# lesson nine cars and loans overheads

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1 lesson nine cars and loans overheads

2 the cost of owning and operating a motor vehicle ownership (fixed) costs: Depreciation (based on purchase price) Interest on loan (if buying on credit) Insurance Registration fee, license, taxes operating (variable) costs: Gasoline Oil and other fluids Tires Maintenance and repairs Parking and tolls cars and loans overhead 9-A

3 how much can you afford? (the rule) never borrow more than 20% of your yearly net income If you earn \$400 a month after taxes, then your net income in one year is: 12 x \$400 = \$4,800 Calculate 20% of your annual net income to find your safe debt load: \$4,800 x 20% = \$960 So, you should never have more than \$960 of debt outstanding. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards. monthly payments shouldn t exceed 10% of your monthly net income If your take-home pay is \$400 a month \$400 x 10% = \$40 Your total monthly debt payments shouldn t total more than \$40 per month. Note: Housing payments (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards. cars and loans overhead 9-B

4 consumer decision making deciding to spend your money: Do I really need this item? Is it worth the time I spend making the money to buy it? Is there a better use for my money right now? deciding on the right purchase: What level of quality do I want (low, medium, or high)? What level of quality do I need? What types of services and repairs does the dealer offer? Should I wait until there is a sale on the type of car I want? Should I buy a new or a used car? If I buy a used car, should I buy it from a dealer or from a private party? Should I choose a car with a well-known name even if it costs more? Do I know anyone who owns the type of car I want? Are the warranty and the service contracts on the car comparable with warranties and service contracts on similar cars? What do consumer magazines say about the type of car I want? cars and loans overhead 9-C

5 shopping for a used car before you begin shopping: Decide how much you can afford to spend. Decide which car models and options interest you. Research the reliability of the model of car you want. Find out where the nearest repair facility is that works on the type of car you want. Find out whether parts are readily available for the type of car you want. Find recent prices in used-car blue books in the library, on the Internet, in newspaper ads, consumer magazines, etc. Shop for financing. Factor in the costs of the loan and the cost of maintenance. Know how to read a Buyer s Guide sticker. as you shop: Find out the reputation of the dealer. Find out what type of warranty comes with the car. Find out what type of service contract comes with the car. cars and loans overhead 9-D

6 sources of used cars new-car dealers provide quality used vehicles; service department available; higher prices than other sources used-car dealers specialize in previously owned vehicles; limited warranty (if any); vehicles may be in poor condition private parties may be a good buy if vehicle was well maintained; few consumer protection regulations apply to private party sales other sources such as auctions or sales by government agencies, auto rental companies, and on the Internet; most of these vehicles have been driven many miles cars and loans overhead 9-E

7 shopping for a new car before you begin shopping: Decide which car model and specific options you want. Find out the invoice price and the true cost to the dealer of the model and options you want. Decide how much you are willing to pay the dealer above the invoice price. Make your offer to as many dealers as possible. Compare final sales prices with other dealers and buying services. Compare financing costs from various sources. If you already have a car, find out its value independent of the dealer s trade-in offer. Try to sell your old car yourself (dealers usually give better deals without a trade-in). Decide whether you need an optional service contract or credit insurance. cars and loans overhead 9-F

8 warranties as-is (no warranty): No expressed or implied warranty. If you buy a car and have problems with it, you must pay for any repairs yourself. Some states do not permit as-is sales on used cars. implied warranties: Warranty of merchantability a product will do what it is designed to do. Warranty of fitness for a particular purpose a product will do what the seller promises it will do. 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. Useful to compare warranty terms on similar cars or negotiate warranty coverage. unexpired manufacturer s warranties: Manufacturer s warranty can sometimes be transferred to the new owner. There may be a fee for the transfer process. cars and loans overhead 9-G

