. d. the reputation of area dealers. 2. Which of the following is not true about buying a new car? a. A person should make a buying offer to as many dealers as possible. b. A person will always get the best deal by trading in his or her old car. c. A person should compare final sales prices and buying services. d. It is a good idea to compare financing costs from various sources. 3. Before deciding to buy a service contract, a person should find out: a. the invoice price. b. the value of a trade-in. c. the nearest shop that services the kind of car. d. whether the vehicle is likely to need repairs and at what cost. 4. The most reliable source for buying a used car is usually: a. an auto rental company. b. the Internet. c. a car dealer. d. a private party. 5. Which of the following is not true about buying a used car? a. A person should never buy from a private party. b. A person should find out the cost of maintenance for the kind of car wanted. c. A person should know the reputation of the dealer. d. It is a good idea to compare financing costs from various sources. cars and loans quiz 8-2

19 name date lesson 8 quiz: shopping for a car choose the correct answer. 1. Kelley Blue Book is a good source for researching: a. current interest rates. b. service contracts. c. used car prices. * d. the reputation of area dealers. 2. Which of the following is not true about buying a new car? a. A person should make a buying offer to as many dealers as possible. b. A person will always get the best deal by trading in his or her old car. * c. A person should compare final sales prices and buying services. d. It is a good idea to compare financing costs from various sources. 3. Before deciding to buy a service contract, a person should find out: a. the invoice price. b. the value of a trade-in. c. the nearest shop that services the kind of car. d. whether the vehicle is likely to need repairs and at what cost. * 4. The most reliable source for buying a used car is usually: a. an auto rental company. b. the Internet. c. a car dealer. * d. a private party. 5. Which of the following is not true about buying a used car? a. A person should never buy from a private party. * b. A person should find out the cost of maintenance for the kind of car wanted. c. A person should know the reputation of the dealer. d. It is a good idea to compare financing costs from various sources. cars and loans quiz key 8-2

20 cars and loans teaching notes 8-3 The student will identify factors to consider when shopping for a car loan and car insurance. how do you shop for a car loan? what do you need to know about car insurance? Discuss the factors that influence the total cost of a loan. Tell students that shopping for a loan is as important as shopping for a car. Discuss various sources for loans, including banks, consumer finance companies, dealerships, and family and friends. Use the example in overhead 8-3a to illustrate how the terms of a loan make a difference in the total cost a borrower pays to buy a car. Demonstrate how to calculate the total cost of a loan. (overhead 8-3b) Introduce students to the Loan calculator from the Practical Money Skills for Life website. Using this tool, students can calculate the cost of a loan or compare the cost of two or more different loans. Review the rule for determining how much a consumer can safely borrow. (overhead 8-3c) Remind students that the rule applies to and includes all debts, not just a car loan. Discuss what information students will need to fill out a loan application. Have students practice filling out this information on a form. (activity 8-3a) Stress that there are serious consequences for failing to make loan payments. They should notify the lender immediately if they are having difficulty making payments. Explain that the car that students buy is actually collateral for their car loans. Repossession is when a creditor takes the property that has been pledged. A creditor will repossess a car if the owner has missed loan payments and has not worked with the lender to resolve the problem. Begin a discussion of car insurance by talking about its importance and by defining some basic terms, such as premium, amount of coverage, and deductible. Define various types of car insurance coverage. (overhead 8-3d) Identify the criteria insurance companies use to set rates. (overhead 8-3e) Discuss which of these discussion overhead 8-3a: shopping for a car loan overhead 8-3b: calculating the total cost of a loan overhead 8-3c: how much can you afford to borrow? overhead 8-3d: types of car insurance coverage overhead 8-3e: how insurance rates are set student activity 8-3a: loan application information cars and loans teacher s guide 8-3

