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Fostering Financial Literacy for Youth

Workshop Series, Spring 2017

The Fostering Financial Literacy for Youth workshop series is designed to equip afterschool program staff

with the knowledge, tools and resources to teach their youth to become financially savvy and in control

of their financial futures.

The workshops in the 4-part series include:

Credit cards, Debts, and Loans, April 21, 2017

Presented by: Douglas Young, The Wiser Choice Financial Investing, May 1, 2017 Presented by: Hillary Webb, Belinda Roman, Hollis Wilkinson, NYU Opportunity Programs

Budgeting and Saving, May 12, 2017 Presented by: James Gurney and Anthony Kuzma, Futures & Options

College Financial Aid Package, May 26, 2017 Presented by: Michael St. John Turner, HESC Use of Materials

These materials are a part of the Fostering Financial Literacy for Youth Series provided by the

Partnership for After School Education. They serve as reference materials and can support your work

with youth around financial literacy.

Fostering Financial Literacy for youth is funded by Morgan Stanley and Voya.

Fostering Financial Literacy for Youth

Credit cards, Debts, and Loans

Resource List

1. Agenda

2. Handout 1.1: Getting Out of Debt

3. Worksheet 1

4. Handout 7.1: Credit Reports and Credit Scores

5. Lesson 14: All About Interest

6. Lesson 15: Shopping for a Credit Card

7. Lesson 16: Shopping for a Mortgage

8. Lesson 17: Shopping for an Auto Loan

Fostering Financial Literacy for Youth:

Managing Your Money

Presenter: Doug Young

THE WISER CHOICE doug.n.young@gmail

9:30 – 9:50 Introduction, Takeaways, Resources

Better Money Habits – CEE and Khan Academy

18 videos plus webinar for teaching - http://www.econedlink.org/topics/25

Videos: https://bettermoneyhabits.bankofamerica.com/en

CEE’s “Financial Fitness for Life” – www.fffl.councilforeconed.org

9:50 – 10:20 Getting Out of Debt –

http://www.econedlink.org/teacher-lesson/1264/Getting-Out-Debt

Handout 1.1

10:20 – 10:50 Credit for Beginners –

http://www.econedlink.org/teacher-lesson/326/Credit-Beginners

Handout – Worksheet 1

Debt to Income Calculator - www.feedthepig.org/tools

10:50 – 11:00 Break

11:00 - 11:30 Credit Reports and Scores

http://www.econedlink.org/teacher-lesson/1273/Credit-Reports-Credit-Scores

Handout 7.1

Power Point

11:30 – 12:00 Financial Fitness for Life

Lesson 14 – All About Interest

12:00 – 12:25 Lesson 15 – Shopping for a Credit Card

Lesson 16 - Shopping for a Car Loan

12:25 – 12:30 Evaluations and Certificates

BETTER MONEY HABITS HIGH SCHOOL LESSON: STEPS TO HELP YOU GET OUT OF DEBT

BETTER MONEY HABITS: HIGH SCHOOL 4

Complete this handout while viewing Better Money Habits: Steps to Help You Get Out of Debt (www.bettermoneyhabits.com)

1. What is debt? _____________________________________________________________

________________________________________________________________________

What can happen if you have too much debt? ____________________________________

________________________________________________________________________

2. What is the purpose of a budget? _____________________________________________

________________________________________________________________________

How can it help you avoid getting into debt or help you get out of debt? ________________

________________________________________________________________________

3. What is secured debt? Define and give an example. ______________________________

________________________________________________________________________

What is unsecured debt? Define and give an example. ____________________________

________________________________________________________________________

What can you do if you’re having trouble making your minimum monthly payments? ______

________________________________________________________________________

4. What is a debt consolidation loan? ____________________________________________

________________________________________________________________________

When can be it a good option? _______________________________________________

________________________________________________________________________

5. What are some ways you could reduce your spending? ____________________________

________________________________________________________________________

What are some ways you could earn extra money? _______________________________

________________________________________________________________________

6. What did you learn from this video? ____________________________________________

________________________________________________________________________

________________________________________________________________________

HANDOUT 1.1 – GETTING OUT OF DEBT

Copyright © Council for Economic Education

Name: __________________________ Worksheet #1 Date: _______________

Directions: Visit the following website: https://www.bankofamerica.com/credit-cards/education/what-is-debt-to-income-ratio.go While viewing the site think about the following and write your answers below.

1. What is debt to income ratio?____________________________________________________________________________________________________________________________________________________________

2. What is the DTI used for?____________________________________________________________________________________________________________________________________________________________

3. What is the usual standard applied to decide if you are loan worthy?______________________________________________________________________________

a. What does the first number represent? ____________________________________________

b. What does the second number represent? _________________________________________

4. What does the acronym PITI stand for?______________________________________________________________________________

View this website and define the following terms. http://www.creditcardcritic.com/advice/glossary.htm

1. Annual Fee _____________________________________________________________________

2. Finance Charge _________________________________________________________________

3. Minimum Payment _______________________________________________________________

4. Balance Transfer ________________________________________________________________

5. Billing Cycle ____________________________________________________________________

6. APR __________________________________________________________________________

7. Grace Period ___________________________________________________________________

8. Late Payment Fee _______________________________________________________________

9. Classic Card ____________________________________________________________________

10. Gold Card ______________________________________________________________________

11. Platinum Card __________________________________________________________________

12. Rebate Card ____________________________________________________________________

13. Secured Card ___________________________________________________________________

14. Unsecured Card _________________________________________________________________

15. Cash Advance __________________________________________________________________

BETTER MONEY HABITS HIGH SCHOOL LESSON:

WHAT’S THE DIFFERENCE BETWEEN A CREDIT REPORT AND A

CREDIT SCORE?

BETTER MONEY HABITS: HIGH SCHOOL 1

GUIDED NOTES: WHAT IS A CREDIT SCORE?

Complete this handout while viewing Better Money Habits: What is a Credit Score?

(www.bettermoneyhabits.com).

A credit report is a compiled ____________________ of all your accounts and payments. It can include a _________ loan, credit _____________, student loans, and a mortgage. Credit reports are maintained by three credit reporting agencies: _______________, _______________, and _______________. A free copy of your credit report can be obtained every ___________. A credit score is a _______________ that helps lenders assess your ability to repay a loan. A credit score consists of ________________ components.

