Shopping for an Automobile Loan. What Do I Need to Know?

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1 Shopping for an Automobile Loan What Do I Need to Know?

2 Automobiles 2 nd most expensive purchase for most consumers Usually purchased with Loan / credit Or cash if you have enough (uncommon) Ask yourself: Do I NEED a car or just want one? What will it be used for? Are there alternative means for me to accomplish this? How much can I afford per month? How long can I afford to pay this? What characteristics am I looking for in a car which will meet these needs?

3 Automobile Loans

4 Definitions Auto Loan borrowed money to purchase an automobile Terms of the loan will vary Lender a financial institution who offers loans to consumers Cosigner a person who guarantees the loan for the original borrower Responsible for paying the debt back if the original borrower defaults (fails to pay the loan back) Common for parents to cosign for young adults Credit Rating evaluation of a person s credit history Based on repayment patterns, prior credit usage, credit history, length of employment, etc.

5 Definitions continued Secured Loan requires a cosigner or collateral Collateral is property of value tied to a loan which is forfeit to the lender if the borrower defaults Automobile loans are secured because the automobile itself is the collateral If the borrower fails to repay the loan, the lender can then seize the collateral by repossessing, or taking back, the property

6 Lender Options Auto Dealers Commercial Banks Credit Unions Online lenders

7 Lender Options continued Your bank with will usually give you their best rate without negotiation Credit Unions traditionally offer lower APRs Auto dealer financing may be the easiest option shop for, finance, and trade-in your old car all in the same place on the same day not always the best deal as they typically use banks to finance and may not be a bank near you May offer deals or rewards like cash back if you utilize their financing

8 Lender Options Be cautious! All financing serves the purpose of making the lender money. Watch out for Credit Shaming -(know your credit score) Sticker Pricing- know the difference between MSRP and Bluebook Payment Ploys- Stick to the amount you should pay total, not the amount you can afford to pay monthly

9 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.

10 What does it REALLY cost to purchase a vehicle When purchasing a vehicle you need to consider all of the hidden costs involved. It s not just principal Finance Charges (interest)- determined by your loan contract Licensing and Fees- License and Registration fees, Title fees, Emissions fees, etc. Taxes- the amount you pay the state to gain possession of the vehicle (usually between 6-7%)

11 What does it REALLY cost to purchase a vehicle $31,000 x.04 x 5 yrs = $6,200 total interest paid $6,200 + $31,000 = $37,200 actual cost Plus 7% Tax ($31,000 x.07 = $2,170) Plus uniform registration fee ($150) Plus license plate fee ($15) Total actual cost to purchase vehicle $39,535

12 Or you could Drive Free and Retire Rich!!! -free/player.html

13 Consumer Rights The Truth in Lending Act 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

14 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 Lenders must disclose to consumers: Interest rate expressed as the APR Any other finance charges Allows consumers to easily compare credit offers