9 service contracts (also called extended warranties ) 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, if so, the potential cost of repairs. Whether there is a deductible and, if so, what it is. Whether repairs and service can be performed at locations other than at the dealership. Whether the contract covers incidental expenses such as towing. Whether there is a cancellation or refund policy and, if so, the cost. Whether the dealer or company offering the service is reputable. Whether you can purchase the service contract later. cars and loans overhead 9-H

10 shopping for a car loan variables include: Annual Percentage Rate (APR) Length of the loan Monthly payments Total finance charge Total to be repaid example of how loans can vary: 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 9-I

11 how to calculate 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: \$10,000 x 0.10 x 5 years = \$5,000 \$5,000 + \$10,000 = \$15,000 to estimate the amount of monthly payments: Total to be paid divided by number of months of the loan* Example: \$15,000 / 60 = \$250 per month * These formulas produce estimates that are slightly higher than your actual costs and payments, because they do not account for the reduction of interest payments as you repay the loan. cars and loans overhead 9-J

12 the truth-in-lending act the truth-in-lending act requires lender to inform borrower of: Amount financed What charges are included in amount financed Total finance charge, in dollars Annual Percentage Rate (APR) Payment schedule Total amount of payments Total sales price Prepayment penalty, if any Late payment penalty, if any Security interest Insurance charges cars and loans overhead 9-K

13 types of auto insurance coverage liability (40 50% of premium) Bodily-injury coverage Property-damage coverage (i.e., to another person s car) collision (up to 30% of premium) Pays for the physical damage to your car as a result of an accident Limited by deductible comprehensive (about 12% of premium) Pays for damage caused by vandalism, hailstorms, floods, theft, etc. medical Covers medical payments for driver and passengers injured in accident uninsured motorist Reimburses you for bodily injury in accidents caused by uninsured drivers towing and labor rental reimbursement Pays a specific amount per day to rent a car while yours is being fixed cars and loans overhead 9-L

14 how insurance rates are set personal characteristics Age Sex Marital status Personal habits (i.e., smoking) Type and frequency of vehicle use (i.e., commuting) geographic location (often classified by zip code) Rural usually lowers rates, urban usually raises rates driving record Accident with death, bodily injury, or property damage in excess of \$400 may trigger surcharge on premium for 3 years Number and kind of moving violations (and total of associated points) Number of years insured with the company vehicle characteristics Damage, repair, and theft record of type and model of car Age of car cars and loans overhead 9-M

15 repossession rights of creditor Can seize car as soon as you default Can t commit a breach of the peace, i.e., use physical force or threats of force Can keep car or resell it May not keep or sell any personal property in car (not including improvements such as a stereo or luggage rack) 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 your creditor has sold your car cars and loans overhead 9-N

16 leasing a motor vehicle advantages Smaller initial outlay than down payment when buying on credit Monthly lease payments may be less than monthly finance payments Lease agreement provides detailed records for business purposes Often times, all service charges related to maintenance are included in lease, so there is no additional outlay of money for regular maintenance disadvantages No ownership interest in the vehicle Must meet requirements similar to applying for credit Additional costs occur (such as for extra mileage, certain repairs, ending lease early) discussion of leasing vs. buying You must decide which option makes the most sense for your situation. 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? cars and loans overhead 9-O

17 lesson nine cars and loans student activities

18 name: date: the operating costs of a motor vehicle model year make, size, model fixed costs Depreciation: Purchase price \$ divided by estimated life years \$ Annual interest on auto loan (if applicable) \$ Annual insurance costs \$ License, registration, taxes \$ variable 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 \$ part 2 Based on business visits, phone calls, advertisements, and the Internet, obtain information for the cost of (a) an oil change, (b) a tune-up, (c) new brakes, (d) tires. cars and loans activity 9-1

19 name: date: warranties and service contracts Find an example of a motor vehicle warranty and of a service contract. Then, answer the following questions. 1. What is the warranty for? 2. What type of warranty is it (as-is, implied, dealer, manufacturer s)? 3. List the basic terms of the warranty. 4. What is the service contract for? 5. List the basic terms of the service contract. cars and loans activity 9-2