21 cars and loans teaching notes factors are beyond students control (ex. age, gender) and which ones, to some extent, they can control (ex. driving record, type of car they drive). sources for obtaining loans Banks this is a good place to start shopping for a loan. Consumer Finance Companies ( small loan companies ) usually offer higher interest rates. Dealership it is possible to finance a new or used car through the dealership where it is purchased. Family and friends always put verbal agreements in writing. shopping for a car loan 1. APR 2. Length of loan 3. Monthly payments 4. Total finance charge 5. Total to be repaid 6. Total cost of various loans 7. Shop around for a car loan and compare the costs. overhead 8-3a: shopping for a car loan how much does it really cost? 1. How to approximate the total cost of a loan 2. How to approximate monthly payments repossession: The car you buy is collateral for your car loan. Repossession is when a creditor takes the property that has been pledged. rights of creditor: Can seize car as soon as you default. Cannot use physical force or threats of force. Can keep car or resell it. May not keep or sell any personal property in car. cars and loans teacher s guide 8-3

22 cars and loans teaching notes your rights: May buy back car by paying the full amount owed on it plus repossession expenses. Your legal responsibilities: Must pay the deficiency balance the amount of debt remaining even after the creditor has sold your car. premium: The amount paid for insurance coverage. Amount of coverage: The maximum amount an insured driver would receive in the event of an accident, theft, or damage to his/her car. deductible: The amount an insured driver must pay toward his/her own losses before the insurance company pays on a claim. car insurance types of car insurance coverage: General liability Most states require this. If the accident is your fault, your policy pays for injury and property damages to another vehicle and people in the vehicle. Collision - Covers damages to your vehicle in an accident. You may or may not want to carry this. For instance, if your car is worth only $600 and you have a minimum deductible of $250, it is not worth paying $300 a year for collision coverage. Comprehensive Covers damages to your vehicle caused by vandalism, fire, floods, theft, or other natural disasters. Decide whether this is necessary coverage based on the present condition of your car. Medical payments Provides coverage for medical expenses related to an injury in a car accident. Uninsured motorist Covers the cost of your injuries if a driver who has no auto insurance or has insufficient insurance coverage hits you. overhead 8-3d: types of car insurance coverage cars and loans teacher s guide 8-3

23 cars and loans teaching notes how insurance rates are set age gender marital status personal habits type and frequency of vehicle use location driving record vehicle characteristics overhead 8-3e: how insurance rates are set lesson 8 quiz: car loans and insurance quiz 8-3 quiz key cars and loans teacher s guide 8-3

24 shopping for a car loan These factors may vary between loans Annual Percentage Rate (APR) Length of the loan Monthly payments Total finance charge and so does the amount you ll repay! Borrowing $8,000 at different rates: Total Total Length monthly finance To be APR of loan payment charge repaid 10.00% 36 months $ $1, $9, months $ $2, $10, % 36 months $ $1, $9, months $ $2, $10, % 36 months $ $1, $9, months $ $2, $10, cars and loans overhead 8-3a

25 calculating the total cost of a loan To estimate the total cost of a loan: amount of the loan x APR x number of years* Example: amount of the loan: $10,000 APR: 10% number of years: 5 $10,000 x 0.10 x 5 = $5,000 interest $5,000 (interest) + $10,000 (amount of loan) = $15,000 total cost To estimate the amount of monthly payments: total to be paid divided by number of months of the loan* Example: total to be paid: $15,000 number of months: 60 (5 years) $15, = $250 per month * These formulas produce estimates that are slightly higher than your actual costs and payments. They do not account for smaller interest payments as you repay the loan. cars and loans overhead 8-3b

26 how much can you afford to borrow? How much can you afford to borrow? (the rule) 20: Never borrow more than 20% of your yearly net income. Example: You earn $400 a month after taxes. Your yearly net income is: $400 x 12 months = $4,800 20% of your yearly net income is: $4,800 x 20% = $960 You should have less than $960 of debt! 10: Your monthly payments should be less than 10% of your monthly net income. Example: You earn $400 a month after taxes. 10% of your monthly net income is: $400 x 10% = $40 You should pay less than $40 per month for all debts! cars and loans overhead 8-3c

