Auto Finance Auto

							Chapter 5


                              Making Automobile and
                              Housing Decisions: Auto
                                     Financing




Based on Personal Financial Planning by Gitman, Joehnk, and Billingsley, Cengage, 12e, 2011. Slides by Dorla Evans, FIN 100, The University of Alabama in
Huntsville.
                                                                                                                                                   1
Cheap financing or rebate?
                                   Assuming no down payment
    SALE! SALE!
                                    and a 36 month loan:
1%* FINANCING OR $1,500 REBATE
    FULLY LOADED MUSTANG             Bank: PV = $22,500 – $1,500 =
                                      $21,000, i = 5/12, n = 36
                                        PMT = $629.39

                                     1% APR: PV = $22,500 i = 1/12,
           only $22,500
                                      n = 36
   *1% APR on 36 month loan.
                                        PMT = $634.68
     If banks are making 5% car
   loans, should you choose the
        1% financing or $1,500       The best deal?
               rebate?



                                                                       2
Effective Annual Interest Rate

 How to lie, cheat, and      SHADY CARS
  steal with interest
  rates:                      Going out for
                              business sale!
 Assume you buy a
  $10,000 car from this
                           $10,000 instant credit!
  dealer and agree to       12% simple interest!
  the above credit          Three years to pay!
  terms.                     Low, low monthly
                                 payments!
 What is the APR of
  this loan?

                                                     3
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?

                                               4
Is this a 12% loan?
   PVA = $10,000           What should
   PMT = -$377.78           payment be?
   n = 36                    PV = $10,000
   i = 1.766% per month      n = 36
                              i = 12/12 = 1%
 APR = 12 x 1.766% =         PMT = $332.14
  21.19%
                              APR = 12%


                                                5
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 >
                        $40K
      * WSJ 9/30/03                                6
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


                                7
Car Lenders
 Credit Union                   Ford Credit
   http://www.alabamacu.com/      www.fordvehicles.com


 Bank                           E-Loan
                                   www.eloan.com


                                 Capital One Auto
                                  Finance
                                     www.capitaloneautofinance.com




                                                                      8
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




                                              9
Leasing Alternatives
                    Open-end leases
                      Car worth less
                       after lease than
                       estimated?
                      You pay the
                       difference!
                      Run….



                                          10
Monthly Lease Payment Factors
 Depreciation of car’s 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

                                                11
Lease Versus Buy: Lease
1. Down payment ($2,500) and security deposit           $2,900
($400)
Monthly lease payment
($25,000 – residual value of $10,000 = $15,000)
PVA = $15,000; n=36; i=3%/12; PMT = $436.22
2. Total payments over lease ($436.22 x 36)            $15,704

3. Opportunity cost of initial payment ($2,900 x .05     $435
x 3 years)
4. End of lease charges                                    $0

5. Less: Refund of security deposit                     ($400)

Total cost of leasing (1 + 2 + 3 + 4 – 5)              $18,639
                                                             12
Lease Versus Buy: Buy
1. Agreed-upon purchase price                        $25,000

2. Down payment (20%)                                 $5,000

Monthly loan payment
(PVA = $20,000; n=36; i=8%/12; PMT = $626.73)
3. Total loan payments ($626.73 x 36)                $22,562

4. Opportunity cost of down payment (5% x $5,000 x     $750
3 years)
5. Less expected market value at end of loan         $10,000

Total cost of buying (2 + 3 + 4 – 5)                 $18,312
                                                           13
Lease Versus Buy: Decide
                  Buy     $18,312
                  Lease   $18,639
                  Diff    $ (327)

                  BUY!




                                     14
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

                                                15
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


                            16
Questions?




             17