6.04a Interest Rates Assignment

We will be considering an auto loan, much like what we did in the lesson.

We will be using the same calculator: https://www.amortization-calc.com/auto-car-loan-calculator/

We will assume that you are buying a vehicle from a dealership, rather than a private seller. Visit the websites of local car dealerships and find a car you find interesting.

1. What are the year, make, and model of the vehicle? (Example: 2022 Ford Mustang)
2. What is the price of the vehicle? (Feel free to round to the nearest hundred or thousand to keep the numbers simple for this task.)
3. Is the vehicle new or used?

Scenario 1

We will assume that you have a down payment ready of $1,500. The rest will be through an auto loan.

1. What is the amount to be financed through auto loan? (This will be the vehicle price from #2 - $1,500 down payment.)

We will assume that you have good (but not exceptional) credit, so your interest rate will either be 4% if the car you have chosen is new or 6% if it is used. (Yes, the average rate for a used car is typically slightly higher than for a new car, even though the actual price of a used car is usually less than a new car.)

1. What is your interest rate (either 4% new or 6% used, based on your answer to #3)?

To keep things simple, we will assume that you are starting payments on this loan in January of next year. (It won't really matter for the purposes of this task.)

Let's begin by considering a loan that will have you pay off the vehicle in five years. That makes this a 60-month loan.

Enter that data into the calculator and then note the following:

(Hint: When entering the data, remember to enter the full vehicle price from #2, not the amount to be financed from #4. There is a blank to enter your down payment, so the calculator will automatically deduct your down payment to determine your loan amount.)

1. Monthly payment for a 60-month loan
2. Total paid after all 60 payments
3. Total interest paid over the life of the loan

Scenario 2

It is time to change things a little bit. Now we will assume that you did not have a down payment. This means that the amount you will be financing is now the full price you used for #2 above. Run the numbers again, and record the following for this new situation:

1. Monthly payment for a 60-month loan
2. Total paid after all 60 payments
3. Total interest paid over the life of the 60-month loan

Scenario 3

Finally, let's looks at one more situation. Let's go back to having our $1,500 down payment, so the amount we will finance is the same as in Scenario 1 (the amount from #4 above). This time we will change from a 5-year (60-month) loan to a 6-year (72-month) loan. Run the numbers again with this change and record the following:

1. Monthly payment for a 72-month loan
2. Total paid after all 72 payments
3. Total interest paid over the life of the 72-month loan

Reflection

1. What did you notice about how having a down payment affected your monthly payments and the overall costs of the loan? (Make sure to answer both parts of this question.)
2. What did you notice about how adding another year to the life of the loan affected your monthly payments and the overall costs of the loan? (Make sure to answer both parts of this question.)
3. Which do you find is the most important consideration when evaluating a loan: the monthly payments or the overall cost of the loan? Why?
4. Do you expect that you will use a calculator like this when you need to make a major purchase that involves a loan? Why or why not?