Young Money Classroom Activities Car Loan Hunting Summary Before becoming entranced with the glitter and glamour of buying that great new set of wheels, you really need to do your homework. Part of that homework involves pinning down a loan you can afford with an institution you trust. Sure, you might be able to get a bigger loan or lower rate somewhere else; but you need to know the hidden costs as well as the upfront costs. For one stop shopping there is nothing like dealer financing. Dealers will bend over backwards to get you the loan that will finance the car you want at the price they want to sell it to you. If the price is high enough, you might even qualify for a very low- or zero-rate loan. But are you really getting such a loan or is it a higher priced loan simply figured into the higher price you are paying for the car? Many people are so excited about buying a new car that they seldom question how much interest they are paying on the loan. They often want the biggest loan they can get at the biggest loan payment they think they can afford. Does this mean they can afford the purchase? Maybe they can if they are able to keep up with the payments and don’t mind giving up more of their future income in payments than is needed. Big loans, big loan payments, and high priced cars can lead to financial disaster. What if you total your car in an accident or need to sell it for some reason and your loan balance is higher than the market value of the vehicle by several thousand dollars? Will you have the extra money to pay off the loan? Will the lender release the title and allow you to sell for less than the loan balance? You could be in big trouble and this is a common dilemma. Now that universal default clauses have begun to pervade credit agreements, any default on your car loan could cause the issuers of other credit agreements you have to increase your interest rate with them to 24% or more. Could you handle such an increase? If this information troubles you, you need to look at getting a loan and buying a car in proper perspective. You need to research your car loan options not only in terms of the interest rate but in terms of the price, quality and market value of the car you will be buying. Reputable lenders will not allow you to borrow more than you should to purchase a particular vehicle. But they cannot protect you from your own lack of initiative in realistically evaluating your car needs and researching your purchasing options. Discussion After your students have read “Car Loan Hunting,” break the class into small groups to discuss the following. Then have each small group share its highlights with the class. 1. 2. 3. 4. What is most important to you in getting a car loan? What aspects of car buying are most difficult for young adults to handle? When auto dealers say there is no need to negotiate, what do you think they are saying? Where can you get reliable information about car loans and loan rates?
Project Ideas • Invite the loan officer of a local credit union or bank to speak to your class about the process, particulars and pitfalls of getting a car loan. Be sure to allow time for questions and answers. • Visit a dealer showroom and ask one of the salespeople to take you through the process of purchasing a car and getting a car loan. Use the opportunity to ask questions regarding what car buyers should know about negotiating the price of a car and the terms of a car loan. • Visit a local credit union or bank and ask one of the loan officers to take you through the process of applying for a car loan. Use the opportunity to ask questions regarding how the following are determined: (1) your qualifications for a car loan and how this would affect the amount you could borrow and the rate you would pay; (2) the maximum amount that you or anyone else could borrow for a particular new or used car; and (3) your options with regard to pre-qualifying or qualifying for an auto loan of a certain amount before shopping for a car. Potential Quiz/Test Question 1. What are some of the sources you could go to in order to obtain a car loan? 2. According to the article, what special service is offered by Scion Solutions? 3. What are the advantages of pre-qualifying for a car loan before shopping for a car? 4. What are the advantages of having your car payment paid directly by your lender? 5. According to the article, what car loan information is available at Bankrate.com? 6. How does your credit score affect any car loans that might be available to you? 7. What are some of the pros and cons of asking your parents for a car loan? 8. What is the meaning of a credit score and where can you find yours? Additional Challenges 1. Go to www.Edmunds.com and go through the process of comparing three different vehicles in terms of safety, reliability, features, style and price. Then explore the loan information available at this site (click “financing” tab) and at www.carloans.com and www.cars.com regarding available terms, rates and payments for the amount that you would need to borrow. 2. Go to the April car buying issue of Consumer Reports. Make a chart comparing the safety, reliability, ride, style and price of the three vehicles that you would be most interested in buying. Determine the loan amount you would need to purchase your top choice. Call a bank, a credit union, and a dealer to find out which would offer the best rate, terms and payments for the amount you would need to borrow in order to purchase the car of your choice. Glossary Credit union—a member owned financial institution open to a specific field of membership, such as all the people belonging to a specific organization or residing in a specific locality. High pressure sales tactics—the words and actions some sales people employ to make a potential buyer feel compelled to buy something immediately without further consideration. Universal default—a provision in a credit agreement that allows the issuer to raise your interest rate or apply other penalties if you default on any credit agreement with any credit issuer.
Worksheet: Financing the Car that’s Right for You
This activity involves researching the important facts you need to compare, select, purchase and finance a motor vehicle suited to your needs, tastes and pocketbook. Use published sources, like Consumer Reports, and/or on-line sources, like www.Edmunds.com, to uncover the information needed to compare vehicles and prices. Use information gathered from banks, credit unions, car dealers, and/or on-line sites like www.cars.com and www.carloans.com to find loan information. SELECTING THE BEST VEHICLE Vehicle 1 Vehicle 2 Make/Model/Year Notable Features Accessories Favorable Comments Unfavorable Comments Safety Rating Reliability Rating Ride/Handling Rating Your Style Rating Manufacturer’s Price Best Purchase Price Needed Loan Amount SELECTING THE BEST LOAN Lender 1 Lender 2 Lending Source Loan Amount Loan Period Loan Rate Lender 3 Vehicle 3
Loan Payment
This worksheet was developed by Ron Wall, Financial Wellness Associates.