27 types of car insurance coverage General Liability (40 50% of premium) Pays for bodily-injury. Pays for property-damage (ex. to another person s car). Collision (up to 30% of premium) Pays for the physical damage to your car. Includes a deductible (paid by the customer). Comprehensive (about 12% of premium) Pays for damage caused by vandalism, fire, floods, theft, etc. Medical Covers medical payments for injured driver and passengers. Uninsured motorist Pays for bodily injury in accidents caused by uninsured drivers. cars and loans overhead 8-3d

28 how insurance rates are set Personal characteristics Age Sex Marital status Personal habits Type and frequency of vehicle use Geographic location Rural usually lowers rates, urban usually raises rates Driving record Accident with death, bodily injury, or property damage Number and kind of moving violations Vehicle characteristics Damage, repair, and theft record of type and model of car Value and age of car cars and loans overhead 8-3e

29 name: date: loan application information Personal: Name: Social Security #: Present Address: How long have you lived at your present address? Do you rent/own your home? How much do you pay each month? Landlord s Name/Phone Number: Previous Address: How long did you live at your previous address? Employment: Current Employer Name: Address: Phone Number: Occupation/Job Title: How long have you worked here? Monthly Income: Do you have any additional income? How much per month? Past Employers (list name, phone number, and time employed for each) Credit History: Credit Cards (list name, account number, and current balance for each card) Other Loans (list lender name, current balance, and monthly payment for each) Bank Accounts: Bank Name: Checking Account #: Savings Account #: Other Accounts: cars and loans activity 8-3a

30 name date lesson 8 quiz: car loans and insurance choose the correct answer. 1. When shopping for a car loan, compare each loan s: a. APR. b. monthly payment. c. total finance charge. d. all of the above. 2. If a person chooses a longer time period to repay the loan: a. the monthly payments will be higher. b. the total amount to be repaid will be lower. c. the total amount to be repaid will be higher. d. the APR will be higher. 3. If a person is having trouble keeping up with car loan payments: a. he/she should notify the lender immediately. b. the car will be repossessed immediately. c. he/she can miss a few payments with no penalty. d. he/she can change the APR of the loan. 4. The insurance coverage for damage to a vehicle as a result of an accident is called: a. property damage. b. comprehensive. c. liability. d. collision. 5. Damage to a car caused by vandalism or floods is covered by: a. medical insurance. b. collision insurance. c. comprehensive insurance. d. uninsured motorist insurance. cars and loans quiz 8-3

31 name date lesson 8 quiz: car loans and insurance choose the correct answer. 1. When shopping for a car loan, compare each loan s: a. APR. b. monthly payment. c. total finance charge. d. all of the above. * 2. If a person chooses a longer time period to repay the loan: a. the monthly payments will be higher. b. the total amount to be repaid will be lower. c. the total amount to be repaid will be higher. * d. the APR will be higher. 3. If a person is having trouble keeping up with car loan payments: a. he/she should notify the lender immediately. * b. the car will be repossessed immediately. c. he/she can miss a few payments with no penalty. d. he/she can change the APR of the loan. 4. The insurance coverage for damage to a vehicle as a result of an accident is called: a. property damage. b. comprehensive. c. liability. d. collision. * 5. Damage to a car caused by vandalism or floods is covered by: a. medical insurance. b. collision insurance. c. comprehensive insurance. * d. uninsured motorist insurance. cars and loans quiz key 8-3

