This document provides information about shopping for an automobile loan. It defines key terms like auto loan, annual percentage rate (APR), principal loan amount, and total cost of the loan. It explains that automobiles are typically the second largest purchase for most consumers and are often purchased using loans. The document also discusses various lender options, consumer rights under the Truth in Lending Act, and how to calculate the real costs of a loan using the principal loan amount, APR, and time period. It provides examples showing how the total cost is affected by the down payment amount and interest rate.

1. Shopping for
an Automobile
Loan
What Do I Need
to Know?
Using Financial Calculators

2. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Automobiles
 2nd
most expensive purchase for most
consumers
 Purchased with
 Cash
 Loan / credit – very common

3. Automobile
Loans

4. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Definitions
 Auto Loan – borrowed money to purchase an
automobile
 Terms of the loan will vary
 Lender – a financial institution who offers loans
to consumers
 Credit Rating – evaluation of a person’s credit
history
 Based on repayment patterns, prior credit usage, credit
history, length of employment

5. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Definitions continued
 Cosigner – a person who guarantees the loan for the
original borrower
 Responsible for paying the debt back if the original borrower
defaults
• Borrower fails to make payments of principle or interest when due and
has not met other requirements of the legal contract
 A cosigner may be required for a loan if the original borrower
does not have a credit history or has a bad credit rating
 Common for parents to cosign for young adults

6. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Definitions continued
 Secured Loan – requires a cosigner or
collateral
 A loan with collateral means the lender has security
interest in the property pledged as collateral
 Automobile loans are secured because the automobile is
typically the collateral
 If the borrower fails to repay the loan, the lender can
then seize the collateral by repossessing, or taking back,
the property

7. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Lender Options
 Auto Dealers
 Commercial Banks
 Savings and Loans
 Credit Unions
 Online lenders
 Life Insurance Policies
 Auto Insurance Companies

8. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Lender Options
continued
 Credit Unions traditionally offer low APRs
 Auto dealer financing may be easier, but not always
the best deal
 Remember – compare every variable to decide best
option for consumer

9. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Consumer Rights
 The Truth in Lending Act - 1968
 Part of the Consumer Protection Act
 Applies to all credit transactions
• Mortgages, credit cards, loans, etc.
 Requires clear disclosure of key terms and all costs
in lending agreements

10. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
The Truth in Lending
Act
Three basic rules for lenders:
1. Lenders cannot advertise a good deal which is not
available to all consumers
2. Advertisements must include all or none of the terms
3. If more than 4 installments are required to pay for the
good or service, the agreement must say “The cost of
credit is included in the price quoted for goods and
services”

11. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
The Truth in Lending Act
continued
 Lenders must disclose to consumers:
 Interest rate expressed as the APR
 Total finance charge
 Allows consumers to easily compare credit offers

12. What’s the
Real Price?

13. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Variables of a Loan
 Negotiated Price
 Price being paid for the automobile agreed upon by the
seller and buyer
 Down Payment
 Amount of money being paid for the automobile at
time of purchase
 Usually required

14. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Variables continued
 Trade-In
 Amount of money received for trading in an automobile
 Trade-in amount is subtracted from the negotiated price of the
automobile
 Principle Loan Amount
 Amount of the loan for the automobile after subtracting the
down payment and/or trade-in price from the negotiated price
 Without interest and fees

15. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Variables continued
 Annual Percentage Rate (APR)
 Measure of the cost of credit on a yearly basis
expressed as a percentage
 Time Period
 Amount of time the loan will be repaid
 Usually expressed in months

16. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Variables continued
 Total Cost of the Loan
 Total of the principal loan amount, interest paid, and
other fees
 Total Purchasing Cost
 Total of the down payment, trade-in value, and total
loan amount

17. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Rules of Thumb
 The larger the down payment on an automobile, the lower
the principle loan amount.
 The longer the time period of the loan, the smaller the
payments. However, more interest is paid.
 The higher the APR, the more interest is paid and the
larger the total loan amount.

18. Calculating
the Cost
Using Financial
Calculators

19. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Calculating the Cost
 Three variables are required to calculate the cost of
a loan:
 Principal loan amount [PV]
 APR [%I]
 Time period [N]

20. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
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?

21. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
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: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT]
 Answer: $156.68
 Step 2: Calculate interest paid
 $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount)
 $5,640.55 – 5,000.00 = $640.55
(Total loan amount – Principal loan amount = Interest paid)

22. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
What’s the Real cost?
 Total loan amount = $5,640.55
 Total purchasing cost =
total loan amount + down payment
 $5,640.55 + $2,500.00 = $8,140.55

23. Down Payment
How does the
cost change with
different down
payment
amounts?

24. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
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?

25. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Example #1 –
$1,000 Down Payment
 $7,500 - $1,000 = $6,500
(Negotiated price – Down payment = Principal loan amount)
 $6,500 over 3 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 6,500 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $203.69
 Step 2: Calculate interest paid
 $203.69 * 36 = $7,332.71
(Monthly payment * Number of payments = Total loan amount)
 $7,332.71 – $6,500 = $832.71
(Total loan amount – Principal loan amount = Interest paid)
 Step 3: Calculate total purchasing cost
 $7,332.71 + $1,000 = $8,332.71
(Total loan amount + Down payment = Total purchasing cost)

26. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Example #2 –
$2,500 Down Payment
 $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
 $5,000 over 3 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $156.68
 Step 2: Calculate interest paid
 $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount)
 $5,640.55 – $5,000 = $640.55
(Total loan amount – Principal loan amount = Interest paid)
 Step 3: Calculate total purchasing cost
 $5,640.55 + $2,500 = $8,140.55
(Total loan amount + Down payment = Total purchasing cost)

27. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Down Payments
 Example #1 - $1,000 down payment
• Principal loan amount - $6,500
• Monthly payment - $203.69
• Interest paid - $832.71
• Total purchasing cost - $8,332.71
 Example #2 - $2,500 down payment
• Principal loan amount - $5,000
• Monthly payment - $156.68
• Interest paid - $640.55
• Total purchasing cost - $8,140.55
 Price Difference - $192.16
 The higher the down payment, the lower the principal loan amount.

28. Annual Percentage
Rate (APR)
How does the
cost change with
different APRs?

29. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
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?

30. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Example #3 – APR 8%
 $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
 $5,000 over 3 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $156.68
 Step 2: Calculate interest paid
 $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount)
 $5,640.55 – $5,000 = $640.55
(Total loan amount – Principal loan amount = Interest paid)
 Step 3: Calculate total purchasing cost
 $5,640.55 + $2,500 = $8,140.55
(Total loan amount + Down payment = Total purchasing cost)

31. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Example #4 - APR 10%
 $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
 $5,000 over 3 years at 10% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 10 2nd
[%i] [%i]
 [CPT] [PMT] = $161.34
 Step 2: Calculate interest paid
 $161.34 * 36 = $5,808.09
(Monthly payment * Number of payments = Total loan amount)
 $5,808.09 – $5,000 = $808.09
(Total loan amount – Principal loan amount = Interest paid)
 Step 3: Calculate total purchasing cost
 $5,808.09 + $2,500 = $8,308.09
(Total loan amount + Down payment = Total purchasing cost)

32. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
APRs
 Example #3 – 8% APR
• Monthly payments - $156.68
• Interest paid - $640.55
• Total purchasing cost - $8,140.55
 Example #4 - 10% APR
• Monthly payments - $161.34
• Interest paid - $808.09
• Total purchasing cost - $8,308.09
 Price Difference - $167.54
 The higher the APR, the more interest paid.

33. Time Period
How does the
cost change with
different time
periods?

34. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
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?

35. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Example #5 – 3 years
 $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
 $5,000 over 3 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 3 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $156.68
 Step 2: Calculate interest paid
 $156.68 * 36 = $5,640.55
(Monthly payment * Number of payments = Total loan amount)
 $5,640.55 – $5,000 = $640.55
(Total loan amount – Principal loan amount = Interest paid)
 Step 3: Calculate total purchasing cost
 $5,640.55 + $2,500 = $8,140.55
(Total loan amount + Down payment = Total purchasing cost)

36. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Example #6 – 5 years
 $7,500 - $2,500 = $5,000
(Negotiated price – Down payment = Principal loan amount)
 $5,000 over 5 years at 8% APR
 Step 1: Calculate monthly payment
 Principal loan amount: 5,000 [PV]
 Time period: 5 2nd
[N] [N]
 APR: 8 2nd
[%i] [%i]
 [CPT] [PMT] = $101.38
 Step 2: Calculate interest paid
 $101.38 * 60 = $6,082.92
(Monthly payment * Number of payments = Total loan amount)
 $6,082.92 – $5,000 = $1,082.92
(Total loan amount – Principal loan amount = Interest paid)
 Step 3: Calculate total purchasing cost
 $6,082.92 + $2,500 = $8,582.92
(Total loan amount + Down payment = Total purchasing cost)

37. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Time Periods
 Example #5 - 3 years
• Monthly payment - $156.68
• Interest paid - $640.55
• Total purchasing cost = $8,140.55
 Example #6 - 5 years
• Monthly payment - $101.38
• Interest paid - $1,082.92
• Total purchasing cost - $8,582.92
 Price Difference - $442.37
 The longer the time period of the loan, the smaller the
payments. However, more interest is paid.

38. 1.16.3.G1
© Family Economics & Financial Education
– Revised December 2004 – Transportation
Unit – Shopping for an Automobile Loan
Funded by a grant from Take Charge
America, Inc. to the Department of Health
and Human Development at Montana State
University – Bozeman
Conclusion
 Compare all offers and variables before signing an
agreement!
 Changing a variable can either save the consumer
money or he/she may end up paying much more
than anticipated!