Payment history: __________ percent Debt to credit ratio: __________ percent Length of credit history: __________ percent Types of credit: __________ percent New credit accounts or inquiries: __________percent

The most common credit score is called the _________ ___________ .

Credit scores range from ________ on the low end to ____________ on the high end.

HANDOUT 7.1 – CREDIT REPORTS AND CREDIT SCORES

http://www.bettermoneyhabits.com/

LESSON DESCRIPTION AND BACKGROUND

To compare the cost of different loans, studentsmust understand finance charges and interestrates. In this lesson, the students learn how tocompute finance charges, how to differentiatebetween add-on and annual percentage rates,and how the annual percentage rate and loanrepayment period affect the cost of a loan.

Lesson 14 correlates with national standards foreconomics and personal finance as shown in Tables 1-2 in the introductory section of thepublication.

ECONOMIC AND PERSONAL FINANCECONCEPTS

• Add-on interest rate

• Annual percentage rate (APR)

• Finance charge

• Interest rates

OBJECTIVES

At the end of this lesson, the student will beable to:

• Describe the factors that determine the cost ofcredit.

• Describe the differences between an add-onand an annual percentage rate.

• Calculate finance charges, using different in-terest rates

• Calculate APRs, given different financecharges and loan repayment periods.

• Analyze relationships among the financecharge, principal of the loan, APR, and loan re-payment period.

TIME REQUIRED

One 45-minute class period

MATERIALS

• A transparency of Visual 14.1

• A copy for each student of Exercise 14.1 fromthe Student Workbook

• Small prizes for the Assessment activity

ADDITIONAL RESOURCES

To download visuals, find related lessons, correlations to state standards, interactives, and more visit http://fffl.councilforeconed.org/9-12/lesson14.

PROCEDURE

1. Tell the students that this lesson will help themunderstand how to identify loans with low inter-est costs. The lesson involves lots of math, whichcould help the students save thousands of dollarsin interest over their lifetimes.

2. Give each student a copy of Exercise 14.1from the Student Workbook. Ask students toread through Part 1. Be sure to go over the for-mula FC=PRT, which is used to calculate financecharges. Ask the students to complete Part 1,answering questions a-f. Go over the answers inclass.

a. Gabrielle Daily borrows $1,000 at a 6 percentadd-on rate for one year. What is the financecharge? ($60)

b. Jesse Candelaria borrows $2,000 at a 10 per-cent add-on rate for three years. What is thefinance charge? ($600)

c. Jessica Tate borrows $2,000 at a 10 percentadd-on rate for two years. What is the financecharge? ($400)

d. Travis Whitaker borrows $2,000 at an 8 per-cent add-on rate for two years. What is the fi-nance charge? ($320)

e. If you want to lower the finance charge,should you shop for a higher or lower interest

63FINANCIAL FITNESS FOR LIFE: Teacher Guide Grades 9-12http://fffl.councilforeconed.org/9-12 ©Council for Economic Education

LESSON

14All About Interest

64 FINANCIAL FITNESS FOR LIFE: Teacher Guide Grades 9-12http://fffl.councilforeconed.org/9-12 ©Council for Economic Education

LESSON

14THEME 4 | Lesson 14: All About Interest

rate? (Lower.) Why? (The interest will beless each year.)

f. If you want to reduce the finance charge,should you pay back the loan more quickly orless quickly? (More quickly.) Why? (The morequickly the loan is paid off, the shorteryour borrowing period and the lower thefinance charge.)

3. Go over the formula MP = (P + FC)/N in Part 2of Exercise 14.1. This formula is used to calcu-late the monthly payment on a loan. Have thestudents read Part 2 of Exercise 14.1 and answerquestions a-e. Go over the answers in class.

a. David Kim borrows $8,000 at an 8 percentadd-on rate for two years. What is the financecharge? ($1,280) What is the monthly pay-ment? ($386.67)

b. Maria Torres borrows $8,000 at an 8 percentadd-on rate for four years. What is the financecharge? ($2,560) What is the monthly pay-ment? ($220)

c. If a borrower takes longer to pay back a loan,what happens to the monthly payment? (It islower.)

d. If a borrower takes longer to pay back a loan,what happens to the total finance charge? (It is higher.)

e. What are the costs and benefits of takinglonger to pay off a loan? (With a longer pay-off period, it is easier to make the monthlypayments, but the total interest cost ishigher. In this case, the cost of the 48-month loan was $2,560, twice the cost ofthe 24-month loan.)

4. Ask the students to read Part 3 of Exercise14.1. Discuss the Truth in Lending Law and theformula for computing the APR in Part 3. Be-cause lenders must state the APR, studentsmight think they shouldn't have to compute it.However, although the APR must be stated in acredit contract, lenders may state only an add-on rate or even a monthly rate. This is why stu-dents should understand exactly what an APR is.Understanding APR is the purpose of this activ-

ity. Have the students answer the questions atthe end of Part 3 of the exercise. Discuss theanswers in class.

a. Lisa Rosas borrows $5,000 at a 5 percent add-on rate for one year. What is the financecharge? ($250)What is the APR? (9.2%)

b. Brett Olson borrows $6,000 for three years ata 7 percent add-on rate. What is the financecharge? ($1,260) What is the APR? (13.6%)

c. What is the relationship between an APR for anadd-on rate for a one-payment loan comparedto an APR for an add-on rate on a monthly in-stallment loan? (The APR on the one-pay-ment loan is substantially less than the APRfor the monthly installment loan. In thiscase it is just less than double the add-onrate.)

CLOSURE

Use the following questions to review the lesson:

• What is the principal of a loan? (The amountof money borrowed or the amount of aloan that is left to be repaid, not includingany finance charges.)

• What is the finance charge on a loan? (Theamount of interest paid, stated in dollars.)

• What is the APR? Why is it important? (APRstands for the annual percentage rate,which is the percentage of the principalthat is paid in interest in a year. It is thebest figure to use when comparing the costof loans.)

• What is the difference between an APR and anadd-on interest rate? (An add-on rate as-sumes that the borrower has the originalprincipal of the loan for the entire loan pe-riod. An APR is calculated on the decliningbalance of the loan or only the principalthat is still to be paid off.)