32 cars and loans teaching notes 8-4 The student will determine how much money can safely be spent each month to own, operate, and maintain a car within a given budget. how do you budget for a car? Remind students that although everyone wants to own a car, owning and maintaining a car can be very expensive. As a class, read and discuss the scenarios for Manuel and Rose. (overheads 8-4a and 8-4b) Divide students into two groups. Assign one group to shop for a car loan for Manuel, the other to shop for a car loan for Rose. Instruct each group to use the Auto Loan calculator on the Practical Money Skills for Life website to determine the finance charges, monthly payments and total loan costs for three different priced cars, at four different interest rates. (activities 8-4a and 8-4b) Based on the groups loan calculation findings, answer questions about which car and car loan Manuel and Rose can afford. As an optional activity, students can consult a car-buying guide to choose a specific type and model of car for each of the three prices. Have the groups create a budget for their fictitious car buyer. Ask them to complete a budget form, noting expenses with and without a car. (activities 8-4c and 8-4d) Remind students to think carefully about what categories of expenses are affected by car ownership. Have each group compare their own car buyer s budget with and without a car and then present their findings to the class. discussion overhead 8-4a & 84-b: scenarios 1 & 2 student activity 8-4a & 8-4b: Manuel s & Rose s car choices student activity 8-4c & 8-4d: Manuel s & Rose s budget review of costs 1. Costs of driving off lot include: down payment, tax, and license 2. Car payments 3. Monthly operating costs 4. Monthly maintenance costs 5. Monthly insurance premium 6. Unplanned maintenance and operating costs cars and loans teacher s guide 8-4

33 scenario 1 Manuel wants to buy a car. He wants to know exactly how much he can afford to spend each month to own, operate, and maintain a car. Manuel s net monthly income is $1,280. His fixed expenses are: $350 for rent His flexible monthly expenses are: $75 for savings $25 for utilities $185 for food $35 for transportation (bus fare) $150 for tuition and books $40 for entertainment $20 for personal items $29 for household items If Manuel gets a car, he expects to spend about $40 a month on gas and oil, and about $20 on parking and tolls. Manuel needs to have car insurance. He has shopped around and expects that a car insurance premium will cost about $225 a month. 1. Which car can Manuel afford? 2. What are the terms of the loan that would allow Manuel to stay within his budget? cars and loans overhead 8-4a

34 scenario 1 Manuel wants to buy a car. He wants to know exactly how much he can afford to spend each month to own, operate, and maintain a car. Manuel s net monthly income is $1,280. His fixed expenses are: $350 for rent His flexible monthly expenses are: $75 for savings $25 for utilities $185 for food $35 for transportation (bus fare) $150 for tuition and books $40 for entertainment $20 for personal items $29 for household items If Manuel gets a car, he expects to spend about $40 a month on gas and oil, and about $20 on parking and tolls. Manuel needs to have car insurance. He has shopped around and expects that a car insurance premium will cost about $225 a month. 1. Which car can Manuel afford? The car for $6, What are the terms of the loan that would allow Manuel to stay within his budget? A 60-month loan with an APR of 10% cars and loans overhead key 8-4a

35 scenario 2 Rose is thinking about buying a car. She has $1,000 saved for a down payment. She wants to know how much she can afford to spend each month on a car. Rose brings home $926 each month from her first job. She brings home $974 from her second job. Her fixed expenses include: $250 for rent $34 for a credit payment on furniture Her flexible monthly expenses include: $100 for savings $20 for telephone $175 for food $45 for transportation (bus fare) $70 for tuition $20 for school supplies $40 for clothing $40 for entertainment $20 for household supplies $29 for personal items If Rose gets a car, she expects to spend about $60 a month on gas and oil, and about $30 on parking and tolls. If Rose gets a car, she will need car insurance. She expects her car insurance premium to be about $175 a month. 1. Which car can Rose afford? 2. What are the terms of the loan that would allow Rose to buy a car and still stay within her budget? cars and loans overhead 8-4b

36 scenario 2 Rose is thinking about buying a car. She has $1,000 saved for a down payment. She wants to know how much she can afford to spend each month on a car. Rose brings home $926 each month from her first job. She brings home $974 from her second job. Her fixed expenses include: $250 for rent $34 for a credit payment on furniture Her flexible monthly expenses include: $100 for savings $20 for telephone $175 for food $45 for transportation (bus fare) $70 for tuition $20 for school supplies $40 for clothing $40 for entertainment $20 for household supplies $29 for personal items If Rose gets a car, she expects to spend about $60 a month on gas and oil, and about $30 on parking and tolls. If Rose gets a car, she will need car insurance. She expects her car insurance premium to be about $175 a month. 1. Which car can Rose afford? The car for $4, What are the terms of the loan that would allow Rose to buy a car and still stay within her budget? A 36-month loan with an APR up to 16% cars and loans overhead key 8-4b