20 name: date: shopping for a car loan Amount of Loan \$ Financial institution APR Length of loan Monthly payment Total finance charge Total to be repaid directions Pretend that you have decided to purchase a new car. Select the model you would like and find out what it costs. Then, shop around for the best car loan terms. Try several different institutions, such as a bank, a credit union, and a private moneylender. When you have finished, look at your chart. Which loan would you take? What features make it more appealing than the others? Which institutions offered the best rates, and why do you think they did so? cars and loans activity 9-3

21 name: date: shopping for insurance minimum coverage required by state Company 1 Company 2 Agent Agent Address Address Phone Phone Bodily injury liability Property damage Personal injury protection (no-fault insurance states) Uninsured motorist Other Amount of Premiums for Premiums for Coverage Company 1 Company 2 coverage you desire Amount of Premiums for Premiums for Coverage Company 1 Company 2 Bodily injury liability Medical Property damage Personal injury protection (no-fault insurance states) Uninsured motorist Collision \$250 deductible Collision \$500 deductible Towing and labor Other which company best suits your needs? cars and loans activity 9-4

22 name: date: how much would you spend? scenario 1 Manuel wants to buy a car. But before he goes shopping, he wants to know exactly how much he can afford to spend each month on owning, operating, and maintaining 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 bridge tolls. Manuel needs to have car insurance. He has shopped around and expects that a car insurance premium for the type and year of car he wants will cost about \$225 a month. directions Use the attached budget sheet and Loan Calculator to complete the following chart and answer the following questions. cars and loans activity 9-5a

23 how much would you spend? (continued) car for \$6,000 (Amount of loan: \$6,000) APR: 10% APR: 12% Length of Loan: 60 months Length of Loan: 60 months APR: 14% APR: 16% Length of Loan: 60 months Length of Loan: 60 months car for \$8,000 (Amount of loan: \$8,000) APR: 10% APR: 12% Length of Loan: 60 months Length of Loan: 60 months APR: 14% APR: 16% Length of Loan: 60 months Length of Loan: 60 months activity 9-5b cars and loans

24 how much would you spend? (continued) car for \$10,000 (Amount of loan: \$10,000) APR: 10% APR: 12% Length of Loan: 60 months Length of Loan: 60 months APR: 14% APR: 16% Length of Loan: 60 months Length of Loan: 60 months 1. Which car can Manuel afford? 2. What are the terms of the loan that would allow Manuel to buy a car and still stay within his budget? 3. Using the column How You d Do It on Manuel s budget worksheet, figure how you would set up a budget if you had Manuel s income and expenses. 4. What were the main differences between the budget you set up using Manuel s income and expenses and the budget that was provided? cars and loans activity 9-5c

25 how much would you spend? (continued) manuel s budget income scenario how you d do it difference 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 \$ \$ \$ activity 9-5d cars and loans

26 name: date: how much would you spend? (continued) scenario 2 Rose is thinking about buying a car. She has \$1,000 saved for a down payment. Before she goes shopping, 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, and \$974 from her second job. Her fixed expenses include: \$250 for rent \$34 for a credit payment on some furniture she bought several months ago that has a total outstanding balance of \$540 Her flexible monthly expenses are: \$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 bridge tolls. If Rose gets a car, she will need car insurance. She has done some research, and she expects her car insurance premium to be about \$175 a month. directions Using the attached budget sheet and the computer-based activity Comparing the True Cost of Loans, complete the following chart. Then, answer the questions that follow. cars and loans activity 9-5e

27 how much would you spend? (continued) car for \$4,000 (Amount of loan: \$3,000) APR: 10% APR: 12% Length of Loan: 36 months Length of Loan: 36 months APR: 14% APR: 16% Length of Loan: 36 months Length of Loan: 36 months car for \$6,000 (Amount of loan: \$5,000) APR: 10% APR: 12% Length of Loan: 36 months Length of Loan: 36 months APR: 14% APR: 16% Length of Loan: 36 months Length of Loan: 36 months activity 9-5f cars and loans