• How can a borrower reduce the financecharge on a loan? (Shop for a low APR andpay off the loan as quickly as possible.)

ASSESSMENT

Divide the class into teams of three studentseach. Display Visual 14.1 on the overhead andshow the problems. Have the groups calculatethe answers to all the problems. The winningteam is the one that calculates the correct an-swers in the shortest period of time. Award thatteam a small prize.

Here are the answers to the problems:

1. $240

2. $960

3. a. $1,680

b. $570

4. a. $1,350

b. $176.39

c. 17.5%

5. a. $3,000

b. $375

c. 9.8%

EXTENSION

Have the students go to an online paymentscalculator and compare the monthly fixed pay-ment that must be made on an auto loan when(a) the interest rate is varied, and (b) the repay-ment period is varied. Ask the students toconfirm the relationship among the interestrate, the repayment period, and the monthlypayment. Ask them to use the amortizationtable that is usually available for these pay-ment calculators to determine the total inter-est paid in the different scenarios.


LESSON

14THEME 4 | Lesson 14: All About Interest


VISUAL

14.1THEME 4 | Lesson 14: All About Interest

Interest Rate Problems

1. Jim Smith borrowed $2,000 at a 6% add-onrate for two years.

What is the finance charge?

2. Alex Rolando borrowed $4,000 at an 8%add-on rate for three years.

What is the finance charge?

3. Ann Fong borrowed $12,000 at a 7% add-onrate for two years.

a. What is the finance charge?b. What is the monthly payment?

4. Michelle Ward borrowed $5,000 at a 9%add-on rate for three years.

a. What is the finance charge? b. What is the monthly payment? c. What is the APR?

5. Julie Freshwater borrowed $15,000 at a 5%add-on rate for four years.

a. What is the finance charge? b. What is the monthly payment? c. What is the APR?

NAME: _________________________________________ CLASS PERIOD: ____________

Credit isn’t free. The price of credit is called the interest rate, and total interest paidis known as the finance charge. The finance charge is usually stated in dollars, butsometimes it is stated as a percentage of the loan. When stated as a percentage ofthe loan, it is another way to refer to the interest rate.

The Truth in Lending Law makes comparing credit costs fairly simple. This federal lawrequires that all lenders state their finance charges and interest rates in the same way.This rate is called the annual percentage rate, or APR. An APR is the rate you pay in asingle year on the money you borrow.

Every loan must also state the finance charge. When stated in dollars, the financecharge is the total dollar amount of interest and other fees you must pay on theloan. The amount you borrow is called the principal of the loan. You pay back theprincipal plus the finance charge. The finance charge depends on the interest rate,the principal, the loan fees, and the length of the loan. The higher the APR and thelonger the period of the loan, the higher the finance charge. By using your mathskills, you can save big bucks on a loan. Let’s find out how.

Part 1: Figuring Simple InterestFirst, let’s figure some finance charges. Here is the basic formula for figuring out interest:

FC = PRT

FC: Finance charge or total interestP: PrincipalR: Interest Rate (an add-on rate, expressed in decimal form)T: Time (in years)

In this formula, the rate is an add-on rate with one payment of principal. An add-onrate is a simplified way to compute total interest on a loan. It is calculated by simplydetermining the total interest that is payable on the full principal. This amount isthen added to the amount of the principal to determine the total amount owed.Note that this is different from calculating payments according to APR procedures.

This formula assumes that the principal (amount of loan) and the interest are paid inone lump sum at the maturity date (end of loan period). For example, if you bor-rowed $2,000 at a 12 percent add-on rate for two years, the interest would be $480($480 = $2,000 x .12 x 2). The amount of $2,480 (interest and principal) would berepaid at the end of two years.

Everything You Wanted to Know AboutFiguring Interest

105FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 ©Council for Economic Education

EXERCISE


106 FINANCIAL FITNESS FOR LIFE: Student Workbook Grades 9-12 ©Council for Economic Education

EXERCISE


Questions:a. Gabrielle Daily borrows $1,000 at a 6 percent add-on rate for one year. What is

the finance charge?

b. Jesse Candelaria borrows $2,000 at a 10 percent add-on rate for three years. What is the finance charge?

c. Jessica Tate borrows $2,000 at a 10 percent add-on rate for two years. What is the finance charge?

d. Travis Whitaker borrows $2,000 at an 8 percent add-on rate for two years. What is the finance charge?

e. If you want to reduce the finance charge, should you shop for a higher or lower interest rate? Why?

f. If you want to reduce the finance charge, should you pay back the loan more quickly or less quickly? Why?


Part 2: Figuring Monthly PaymentsMost loans are paid back on a monthly basis. Very few are paid back all at once at the maturity value of the loan. The monthly payment is the amount the borrower mustpay the lender each month to pay back the loan. The monthly payment covers bothprincipal and an interest finance charge. When using add-on interest, the formula forfiguring the monthly payment is:

MP = (P + FC)N

MP: Monthly paymentP: Principal of the loanFC: Finance charge or total interest

(Calculated in the same way as in part 1 above)

N: Number of months the loan is for

For example, you borrow $10,000 at an 8 percent add-on rate for four years.

P = $10,000FC = ($10,000 x .08 x 4) = $3,200MP = ($10,000 + $3,200) = $275

48

Questions:a. David Kim borrows $8,000 at an 8 percent add-on rate for two years.

-What is the finance charge?

-What is the monthly payment?

b. Marcia Torres borrows $8,000 at an 8 percent add-on rate for four years.-What is the finance charge?

-What is the monthly payment?

c. If a borrower takes longer to pay back a loan, what happens to the monthly payment?

d. If a borrower takes longer to pay back a loan, what happens to the finance charge?

e. What are the costs and benefits of taking longer to pay off a loan?

EXERCISE



EXERCISE


Part 3: Determining the APRIn the past, lenders advertised interest rates in various ways. In some instances, peo-ple were paying higher rates than they thought they would pay because lenderswere figuring the rates differently. Consumers had difficulty shopping for credit be-cause of these variations in figuring rates.

