Auto Loans: Financial Literacy PDF

# Auto Loans ## Financial Literacy ### Learning Objectives - Discuss key term associated with making a car loan - Consider whether to buy new or pre-owned - Pros and cons of Lease vs Purchase - Understand auto loan payments - Financing options based on data related to individual needs ### Car Buy...

# Auto Loans ## Financial Literacy ### Learning Objectives - Discuss key term associated with making a car loan - Consider whether to buy new or pre-owned - Pros and cons of Lease vs Purchase - Understand auto loan payments - Financing options based on data related to individual needs ### Car Buying Basics - Most people don't have enough cash on hand to buy a car - Trade-in value – amount dealer gives you for the car you're providing as partial payment for the car you wish to purchase - Kelly Blue Book - Book Value - how much a car is worth based on its condition, mileage and other factors - Incentives – factors such as special finance rates, rebates, or other offers designed to encourage buyers to purchase a vehicle ### Continued - Auto loan is a secured loan - An auto loan has collateral, meaning the value of the vehicle is the security for the lender. - The lender has protection against default. - In other words, if you do not make payments or default on your loan, the bank can seize the underlying asset. - In this case, they can take your vehicle. ### New vs Pre-Owned | | New | Pre-Owned | |---|---|---| | | Technology | Less expensive | | | Features and Design | May not be in the best shape | | | Warranty | Mileage| | | Cost more | Limited warranty | | | Lose value once it leaves the lot | History of problems | ### Continued - The simple fact that a new vehicle will cost more than an identical pre-owned vehicle will affect the amount of money borrowed. - However, when purchasing a new vehicle, some manufacturers offer low, or even 0%, financing options. - In general, rates on new vehicles, for these reasons, tend to be lower. - In addition, dealerships will have different financing options available, and rates and terms may vary by many factors, including new versus pre-owned. - In short, it is best to look at many financing options before making a vehicle purchase and financing decision. ### Leasing Vs Purchasing | | Leasing | Purchasing | |---|---|---| | | Pay only portion of sales price | Own the car after payments made | | | New car every few years | Can drive as much miles as you want | | | Some dealers will cover regular maintenance | Lower insurance cost | | | You never own the car | Down payment needed| | | Mileage restrictions | Can end up upside down on loan | | | Higher insurance | Have to pay for maintenance usually | ### Continued - Leases and loans are not the same things. - When you purchase a vehicle with a loan, you own the vehicle and make periodic payments against the balance of the loan. - When the loan is paid off, you own the vehicle title free and clear. - When you lease a vehicle, you do not own the vehicle. Instead, you pay a monthly fee to simply rent the vehicle for a specified term under specified conditions. - At the end of the term, you must return the vehicle or pay the remaining value of the vehicle, known as residual value, to own it. - For these reasons, the monthly payment on a lease is usually lower than an auto loan. However, one must be incredibly careful in considering the lease terms, such as the maximum miles the vehicle can be driven, and if it is best to purchase the vehicle at the end of the term. ### Before Purchasing - Before purchasing a vehicle, you should do plenty of research. - Decide what type of vehicle you want to purchase and use an online vehicle ranking comparison tool to compare reviews and ratings of the models between which you are deciding. - Make sure the vehicle meets your needs and ranks high in areas important to you, such as safety, gas mileage, and price. - Narrow your choices before stepping onto the dealership lot. - Determine what options are available to you to pay for the vehicle. - How much cash can you or should you put down? - Use a lease versus purchase calculator to determine which option is better for you. ### Continued - If an auto loan is the best option, then compare rates from various lenders such as a local bank, credit union, insurance company, and online lenders. - To get an accurate idea of rates, you will need to know what your credit score is and how that will affect rates. - Check your credit history from one of the three free credit reporting companies by going to AnnualCreditReport.com. - If there are any errors in your credit history, you will want to go through the process to fix those. - Then, when at the dealership, see what rates and terms they have to offer, so you are ready to compare loan options. - Do not be afraid to tell the dealership what rates are available to you to see if they can beat it. - You will also want to research the ownership costs of the vehicle before applying for a loan. - Get an auto insurance quote from a couple of insurance companies, and consider how much you will be spending on gas and maintenance each year. ### How much can you afford? - Every individual is different, and there is not one rule of thumb to go by when determining how much your car payment should be. - Though some will say that vehicle costs should be below 20% of your net income, much more should be taken into consideration. - What other debt do you have? - What are those payments? - Do you have a steady income to repay the loan, and do you have an emergency fund or savings set aside should something unforeseen happen or major vehicle repairs be necessary? - Consider what your current monthly expenses are, and how adding the loan payment will affect your overall budget. Do not overextend yourself. ### Dealer vs Private Lending - As stated above, it is best to shop around. - Every vehicle, scenario, and situation are different. - Sometimes dealers can offer financing incentives or manufacturer terms that are better than a private lender. - Other times, banks, credit unions, insurance companies, or online lenders can provide better rates. ### GAP Insurance - When purchasing a new vehicle, the vehicle loses value as soon as you drive it off the lot. - A new vehicle can depreciate anywhere from 10 to 30% within the first year alone. - GAP insurance is intended to cover the difference between what you still owe on the vehicle loan and what the current, depreciated vehicle is worth. - For example, if you buy a new vehicle and finance all of it at $30,000 and get in an accident one year later, you may owe more on the vehicle than it is now worth after depreciation. A standard auto policy will cover the damaged auto at its current replacement value, but the GAP insurance will then cover the difference between that replacement value and what you still owe on the vehicle. ### Continued - GAP insurance is often required on leased vehicles, and it is advised when purchasing a vehicle with little or no money down. - It is also used when a consumer trades in a vehicle that has been financed, and you are bringing in the negative equity (owe more than the vehicle is worth). - An auto insurance company often charges less for a GAP policy than a dealership. - So again, get a couple of rate quotes before purchasing a GAP policy at the dealership. ### Extended Warranties - Dealerships will often offer extended warranties and added vehicle protections. - Again, this is a decision that varies by person and situation. An extended warranty is essentially taking your risk of something breaking down on your vehicle and spreading that cost over the term of the warranty. - So, rather than you having to pay for the repair in full when it happens, you have paid a smaller, monthly payment for the warranty to cover that if or when it occurs. - In general, I would encourage a consumer to negotiate the price of the warranty. - The price that is listed in literature, or first offered, is much higher than what the salesperson or financing officer can offer you. - Again, be patient, and shop around. You can always add an extended warranty later. ### Loan Terms - The lower the period of time you take to repay the loan, the less overall interest you will pay on the loan. - Use an online payment calculator and look at the monthly payment for each period option with the corresponding total interest paid over the life of that loan. - You will want to consider the lowest period you can afford to keep the interest costs down. - However, if the rate is really low, or zero, then perhaps the lower payment and longer repayment period is the way to go. ### Costs With Owning a Car - Insurance - Maintenance (oil changes, tires, etc) - Sales Tax - Inspection and licensing fees - Gas