Financing a Car Loan
Objective: You will understand how the relationship between the down payment, interest rate, and length of a loan influences the cost of a loan.
Understanding how a loan works can be tricky. First, let's review some terms:
- Purchase Price-The amount the car is selling for after you negotiate with the sales person.
- Principal-Amount you are borrowing from the bank.
- Interest or Interest Rate-What you are charged from the bank to take out the loan (the price of money).
- Down Payment-Typically a 10% down payment should be made. This money comes from your savings account and helps reduce the amount of money you have to borrow (principal).
- Length of Loan-This helps determine your monthly payments on your car loan. The longer the loan, the more interest you will pay but you may have lower payments. Usually car loans are 2, 3, 4 or 5 years in length measured in months.
- Total Purchase Cost-This is the amount of your principal (loan) + interest accrued + down payment
1. Review the Financing a New or Used Car Presentation located at the bottom of this page, making note of specific information you will need in completing the worksheet.
2. Study the Shopping for an Auto Loan Presentation found in the resources below.
3. Read the Shopping for an Auto Loan Information sheet found in the resources below.
4. Complete the worksheets Calculating the Cost of a Loan and Shopping for an Auto Loan with Financial Calculators located at the bottom of this page. You may use an online financial calculator such as http://www.onlineloancalculator.org/ to complete the calculations for the car loans. Set the sales tax to 0%.