Let’s look at a couple of examples to illustrate what was being done. SupposeGeorge secures a $1,200 loan at 10 percent add-on interest for one year—a loanthat he would pay off (interest and principal) at the end of the year. At the end ofthe year, he would pay $1,320 to the lender ($1,200 principal plus $120 financecharge). The interest rate advertised for this loan was 10 percent.

Now suppose that Sheila secured a $1,200 loan at 10 percent add-on interest,paying $110 a month. She would be paying a total of $1,320 as well. Before theTruth in Lending Law, the lender probably would have advertised this loan as a 10percent interest loan, just like the lender for George’s loan. In reality, are both ofthem paying the same interest rate?

They are certainly paying the same amount of interest, but they are not paying thesame rate of interest. Why? In the first situation, the person receiving the loan hasthe full $1,200 for the entire year. In the second situation, part of the $110 a monthis going toward the repayment of the loan. Sheila has less of the loan each monthbecause of her monthly payments.

The Truth in Lending Law was established so that individuals shopping for creditcould have a common basis for comparing loans. According to this law, the interestrate must be stated as an Annual Percentage Rate (APR), based on the decliningbalance of the loan. The Truth in Lending Law also requires that the full amount offinance charges (interest plus other charges) must be indicated to the consumer.

There can be variations on the formula for determining the effective APR for a loan.One method using simple interest computations is:

APR = 2 x M x FCP x (N + 1)

M: Number of payments per year (For monthly payments this is always 12)

FC: Finance charge or total interestP: PrincipalN: Total number of payments


Let’s figure out the APR for Sheila’s loan by first looking at the finance charge thatshe pays.

$120 = $1,200 (principal) X .10 (interest rate) X 1 (number of years)

Now let’s figure the annual percentage rate using the APR formula.

APR = 2 x 12 x $120 = $2880_ = 0.1846 = 18.46%$1200 x 13 $15,600

Notice that the APR for Sheila is much higher than the 10 percent that was probablyquoted to her by the lender. If you use the formula for George’s loan, you will seethat it will come out to 10 percent APR since there was no declining balance on theloan. He always had $1,200 available on the loan.

Questions:Now let’s figure some APRs. All these loans are paid back on a monthly basis.

a. Lisa Rosas borrows $5,000 at a 5 percent add-on rate for one year. -What is the finance charge?

-What is the APR?

b. Brett Olson borrows $6,000 for three years at a 7 percent add-on rate.-What is the finance charge?

-What is the APR?

c. What is the relationship between an APR for an add-on rate for a one-paymentloan compared to an APR for an add-on rate on a monthly installment loan?

EXERCISE



In 2007, nearly three-fourths of all U.S. familieshad at least one credit card. According to theFederal Reserve, 46 percent of families carried abalance on their cards. The median balance car-ried was $3,000. Americans are obviously in lovewith their credit cards, but they are not always wellinformed about them. They may not know that allcredit cards are not created equal. The first part ofthis lesson emphasizes that credit cards differ fromone another in terms of annual fees, annual per-centage rates, grace periods, and credit limits.The second part shows students how to read acredit card statement so that they can see the realcost of charging goods and services.



• Annual fee

• Annual percentage rate (APR)

• Credit card

• Credit limit

• Grace period

OBJECTIVES


• Describe differences among credit cards, in-cluding fees, annual percentage rates, graceperiods, and credit limits.

• Read and understand a credit card statement.

• Evaluate the costs and benefits of using acredit card to purchase goods and services.

TIME REQUIRED


MATERIALS

• A transparency of Visual 15.1

• A copy for each student of Exercise 15.1 and15.2 from the Student Workbook

• Optional: Credit card solicitation lettersand/or information sheets that accompanycredit card statements



PROCEDURE

1. Introduce the lesson’s focus on credit cards.Ask:

a. How many of you have a credit card?(Answers will vary. If no students havecredit cards, ask whether they know people who do have credit cards.)

b. What do you buy with your credit card? (Answers may include such things as gas,clothing, CDs, small appliances, dinner at arestaurant, mail-order catalog purchases,and Internet purchases.)

2. Give each student a copy of Exercise 15.1from the Student Workbook. Ask the studentsto read the exercise and answer the question atthe end. When they have finished, discuss theanswer:

a. What characteristics should you look for ifyou want to save money on a credit card?(The credit card should have a low fee orno annual fee, a low APR, and a longgrace period.)


LESSON

15Shopping for a Credit Card


LESSON

15THEME 4 | Lesson 15: Shopping for a Credit Card

3. Remind students that Exercise 15.1 explainsdifferent ways to calculate credit card interest. Itis important for cardholders to understand howtheir credit card company calculates interest.Display Visual 15.1 on the overhead and dis-cuss how the different methods provide differ-ent calculations of interest for the statementperiod, even when the transactions are thesame.

4. When you have finished discussing Visual15.1, ask:

a. Which method of calculating interest is morefavorable to the card holder? (An adjustedbalance method of calculation is more favorable to the cardholder.)

b. Which method is more advantageous to thecreditor? (The previous balance is more advantageous to the creditor. Note thatthe most popular method used by creditcard companies is the average daily bal-ance method.)

5. Give each student a copy of Exercise 15.2from the Student Workbook. Ask the studentsto read the exercise and answer the questions atthe end. Discuss the answers.

a. How much did Tim Gray charge on his creditcard in the month of the statement? ($30.63)

b. What is the credit limit on this credit card?($7,500)

c. How much of that credit was available at thetime of this statement? ($6,378)

d. How does Tim's previous balance compare tothe new balance shown on this statement?(The new balance is $50.55 higher thanthe previous balance.)

e. Was Tim charged a finance charge thismonth? If so, what was the amount of the finance charge? (Yes. He was charged a finance charge of $19.92 this month.)

f. What is the annual percentage rate for crediton this account? (21 percent)

g. Looking at this statement, do you think Tim ishandling his credit well? Why or why not? What

would you recommend? (Tim is probably nothandling his credit well. He is not paying offhis monthly balance. In fact, his monthly bal-ance is increasing. He is paying a relativelyhigh APR. Tim should consider how he couldquickly pay off the total balance of thiscard.)

