# Auto Finance Auto

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Auto Finance Auto document sample

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```							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
\$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
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
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   \$18,639
 Diff    \$ (327)

14
 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
Accord

 Contract said the price
would be \$16,700

 She offered \$14,000

 Bank agreed to \$14,400

16
Questions?

17

```
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