28 how much would you spend? (continued) car for \$8,000 (Amount of loan: \$7,000) APR: 10% APR: 12% Length of Loan: 36 months Length of Loan: 36 months APR: 14% APR: 16% Length of Loan: 36 months Length of Loan: 36 months 5. Which car can Rose afford? 6. What are the terms of the loan that would allow Rose to buy a car and still stay within her budget? 7. Using the column How You d Do It on Rose s budget worksheet, figure how you would set up a budget if you had Rose s income and expenses. 8. What were the main differences between the budget you set up using Rose s income and expenses, and the budget that was provided? cars and loans activity 9-5g

29 how much would you spend? (continued) rose s budget income scenario how you d do it difference 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 \$ \$ \$ activity 9-5h cars and loans

30 how much would you spend? answer key scenario 1 Manuel wants to buy a car. But before he goes shopping, he wants to know exactly how much he can afford to spend each month on owning, operating, and maintaining 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 bridge tolls. Manuel needs to have car insurance. He has shopped around and expects that a car insurance premium for the type and year of car he wants will cost about \$225 a month. directions Use the attached budget sheet and Loan Calculator to complete the following chart and answer the questions that follow. cars and loans activity answers 9-5a key

31 how much would you spend? answer key car for \$6,000 (Amount of loan: \$6,000) APR: 10% APR: 12% Length of Loan: 60 months Length of Loan: 60 months \$7, \$8, \$ \$ \$1, \$2, APR: 14% APR: 16% Length of Loan: 60 months Length of Loan: 60 months \$8, \$8, \$ \$ \$2, \$2, car for \$8,000 (Amount of loan: \$8,000) APR: 10% APR: 12% Length of Loan: 60 months Length of Loan: 60 months \$10, \$10, \$ \$ \$2, \$2, APR: 14% APR: 16% Length of Loan: 60 months Length of Loan: 60 months \$11, \$11, \$ \$ \$3, \$3, activity answers 9-5b key cars and loans

32 how much would you spend? answer key car for \$10,000 (Amount of loan: \$10,000) APR: 10% APR: 12% Length of Loan: 60 months Length of Loan: 60 months \$12, \$13, \$ \$ \$2, \$3, APR: 14% APR: 16% Length of Loan: 60 months Length of Loan: 60 months \$13, \$14, \$ \$ \$3, \$4, Which car can Manuel afford? The car for \$6, What are the terms of the loan that would allow Manuel to buy a car and still stay within his budget? A 60-month loan with an APR of 10% 3. Using the column How You d Do It on Manuel s budget worksheet, figure how you would set up a budget if you had Manuel s income and expenses. 4. What were the main differences between the budget you set up using Manuel s income and expenses and the budget that was provided? cars and loans activity answers 9-5c key

33 how much would you spend? answer key scenario 2 Rose is thinking about buying a car. She has \$1,000 saved for a down payment. Before she goes shopping, 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, and \$974 from her second job. Her fixed expenses include: \$250 for rent \$34 for a credit payment on some furniture she bought several months ago that has a total outstanding balance of \$540 Her flexible monthly expenses are: \$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 bridge tolls. If Rose gets a car, she will need car insurance. She has done some research, and she expects her car insurance premium to be about \$175 a month. directions Using the attached budget sheet and the computer-based activity Comparing the True Cost of Loans, complete the following chart. Then, answer the questions that follow. activity answers 9-5d key cars and loans

34 how much would you spend? answer key car for \$4,000 (Amount of loan: \$3,000) APR: 10% APR: 12% Length of Loan: 36 months Length of Loan: 36 months \$3, \$3, \$96.80 \$99.64 \$ \$ APR: 14% APR: 16% Length of Loan: 36 months Length of Loan: 36 months \$3, \$3, \$ \$ \$ \$ car for \$6,000 (Amount of loan: \$5,000) APR: 10% APR: 12% Length of Loan: 36 months Length of Loan: 36 months \$5, \$5, \$ \$ \$ \$ APR: 14% APR: 16% Length of Loan: 36 months Length of Loan: 36 months \$6, \$6, \$ \$ \$1, \$1, cars and loans activity answers 9-5e key