37 name: date: Manuel s car choices $6,000 (Amount of loan: $6,000) APR 10% 12% 14% 16% Length of Loan 60 months 60 months 60 months 60 months Total Cost of Loan $ $ $ $ Monthly Payment Total Finance Charge $8,000 (Amount of loan: $8,000) APR 10% 12% 14% 16% Length of Loan 60 months 60 months 60 months 60 months Total Cost of Loan Monthly Payment Total Finance Charge $10,000 (Amount of loan: $10,000) APR 10% 12% 14% 16% Length of Loan 60 months 60 months 60 months 60 months Total Cost of Loan Monthly Payment Total Finance Charge cars and loans activity 8-4a

38 name: date: Manuel s car choices $6,000 (Amount of loan: $6,000) APR 10% 12% 14% 16% Length of Loan 60 months 60 months 60 months 60 months Total Cost of Loan $7, $8, $8, $8, Monthly Payment $ $ $ $ Total Finance Charge $1, $2, $2, $2, $8,000 (Amount of loan: $8,000) APR 10% 12% 14% 16% Length of Loan 60 months 60 months 60 months 60 months Total Cost of Loan $10, $10, $11, $11, Monthly Payment $ $ $ $ Total Finance Charge $2, $2, $3, $3, $10,000 (Amount of loan: $10,000) APR 10% 12% 14% 16% Length of Loan 60 months 60 months 60 months 60 months Total Cost of Loan $12, $13, $13, $14, Monthly Payment $ $ $ $ Total Finance Charge $2, $3, $3, $4, cars and loans activity key 8-4a

39 name: date: Rose s car choices $4,000 (Amount of loan: $3,000) APR 10% 12% 14% 16% Length of Loan 36 months 36 months 36 months 36 months Total Cost of Loan Monthly Payment Total Finance Charge $6,000 (Amount of loan: $5,000) APR 10% 12% 14% 16% Length of Loan 36 months 36 months 36 months 36 months Total Cost of Loan Monthly Payment Total Finance Charge $8,000 (Amount of loan: $7,000) APR 10% 12% 14% 16% Length of Loan 36 months 36 months 36 months 36 months Total Cost of Loan Monthly Payment Total Finance Charge cars and loans activity 8-4b

40 name: date: Rose s car choices $4,000 (Amount of loan: $3,000) APR 10% 12% 14% 16% Length of Loan 36 months 36 months 36 months 36 months Total Cost of Loan $3, $3, $3, $3, Monthly Payment $96.80 $99.64 $ $ Total Finance Charge $ $ $ $ $6,000 (Amount of loan: $5,000) APR 10% 12% 14% 16% Length of Loan 36 months 36 months 36 months 36 months Total Cost of Loan $5, $5, $6, $6, Monthly Payment $ $ $ $ Total Finance Charge $ $ $1, $1, $8,000 (Amount of loan: $7,000) APR 10% 12% 14% 16% Length of Loan 36 months 36 months 36 months 36 months Total Cost of Loan $8, $8, $8, $8, Monthly Payment $ $ $ $ Total Finance Charge $1, $1, $1, $1, cars and loans activity key 8-4b

41 name: date: Manuel s budget Without a Car Owning a Car Income Job #1 $ $ Job #2 $ $ Other $ $ Total Income $ $ Fixed expenses Rent $ $ Car insurance $ $ Installment payments Car loan payment $ $ Credit card 1 $ $ Credit card 2 $ $ Total installment debt $ $ Percentage of net income % % Flexible expenses Savings $ $ Utilities $ $ Food $ $ Transportation $ $ Bus fare $ $ Gas and oil $ $ Parking and tolls $ $ Repairs $ $ Tuition $ $ School expenses $ $ Clothing $ $ Entertainment $ $ Household items $ $ Personal items (toothpaste, etc.) $ $ Total Monthly Expenses $ $ Total income Total expenses $ $ cars and loans activity 8-4c