CLOSURE

Conclude the lesson by noting that most stu-dents in the class will use a credit card sometime in their lives. Credit cards provide manyadvantages, including the efficiency with whichpayments can be made, the way they free peo-ple to carry relatively little cash, and their use inemergencies. However, card holders can getinto trouble easily if they use credit cards care-lessly. If credit card holders maintain high bal-ances that are unsupported by current income,the finance charges they incur may absorb agrowing proportion of each month’s income. Ifthat happens, it can set a vicious cycle in mo-tion—sometimes leading to personal bank-ruptcy. Students should take great care not tolet this happen to them. To protect themselves,they must, for starters, be well informed aboutthe different characteristics of credit cards andthe numbers found on a credit card statement.

ASSESSMENT

As a homework assignment, ask the students tobring to class credit card solicitation letters orthe information sheets that accompany creditcard statements. An alternative to collecting so-licitation letters is to compare credit card offersonline. One website, www.bankrate.com, couldbe useful for this purpose. Put the students intogroups of three and have them compare thefeatures of three different credit cards. Theyshould use the chart on the next page to displaythe results of their comparisons. They alsoshould answer the questions that follow thechart.

Questions:

1. What characteristics would you look for if youcarried a balance and wanted to save money ona credit card? (Low APR, no annual fee, favor-able method for computing interest.)

2. What features would you look for if you plannedto pay off your balance each month? (Long graceperiod, rewards for use, no annual fee.)

3. Which card would your group choose? (Accept a variety of well-reasoned answers.)

EXTENSION

Ask the students to interview an adult who uses acredit card. They should ask what uses the inter-viewee makes of his or her card and what the ad-vantages and disadvantages are of using thecard. Depending on the extent to which theadult is willing to share this information, she or hemay also permit the student to look at a recentcredit card statement or online form, to provide areal illustration of the use of credit cards.


Card #1 Card #2 Card #3

APR (annual percentage rate): Is it fixed or variable?

Penalty APR and trigger events when it is charged

Annual fee

Late fee

Over-the-limit fee

Transaction fees (balance transfers, cash advances, etc.)

Grace period

Method of computing account balance

Rewards for use

Credit Card Comparison Chart

LESSON

15THEME 4 | Lesson 15: Shopping for a Credit Card


VISUAL

15.1THEME 4 | Lesson 15: Shopping for a Credit Card

Methods of Calculating CreditCard Interest

Assume: APR 18 percent annually or .04931 percent daily (.0004931)

Statement received on April 1 with the following information:

Previous balance as of March 1: $600

Payment (on March 15): $400

Purchase (on March 15): $100

Days in the billing cycle: 30

1. Previous Balance Method:

The creditor would charge .0004931 times the previous balance of $600 times thenumber of days in the billing cycle (30). This would total $8.88. Your $400 paymenton March 15 is ignored in calculating interest owed.

Previous balance method interest calculation = $600 x 30 x .0004931 = $8.88

2. Adjusted Balance Method:

You would be charged $2.96. That is: .0004931 times the adjusted balance ($200),which is the previous balance ($600) minus payments made ($400). This is multipliedby 30, the number of days in the billing cycle. This is the best deal for consumers,but it is rarely used by creditors.

Previous balance $600

Payment - $400

Adjusted balance $200

Adjusted balance method interest calculation = $200 x 30 x .0004931 = $2.96


3. Average Daily Balance (ADB) Method

Average Daily Balance Method (Including Newly-Billed Purchases): The creditorwould charge you $6.66. That is: .0004931 times the average daily balance, whichwas $600 for the first half of the month and $300 for the second half. Note that theaverage balance was $450 for the month. Using this method effectively eliminatesthe grace period on new purchases. The only way to have a no-interest grace pe-riod is by paying the outstanding balance in full each month.

$600 x 15 x .0004931 = $4.44

$300 x 15 x .0004931 = $ 2.22

Interest charge for this method: $6.66

VISUAL



1. Credit cards are in widespread useAmericans love credit cards. Here are some statistics that show how widespreadcredit card use is in the United States.

• 73% of all U.S. families had at least one credit card in 2007.• Most U.S. families do not have credit card debt. In 2007, only 46.1 percent of

families carried a credit card balance. • For those who carry a credit card balance, the median amount owed was $3,000

in 2007.• For those who carry a credit card balance, the average amount owed was $7,300

in 2007. • Ninety-six percent of families with credit cards have a bank-type card. Bank

cards accounted for 87 percent of all outstanding credit card balances. • The average family has two bank-type credit cards.• The median credit limit on bank-type cards was $18,000 in 2007.• The median interest rate on bank-type cards was 12.5 percent in 2007. • Credit cards are an important component of all consumer credit in the United

States. In 2009, total revolving debt (credit card debt is the majority of thisamount) of U.S. households was $866.1 billion.

(These statistics come from Federal Reserve statistical releases and the Survey of Consumer Finances conductedby the Federal Reserve in 2007. For more information on theSurvey of Consumer Finances, see “Changes inU.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances” by B. K. Bucks, A. B.Kennickell, T. L. Mach, and K. B. Moore, published in the Federal Reserve Bulletin, February 2009.)

2. Shopping for a credit card can save you money. Not all credit cards are alike.Here are some ways in which they differ:• The annual fee. Some credit cards charge an annual fee, and some do not. The

amount of the annual fee may vary from card to card. Most people who have astrong credit record can find cards that do not charge an annual fee.

• Other fees. Credit cards usually charge stated fees for late or missed payments,going over your credit limit, or making certain transactions such as cash advances.

• The annual percentage rate (APR). The APR can vary from card to card by sev-eral percentage points. Furthermore, some credit cards offer a low APR for thefirst few months and then increase it after three or six months. The APR on cashadvances often differs from the APR for purchases.


Comparing Credit Cards

EXERCISE



EXERCISE


• The grace period. This is the amount of time a cardholder has to pay the creditcard balance without paying interest. The longer the grace period, the more inter-est-free days the cardholder has. If the entire balance is paid within the grace pe-riod, no interest is due.

• The way interest is figured. There are many different methods of calculatingcredit card interest. These include:� Average daily balance: The interest rate is calculated each day on the average ofeach day’s balance for the billing cycle. This is the most frequently-used method.

� Adjusted balance: The interest rate is calculated on the opening balance aftersubtracting the payments made during the month.

