Making a Deal with the Auto Finance Devil? by HC1207301206

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									BUS 2141 – Widdel                                                 92140681-b09a-4d97-8cad-5836b6fb0881.doc



Your Name:

                      Personal Finance
                      Making a deal with the auto
                      finance devil?
                      Due: 10:00 AM Wednesday, March 28                             Value: 52 pts.

Submission: Upload a copy to the related D2L drop box.

Directions

Step 1:      View the sales pitch delivered by an auto finance rep. (The following link is
             provided at the class website if you don’t want to have to type it.)

             http://afitoday.blogspot.com/2009/03/automotive-finance-department-video-on.html

Step 2:      Review this information taken from the video.

             “We finance the car for as long as we can to keep the payment as low as we
             can.”

             Car’s selling price is $29,000. Final price of $28,700 is to be financed.

             Customer is making a down payment of $1,000, receiving a $1,000 trade in
             allowance.

             Car sales rep told customer to expect a payment of $475-$480 per month for a 72
             month loan before she when to visit the finance rep.

             The customer wants a payment near $470 per month and is in agreement with a
             72 month (6 year) loan.

             The finance rep offers a 72 month loan at 6.9% with payment of $478.21 per
             month. Included in this price is a 3-year/36,000 mile bumper-to-bumper warranty.

             The customer, who drives about 20,000 miles per year, is then offered these
             additional options:

             Option 1 - costing $542 per month

             72 month 100,000 mile wrap warranty includes rental car reimbursement, 24 hr
             roadside assistance, towing, trip interruption, covers everything but belts, hoses,
             spark plugs, sheet metal, glass and brake pads. Also includes credit life insurance,
             gap insurance (difference between depreciated value and the loan value if the car
             is totaled) and wheel/tire warranty for 60 months for tire punctures or wheel
             damage. (This plan has a “small” unspecified deductible.)


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BUS 2141 – Widdel                                            92140681-b09a-4d97-8cad-5836b6fb0881.doc



             Option 2 - $521 per month.
             Same options except credit life insurance is removed.

             Option 3 - $499 per month
             No Gap or credit life insurance.

             Option 4 - $485 per month
             Everything out except tire and wheel.

             Option 5 - $910 over the term of the loan.
             Credit life insurance only.

             Option 6 - $497.66 per month.
             Credit life insurance and gap insurance only.

             Option 7 - $505.25 per month.
             Tire and wheel option with 24 hour roadside assistance.

             It’s important to note that after being scared into considering a higher monthly
             payment due to potential repair bills ($1,800 for broken air conditioning) the
             customer requested warranty protection for under $500 per month. She settled for
             something different – Option 7 – tire and wheel protection with roadside
             assistance at $505.25 per month.

             The finance rep informed her that an extended warranty would be made available
             to her at a later day for $1,595 as long as the car is under 3 years old and under
             36,000 miles. The $1,595 price was the price at that moment – “the price will
             escalate a little bit as time goes on.”

For the following questions, you may key your answers right into this document.
Download it from the class website.

1.           Use the online car payment calculator posted at the class website and enter the
             relevant figures for the total amount to be financed, term of the loan and interest
             rate. Show and print the Amortization Table (you’ll need to review it for a
             question asked later in this exercise).

             What is the true monthly payment (versus the one quoted by the finance rep) of a
             $28,700 loan at 6.9% for 72 months borrowed on Nov 1, 2011?

             $

2.           Calculate the total cost of this $29,000 car if it is purchased at the Option 7 price.
             Consider the total loan amount to be paid. Don’t forget the down payment and
             trade-in amounts.

             $




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BUS 2141 – Widdel                                         92140681-b09a-4d97-8cad-5836b6fb0881.doc



3.           How much is the customer paying for the tire/wheel and roadside assistance
             protection per month? The total amount over the duration of the loan? Is this a
             good idea? Why or why not?

             $               $

4.           Should she be buying credit life insurance? Yes or No? Why?


5.           Should she be purchasing gap insurance? Yes or No? Why?


6.           Should she be purchasing an extended warranty? Yes or No? Why?


7.           Did the customer make a wise purchase? Yes or No? Why? (List and explain
             three major reasons.)

             1.

             2.

             3.

8.           Consider the responsibility of the consumer to be knowledgeable when making a
             significant purchase such as a new car. List five things the customer should have
             done before buying a car from this dealer.

             1.

             2.

             3.

             4.

             5.

9.           Consider the actions of an ethical versus unethical finance representative. If this
             finance manager were ethical, how would he handle this customer differently? List
             five specific recommendations.

             1.

             2.

             3.

             4.

             5.

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BUS 2141 – Widdel                                         92140681-b09a-4d97-8cad-5836b6fb0881.doc



10.          What would be the financial benefit to this customer if she denied the roadside
             assistance and tire/wheel coverage (calculated in Q3) and instead sent it in as an
             extra amount to the monthly loan payment calculated for question 1? Use the
             online calculator to determine this answer. Note: When adding extra monthly
             payment amount, clear the “Charges paid off date” box before recalculating the
             amortization table.

             How many fewer months of payments?
             How much savings in interest?




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