42 name: date: Rose s budget Without a Car Owning a Car Income Job #1 $ $ Job #2 $ $ Other $ $ Total Income $ $ Fixed expenses Rent $ $ Car insurance $ $ Installment payments Car loan payment $ $ Credit card 1 $ $ Credit card 2 $ $ Total installment debt $ $ Percentage of net income % % Flexible expenses Savings $ $ Utilities $ $ Food $ $ Transportation $ $ Bus fare $ $ Gas and oil $ $ Parking and tolls $ $ Repairs $ $ Tuition $ $ School expenses $ $ Clothing $ $ Entertainment $ $ Household items $ $ Personal items (toothpaste, etc.) $ $ Total Monthly Expenses $ $ Total income Total expenses $ $ cars and loans activity 8-4d

43 cars and loans lesson outline additional activities for practice and generalization of concepts related to cars and loans Have students compare the cost of owning and maintaining a vehicle compared to the cost of using mass transit. Have students interview several people to obtain information about which factors influenced their selections of a motor vehicle. Take a field trip to compare prices and services at various sources of used cars. Introduce students to the Consumer Reports annual Buying Guide to research the reliability of various cars and learn tips for purchasing a used car. Have students use the Auto Loan calculator from the Practical Money Skills for Life website to determine how much car they can reasonably afford, based upon down payment, length of loan, monthly payments, and APR. Go to or for information on current prices for motor vehicles. Have the students search newspaper listings for cars in their price ranges. Using the Loan calculator from the Practical Money Skills for Life website, have them determine how much their monthly payments would be for different car prices. Watch and discuss video case study C, from Practical Money Skills for Life. Have students prepare a video or in-class presentation in which they role-play shopping for a new or used car with an auto-dealer. Invite an insurance agent to give a presentation on types of coverage, how automobile insurance rates are set, and advice to young car owners. Have students research the cost of car insurance based on their age, gender, marital status, frequency of car use, residence, driving record, types of cars they want, and the amount of insurance they think they need. There are several websites that enable consumers to enter information and compare quotes from multiple sources: Invite a driver education instructor to talk about safe driving tips and how a driver s safety record affects his/her insurance rates. cars and loans teacher s guide

44 cars and loans lesson outline Discussion of leasing vs. buying After researching and negotiating a reasonable price for a new car, you have the option of buying the car outright or leasing. You must decide which of these two options makes the most sense for your situation. For example, if you purchase a car outright, you may be able to negotiate a price that is lower than sticker price. Usually there is a down payment required. So, the first consideration is the time value of that initial cash outlay, since there are other ways that cash could be invested. The monthly payments are generally quite a bit higher than monthly lease payments would be. Occasionally, there might be a special low interest rate promotion running that will lower the payments, but as you increase the number of months that you want to finance the car, you will also increase the interest rate. At the end of the loan, you will own the car with no further payments due. If you lease the car, it is possible to do it with no down payment, but the lease is usually calculated on sticker price. The monthly payments are usually less than an actual car loan. At the end of the lease, however, you will either have to turn in the car or pay an agreed-to buy-out price to keep the car. If you turn in the car, there might be a return fee and a mileage fee if you have gone over the total miles allowed, as specified in the lease. Any damages to the car must be paid at that time (ex. scratches on car doors, stains on seats, etc.) Also, you will have to start the whole process over again with a new car. If you want to keep the car, you will have to pay the buy-out price (sometimes called residual value) either in cash or with a used car loan. There are financial formulas that can calculate the net present value of all of your options, but your own personal situation also needs to be taken into account. Some questions to keep in mind are: Do you have cash available for a down payment? How much of a monthly payment can you afford? How long do you plan to keep the car? What would it be like to own a car outright with no payments at the completion of a loan? What would it be like having to return a car to the dealership at the end of a lease? cars and loans teacher s guide