� Previous balance: Interest is calculated on the opening balance regardless ofpayments made during the month.

• The credit limit. This is the maximum amount of money a cardholder can charge.A higher credit limit gives the cardholder flexibility but can also lead to credit cardbalances that are difficult to pay off.

3. Credit cards also differ in the types of services offered; this can be a reasonto choose one card over another. Here are some of the services:• High or no credit limits.• Rewards for the cardholder such as cash back, gifts, airline miles, or a discount

on a new car.• The number of merchants who accept the card.• Travel services such as covering the rental car insurance deductible, discounts on

hotels, travel-life insurance, or check-cashing privileges.

Question:a. What characteristics should you look for if you want to save money on a credit

card?

A credit card statement reveals a lot about what it costs to charge your pur-chases and then pay interest on the loan. Let’s see what information is found ona typical statement. Take a look at the credit card statement below:


Reading a Credit Card Statement


EXERCISE


Credit Is UAmerica’s Credit Card Company

Cardmember Name:Tim Gray333 Palm WayOceanview, FL 00000

Account Number: 000 000 0

Payment Due Date: 2-19-09Minimum Payment: 23.00Total Amount Due: $1,122.85

Amount Enclosed: ______________

Mail Payment to: P.O. Box 00000000Newark, DE 19716

Detach and mail this portion with your check or money order ot the address above. Do not staple or fold.

Account Number Billing Date Payment Due Date Days in Billing Period000 000 0 01-25-09 02-19-09 32

Date Reference Number Description Amount1-14-09 01010101 CD Haven 22.301-21-09 02020202 Pizza, Etc. 8.33

Credit Line: $7,500 Credit Available: $6,378

Previous Balance - Payments & Credits + Finance Charges + New Charges = New Balance Min. Payment$1,072.30 - .00 + 19.92 + 30.63 = $1,122.85 23.00

*Purchases, returns, and payments made just prior to billing date may not appear until next month’s statement.

Inquiries: Send inquiries (not payment) to: P.O. Box 222, Denver, CO 80202

Notice: See reverse side for important information

The finance charge isdetermined by apply-ing a periodic rate of

Which is an ANNUALPERCENTAGE RATEof

To that part of thebalance subject to fi-nance charge of up to

Balance computationmethods shown onreverse side

.05754% 21.00% Entire Balance Average daily balance


EXERCISE


Questions:a. How much did Tim Gray charge on his credit card in the month of the statement?

b. What is the credit limit on this credit card?

c. How much of that credit was available at the time of this statement?

d. How does Tim’s previous balance compare to the new balance shown on thisstatement?

e. Was Tim charged a finance charge this month? If so, what was the amount of thefinance charge?

f. What is the annual percentage rate for credit on this account?

g. Looking at this statement, do you think Tim is handling his credit well? Why orwhy not? What would you recommend?


LESSON

16


In this lesson, the students use a computer loancalculator to determine the monthly payment ondifferent mortgage loans. Understanding how touse computer loan calculators is very important formortgage calculations. There are many loan calcu-lators on the Internet; many software packages,such as Quicken, also provide loan calculators.



• Amortization

• Mortgage loan

OBJECTIVES


• Explain what it means to amortize a loan.

• Use a computer program to amortize severalmortgages.

• Identify and explain ways to reduce the cost ofbuying a home on credit.

TIME REQUIRED


MATERIALS

• A copy for each student of Exercise 16.1 fromthe Student Workbook

• Student access to an Internet-connected com-puter, a computer lab, or a computerequipped with mortgage-calculation software



PROCEDURE

1. Introduce the lesson’s focus on mortgageloans. Ask:

a. How many of you plan to be homeownerssome day?

b. Do you know how much new homes cost?(Discuss responses briefly. As necessary,supply cost figures from local real estatelistings.)

c. How do you plan to pay for your new homes?(Discuss responses briefly. As necessary,explain that most people use a mortgageloan to purchase a new home.)

2. Tell the students that not all mortgage loansare alike. They come in many shapes and sizes,with a variety of features that can be difficult tounderstand. Since the purchase of a home isone of the most important investments mostpeople will ever make, it is critical that they un-derstand their mortgage, especially the ele-ments related to required monthly payments.Fortunately, several payment calculators are nowavailable online or in the form of software; thesecalculators can help people understand howmortgage payments are computed. It is very im-portant that borrowers understand how to makethese calculations so that they are not com-pletely dependent on the computations and ex-planations of bankers and mortgage brokers.

3. Give each student a copy of Exercise 16.1.Ask the students to read the exercise and com-plete the table. The exercise will provide prac-tice in using a mortgage calculator and anamortization table. The exercise referencesmortgage calculators at www.bankrate.com,

Shopping for a Mortgage


LESSON

16THEME 4 | Lesson 16: Shopping for a Mortgage

but other online calculators (there are several)may also be used. You may wish to demon-strate how such a calculator can be used andshow the students what the amortization tableassociated with the calculator looks like. In ad-dition, you may wish to demonstrate the use ofa mortgage APR calculator. These can be foundon the Internet; they can be important forprospective borrowers who want to comparecosts for loans with substantially different char-acteristics. You should note that the Truth inLending Act requires that the APR for any givenmortgage be identified, and this calculationmust include such costs as closing costs andPMI (Private Mortgage Insurance).

When the students have completed their work,discuss their answers.

Answers to Exercise 16.1:

a. If you buy a home and make a relatively smalldown payment, what happens to the monthlypayment and total payment for your loan?(With a small down payment, the monthlypayment and the total payment will behigher than they would have been with alarger down payment. Also, the buyer willhave to pay for mortgage insurance if thedown payment is below 20 percent.)

b. What happens to the monthly payment andtotal payment for a loan with a lower annualinterest rate? (Both the monthly paymentand the total payment are less.)

c. What happens to the monthly payment andtotal payment if the term of the mortgage is 15 years rather than 30 years? (The buyerpays more each month, which can be toughon the budget. However, the buyer saves alot on interest, so the total payment is less.)

