Unit 5: Transportation

Lesson 3: Owning a Car

Topic 2: Financing a Car

OBJECTIVES

1. Identify where you can get a loan for a car.

2. Differentiate between the principal and the interest.

3. Compare the cost of a $5,000 car loan from different lending sources.

4. Review the information needed for a loan application.

MATERIALS
Loan Calculation Chart

Loan Application Information Sheet

marker board or something to write on

calculators

SUPPLEMENTAL RESOURCES
Money Management – A $13.95 book by Educational Design, Inc. (1800 221-9372).

Financing a Car (Individual Title from the Survival Skills Reading or Cassette Unit) – A $9.95 workbook by Phillip Roy, Inc. (1800 255-9085).

Consumer Loans & Credit Cards – A $6.95 workbook by JIST Works, Inc. (1800 648-5478).

Janus Life Skills: Shopping and Caring for Cars – A $7.95 workbook by Globe Fearon (1800 848-9500).

INSTRUCTIONAL FORMAT
This lesson will provide information about how to finance a car if the student is unable to come up with the money in one lump sum. Due to the complex math that is involved in calculating interest on a loan, trainers may need to modify some of the information. At the very least, students should understand that they will be paying back more than they borrow by the time they pay off the car. It is strongly recommended that trainers buy one or more of the supplemental resources to provide information for the class.

1. Identify different places that a person can get a loan.
   
   

   • Banks – If a student has other accounts at a bank, this may be the best place to get a loan or at least a good place to start. Different banks have different interest rates, so it is important to shop around.
     
     

   • Consumer Finance Companies – Also called "small loan companies," these places are generally less intimidating than large banks. Consumer finance companies usually lend small amounts of money and take greater risks. Although they are regulated by the state, the interest rates tend to be higher.
     
     

   • Dealership – Most of the time, you can finance the car through the dealership where you purchase the vehicle. Sometimes dealers advertise low-interest loans to attract customers. In general, the rates are higher because they are playing the middle man for loan companies, so they want to make money off the deal.
     
     

   • Family and friends – Although this is a convenient way to get money be sure you can pay the person back. Many relationships are damaged over issues of money.
     
     

2. Discuss the three basic components of a loan.
   
   

   • The principal is the amount of the loan.

   • The interest is the amount charged for borrowing the money.

   • The term is the amount of time that will pass before the loan is fully repaid.
     
     Calculating interest payments for loans is difficult for most people. What is important during discussions about financing is to ask the loan officer to tell you the total amount of interest you will be paying. This can help a person comparison shop. In order to illustrate differences in the amount paid with different principal amounts, interest rates, and terms, use the "Loan Calculation Chart."
     
     First, ask what they notice as they look at the monthly payments for a $4,000 loan as the interest rates increase (the payments increase). Next, have them do the following calculation to see what the total interest payment will be: Monthly payment for a $5,000 loan at 8 percent interest ($156.68) X 36 months = $5,640.48. Ask the students if they can figure out the interest charge for the loan ($640.48). Finally, ask them to notice the difference between taking out a loan for 36 months versus 48 months. Before they get real excited, have them figure the total interest payment for the same loan amount and interest rate.
     
     $123.51 ($4,000 at 7% interest) X 36 = $4,446.36 - $4000 = $446.36
     $95.78 ($4,000 at 7% interest) X 48 = $4,597.44 - $4,000 = $597.44
     
     Using this scenario, it shows that the person will pay about $150 more for taking out the loan for a longer period of time.
     
     If you have access to the Internet, there are a variety of sites that have auto loan calculators that allow you to plug in different numbers and get the amount of monthly payments. This would be a good way to further illustrate how different interest rates and terms will affect the total amount of money a person has to pay back. One site is www.autoweb.com/loancalc.htm.
     
     

3. Instruct the students to call three different lending institutions and find out the interest rate, monthly payment, and total amount of the loan if they were to borrow $5,000 for three years. Sometimes lenders want to know what type of car they are buying. Inform students that it might be a good idea to tell the loan officer that they are getting the information for a class and they would appreciate her help. Review the information during the next class.
   
   

4. After reviewing the information the students obtained from the lenders, discuss what information they will need to fill out the loan application. Use the "Loan Application Information Sheet" to review the information that is generally needed. Once the student has all of this information filled out, she can keep the form to use when applying for a loan. Whatever information the student cannot fill out during the class, she should fill in the remaining information and bring in the filled out information to the next class.
   
   

5. Instruct students on what will happen when they cannot make a payment on the loan. The consequences will depend on what is in the loan contract. If a person misses a payment, the following might happen: the lender will ask for immediate repayment of the loan, allow a late payment with a penalty fee, deduct the money out of an account if the person has one where he got the loan, get a court order to have the person's employer pay a portion of his wages to loan company, or take the car back. These are serious consequences, and students need to be aware of these issues.

SIGNS OF GENERALIZATION
Ideally, a student will be able to finance a car on her own following this lesson. This may be too much to ask for some people however. Hopefully, most students will be able to use good decision-making skills throughout the process and will need to rely on assistance as little as possible.

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