35 how much would you spend? answer key car for \$8,000 (Amount of loan: \$7,000) APR: 10% APR: 12% Length of Loan: 36 months Length of Loan: 36 months \$8, \$8, \$ \$ \$1, \$1, APR: 14% APR: 16% Length of Loan: 36 months Length of Loan: 36 months \$8, \$8, \$ \$ \$1, \$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% 7. Using the column How You d Do It on Rose s budget worksheet, figure how you would set up a budget if you had Rose s income and expenses. 8. What were the main differences between the budget you set up using Rose s income and expenses, and the budget that was provided? activity answers 9-5f key cars and loans

36 name: date: lesson nine quiz: cars and loans true-false 1. Most used cars sold by private parties have a one-year warranty. 2. A service contract is designed to avoid costly repairs as a motor vehicle gets older. 3. The truth-in-lending law requires that a borrower be informed of the total finance charge. 4. Bodily-injury liability covers the damage to another person s car for which you were at fault. 5. Collision insurance covers damage caused to a motor vehicle by vandalism or floods. multiple choice 6. The most reliable source for buying a used car is usually: A. a rental car company. B. a police auction. C. a car dealer. D. private party sales. 7. warranty refers to the fact that a product will do what it is designed to do. A. An extended B. An implied C. A dealer D. An unexpired manufacturer s 8. The truth-in-lending law requires that borrowers be informed of the: A. amount financed. B. cost of auto insurance. C. features of an extended warranty. D. reasons a person has been denied credit. 9. The auto insurance coverage for damage to your vehicle as a result of an accident is called: A. property damage. B. comprehensive. C. liability. D. collision. 10. Doctor costs for injuries to others resulting from an accident are covered by liability. A. medical B. collision C. bodily injury D. comprehensive case application Angelina drives a seven-year-old car that recently needed \$1,300 in repairs. Each day, she drives 46 miles to and from her job. What actions should she take to decide if she should (1) keep this car, (2) buy a newer used car, or (3) buy a new car? cars and loans quiz 9-6

37 lesson nine quiz: cars and loans answer key true-false 1. f Most used cars sold by private parties have a one-year warranty. 2. t A service contract is designed to avoid costly repairs as a motor vehicle gets older. 3. t The truth-in-lending law requires that a borrower be informed of the total finance charge. 4. f Bodily-injury liability covers the damage to another person s car for which you were at fault. 5. f Collision insurance covers damage caused to a motor vehicle by vandalism or floods. multiple choice 6. C The most reliable source for buying a used car is usually: A. a rental car company. B. a police auction. C. a car dealer. D. private party sales. 7. B warranty refers to the fact that a product will do what it is designed to do. A. An extended B. An implied C. A dealer D. An unexpired manufacturer s 8. A The truth-in-lending law requires that borrowers be informed of the: A. amount financed. B. cost of auto insurance. C. features of an extended warranty. D. reasons a person has been denied credit. 9. D The auto insurance coverage for damage to your vehicle as a result of an accident is called: A. property damage. B. comprehensive. C. liability. D. collision. 10. C Doctor costs for injuries to others resulting from an accident are covered by liability. A. medical B. collision C. bodily injury D. comprehensive case application Angelina drives a seven-year-old car that recently needed \$1,300 in repairs. Each day, she drives 46 miles to and from her job. What actions should she take to decide if she should (1) keep this car, (2) buy a newer used car, or (3) buy a new car? Many factors go into this decision. First, Angelina must consider her financial situation. Based on a realistic budget, what amount can she afford to spend for buying a different vehicle? Next, will her current car (after the recent repairs) give her reliable transportation? In addition, how do the expected operating costs of the various vehicles compare? cars and loans quiz answers 9-6 key

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