Mortgage 1 Mortgage 2 Mortgage 3 Mortgage 4

Home p rice $175,000 $175,000 $175,000 $175,000

Down payment % 20% 5% 20% 20%

Down payment $ $35,000 $8,750 $35,000 $35,000

Principal $140,000 $166,250 $140,000 $140,000

Interest rate 7% 7% 6% 5.5%

Term 30 years 30 years 30 years 15 years

Monthly payment $931.42 $1,106.07 $839.37 $1,143.92

Total interest $195,312.46 $231,933.54 $162,173.46 $65,905.03

Closing costs and PMI $4,200 $4,987 +$13,133 (PMI)

$5,000 $4,200

APR 7.295% 8.058% 6.331% 5.958%

Total payment, down payment,principal, interest, closingcosts, and PMI

$374,512.46 $425,053.54 $342,173.46 $245,105.03

Answers to Exercise 16.1


LESSON

16THEME 4 | Lesson 16: Shopping for a Mortgage

d. What is the trade-off if you get a 15-yearmortgage rather than a 30-year mortgage?(With a 15-year mortgage, you pay lowertotal interest but you make highermonthly payments.)

e. How does calculating APR help you com-pare the two 30-year loans that have a 7percent interest rate? (While both loanshave interest rates of 7 percent, the 5percent down-payment loan has higherfees associated with it. When all thecosts of both loans are put into the APRcalculations, the loan with the smallerdown payment has an APR that is about0.8 percent higher than the other loan.)

f. How can you reduce your total payment whenbuying a home? (Increase the down pay-ment, get a lower mortgage rate, pay themortgage off faster, have lower closingcosts, find a lower APR.)

CLOSURE

Conclude the lesson by noting that, for manypeople, the purchase of a home will be one ofthe most important investments they will evermake. Finding the right home in the right loca-tion is very important. What is often over-looked, however, is the importance of using theappropriate instrument to finance a home.These days, borrowers must consider many dif-ferent characteristics of mortgage loans beforemaking a final decision on purchasing a home.Whether to use a fixed-rate or adjustable-rateloan will depend, among other things, on howlong the buyer plans to live in the home. Thedecision may also be influenced by the outlookfor future rates. This lesson helps students takea first step toward understanding mortgage fi-nance. The topic is sure to come up again inmost students’ personal lives.

ASSESSMENT

Have the students create their own mortgage-calculation problems by creating a table andscenarios similar to those that appear in

Exercise 16.1. Make sure they structure theproblem correctly and provide the completedtable as an answer to the assessment exercise.They should also ask (and provide answers for)questions. Give bonus points to students whoare able to use an online calculator to deter-mine the APR for their mortgage loans. In addition, make sure they include results from an amortization table in their questions and answers.

EXTENSION

Ask the students to interview an older adultabout the homes he or she has lived in. Howmany times has the interviewee moved? Whatwere some of these homes like? What price didthe interviewee pay for the homes? How didthe interviewee finance the purchases? Whatwere the mortgage interest rates? What werethe terms (30 years? 15 years?) of the mort-gages? Were any of them adjustable rate mort-gages? Did the interviewee ever refinance ahome? What tax advantages does the interviewee get from owning his or her home?


IntroductionComputers can be very helpful in figuring out various aspects of a loan. In the fol-lowing situation, you will be working with mortgages, which are relatively largeloans that are used to finance house purchases. Mortgage payments are typicallymade every month and are extended over many years—often 15 or 30 years.

Mortgages aren’t free. Borrowers pay interest on their mortgage loans. And thereare costs in addition to interest. Some of these are called closing costs. Closingcosts vary from lender to lender depending upon the expenses the lender has forprocessing mortgage loans.

Let’s analyze four different mortgages. These mortgages come with different downpayments, different annual interest rates, and different time periods. In each case,however, the homebuyer is purchasing a $175,000 house.

The Four Mortgages1. Sean and Amber Johnson made a 20 percent down payment and took out a$140,000 mortgage at the local bank. It is a 30-year fixed-rate mortgage with an an-nual interest rate of 7 percent and closing costs of $4,200.

2. Alvin and Emily Jin qualified for a special mortgage program in which the re-quired down payment is only 5 percent of the cost of the home. They took out a$166,250 mortgage. It is a 30-year fixed-rate mortgage with an annual interest rateof 7 percent and closing costs of $4,987, plus private mortgage insurance (PMI) for10 years for a cost of $13,133. (When you make a down payment of less than 20percent, lenders require mortgage insurance. For this insurance you pay an insur-ance premium each month, along with your mortgage payment, until the equity inyour home is equal to 20 percent.)

3. Benny and Silvia Ramirez got a loan through a mortgage broker who found alower interest rate (6 percent) than the one offered by the local bank. They made a20 percent down payment and borrowed $140,000 for 30 years. Their closing costsinclude more fees than they would have paid the bank, but their interest rate is 1percentage point lower. Their closing costs are $5,000.

4. Emily McGill knows that she can save money by paying off a mortgage quickly.She made a down payment of 20 percent and borrowed $140,000 at a fixed rate of5.5 percent. Because she will pay off her mortgage in 15 years, her annual interestrate is lower than she would have paid for a 30-year mortgage. The closing costsfor this loan are $4,200.


Using a Computer to Calculate Payments for a Loan

EXERCISE

16.1THEME 4 | Lesson 16: Shopping for a Mortgage


EXERCISE


Mortgage 1 Mortgage 2 Mortgage 3 Mortgage 4

Home price $175,000 $175,000 $175,000 $175,000

Down payment % 20% 5% 20% 20%

Down payment $

Principal $140,000 $166,250 $140,000 $140,000

Interest rate

Term

Monthly payment

Total interest

Closing costs and PMI $4,200 $4,987 +13,133 (PMI)

$5,000 $4,200

APR 7.295% 8.058% 6.331% 5.958%

Total payment, downpayment, principal, interest, closing costsand PMI

Your TaskCompare these four mortgages by completing the Mortgage Comparison Table.Enough information has been provided above for you to fill out most of the table.However, you will need to use a mortgage calculator to determine the monthly pay-ment for each loan. Also, you will need to use the amortization table from the mort-gage calculator to determine the total interest that will be paid over the life of eachloan.

