Making Automobile and Housing Decisions: Auto Financing

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Chapter 5

• Making Automobile and Housing Decisions Auto
  Financing

2
Cheap financing or rebate?

• Assuming no down payment and a 36 month loan
• Bank PV 22,500 1,500 21,000, i 5/12,
  n 36
• PMT 629.39
• 1 APR PV 22,500 i 1/12, n 36
• PMT 634.68
• The best deal?

SALE! SALE!
1 FINANCING OR 1,500 REBATEFULLY LOADED
MUSTANG
only 22,500 1 APR on 36 month loan. If banks
are making 5 car loans, should you choose the 1
financing or 1,500 rebate?
3
Effective Annual Interest Rate

• How to lie, cheat, and steal with interest rates
• Assume you buy a 10,000 car from this dealer and
  agree to the above credit terms.
• What is the APR of this loan?

• SHADY CARS
• Going out for business sale!
• 10,000 instant credit!
• 12 simple interest!
• Three years to pay!
• Low, low monthly payments!

4
Effective Annual Interest Rate

• You borrow 10,000 today at 12 per year for
  three years. You will owe
  
  
• 10,000 (10,000 .12 3) 13,600.
• Make 36 low, low payments of 13,600/36 377.78
• Is this a 12 loan?

5
Is this a 12 loan?

• PVA 10,000
• PMT -377.78
• n 36
• i 1.766 per month
• APR 12 x 1.766 21.19

• What should payment be?
• PV 10,000
• n 36
• i 12/12 1
• PMT 332.14
• APR 12

6
Car Loans Outlast Car

• Up to 8 years! 6 and 7 years more common
• Higher down payments in some cases
• Carry 1 to 2 higher rates
• Mostly luxury vehicles gt 40K

WSJ 9/30/03
7
Car Loans Outlast Car

• 25,000 loan
• 8, 8 yr 353
• 5, 5 yr 472
• But pay extra 5,568 over life of loan
• Car may be worth less than loan at end
• Avoid or prepay these long loans

8
Car Lenders

• Credit Union
• http//www.alabamacu.com/
• Bank

• Ford Credit
• www.fordvehicles.com
• E-Loan
• www.eloan.com
• Capital One Auto Finance
• www.capitaloneautofinance.com

9
Leasing Alternatives

• Financing, not a purchase decision
• Closed-end leases, or walk-away leases
• Car returned in agreed upon condition
• Purchase option
• Dealer is responsible for resale
• 80 of leases

10
Leasing Alternatives

• Open-end leases
• Car worth less after lease than estimated?
• You pay the difference!
• Run.

11
Monthly Lease Payment Factors

• Depreciation of cars value
• Agreed-upon price (negotiate price before you
  mention leasing)
• Residual value
• Down payment or trade allowance
• Rent, or finance charge
• Up-front fees
• Length of the lease

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Lease Versus Buy Lease
13
Lease Versus Buy Buy
14
Lease Versus Buy Decide

• Buy 18,312
• Lease 18,639
• Diff (327)
• BUY!

15
Buying Your Car at End of Lease

• 2001 leasing firms lost an average of 2.9K on
  every returned car!
• Negotiate the price
• Banks more willing to negotiate than car dealers
• Check out value of car at www.Edmund.com or
  www.kbb.com

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Example

• C. DeStafano wanted to buy her 1999 Honda Accord
• Contract said the price would be 16,700
• She offered 14,000
• Bank agreed to 14,400

17
Questions?