An additional piece of information has also been provided. Each loan has an APRthat represents the true annual interest percentage cost of the loan. MortgageAPRs are calculated by including closing costs and other mortgage-related costsinto the effective cost of the loan. You can find mortgage APR calculators online.Determining APR is particularly useful because it enables you to compare interestrates across different types of financing instruments. The Truth in Lending Law re-quires that the APR be identified for loans.

Using a mortgage calculator is easy. Just plug in the principal, annual interest rate,and term (in years) for each of the four mortgages. Check the monthly paymentamounts and use the amortization table to calculate total interest payments. Thenuse a mortgage calculator and fill in the chart. If your teacher does not provide awebsite, try www.bankrate.com to calculate the mortgage payment.

Mortgage Comparison Table

Questions:a. If you buy a home and make a relatively small down payment, what happens to

the monthly payments and total payment for your loan?

b. What happens to the monthly payment and total payment for a loan with a lower annual interest rate?

c. What happens to the monthly payment and total payment if the term of the mortgage is 15 years rather than 30 years?

d. What is the trade-off if you get a 15-year mortgage rather than a 30-year mortgage?

e. How does calculating APR help you compare the two 30-year loans that have a 7percent interest rate?

f. How can you reduce your total payment when buying a home?


EXERCISE



LESSON

17Shopping for an Auto LoanLESSON DESCRIPTION AND BACKGROUND Wise consumers shop for credit just as theymight shop for a car or a computer. In this lesson, to begin learning the skills needed inshopping for credit, the students fill out a credit-comparison chart for a hypothetical auto loan.Then, using the same techniques, they shop on-line for a loan. Finally, they compare the cost ofthe same loan at various local lending institu-tions. In the course of these inquiries, they alsotake account of costs of automobile ownershipover and above the purchase price and creditcost.


ECONOMIC AND PERSONAL FINANCECONCEPTS• Annual percentage rate (APR)

• Auto loan

• Credit

OBJECTIVESAt the end of this lesson, the student will beable to:

• Compare costs of different loans and choosethe loan with the lowest cost.

• Demonstrate how to shop for a loan online.

• Explain the factors that reduce the cost of aloan.

TIME REQUIRED

Two 45-minute class periods

MATERIALS

• A copy for each student of Exercise 17.1,17.2, 17.3, and 17.4 in the Student Workbook



PROCEDURE

1. Introduce the lesson’s focus on shopping forautomobile loans. Explain briefly that shoppingfor the best deal on a loan is just as important asshopping for the best deal on shoes or vacationtravel or anything else. Money is money. Thelowest-cost loan is usually the best choice for aborrower.

2. To shop for a loan, a borrower must first decide on the type of loan, the amount to be borrowed (principal of the loan), and thenumber of years to repay the loan. Then theborrower should shop for the loan with the lowest annual percentage rate (APR) of interest.The lowest APR should have the lowest financecharge (cost of the loan). If it does not, the borrower has probably been given incorrect ormisleading information.

3. Discuss some of the mistakes people make inshopping for a loan.

Mistake 1: Looking for the lowest monthly payment. The monthly payment can be loweredby lengthening the repayment period. But, thelonger the repayment period, the higher the finance charge over the life of the loan. Don'tfocus solely on the monthly payments.

Mistake 2: Not asking for the identical principaland repayment schedule in comparing loans of-fered by different lenders. Always compare thecost of the same loan. Don't try to compare ap-ples and oranges.

Mistake 3: Not asking for both the APR and thefinance charge. By asking for both, you will besure the information given is correct.


LESSON

17THEME 4 | Lesson 17: Shopping for an Auto Loan

4. Give each student a copy of Exercise 17.1from the Student Workbook. Ask the studentsto read the exercise, complete the chart, andanswer the accompanying questions. Whenthey have finished, discuss the completed chartand the answers to the questions.


a. Which loan is the best deal? (Online Lending Site.)

b. Which loan is the worst deal? (Friendly Finance Company.)

c. Jill took the best loan. How much extra didshe pay because she financed her car insteadof buying it for cash? ($1,416.47)

d. How much money did Jill save by taking thebest deal rather than the worst deal?($2,485.38)

5. Give each student a copy of Exercise 17.2from the Student Workbook. Because this exer-cise requires Internet access, it should be con-ducted in a computer lab or distributed as ahomework assignment. When the studentshave completed the activity, discuss their an-swers with the class.

a. Which loan has the lowest APR? (Answerswill vary.)

b. How do the APRs on new-auto loans com-pare to APRs for used-auto loans? (Answerswill vary; the students should be able todescribe how these APRs appear to dif-fer.)

c. Are the loan rates the same in all areas?(No. There is variation from one region toanother.)

d. Are the loans quoted only in terms of their in-terest rates, or are there other costs involved?(Some lenders require fees such as applica-tion fees or document-preparation fees.)

6. While this lesson focuses primarily on the costof automobile loans, it also provides an oppor-tunity to identify other costs of owning and op-erating a vehicle. Ask: What are some of theseother costs? (Insurance, maintenance, repairs,fuel, parking, permits, accessories, taxes,and licensing.)

7. Also point out that a hidden cost of buying acar is depreciation. Consumer Reports esti-mates that cars lose 45 percent of their valueover the first three years of ownership. Not allcars depreciate at the same rate. ConsumerReports, Kelley Blue Book, www.CarSoup.comand other websites have information that en-ables consumers to learn how well different carshold their value.

8. Tell the students that there are several organizations (and websites) that provide informa-tion for car buyers. Consumer Reports (online or inlibraries), www.consumerreports.org, Kelley BlueBook (www.kbb.com), American Auto Dealers As-sociation (www.nada.org), and carsoup.com are allsources that tend to provide neutral, unbiased in-formation. Edmunds (www.edmunds.com) has acalculator that estimates the “True Cost to Own” acar. The calculator enables users to compare thefollowing costs over a five-year period: deprecia-tion, fuel, taxes, maintenance, repairs and insur-ance. Using tools like these can help consumersmake decisions that meet their preferences andtheir budgets.

Lender APR Finance Charge Total Cost Monthly Payment

Last National Bank 6.65% $1,799.00 $18,799.00 $522.19

Online Lending Site 5.27% $1,416.47 $18,416.47 $511.57

Car Dealer 7.24% $1,964.01 $18,964.01 $526.78

Friendly Finance Company 13.95% $3,901.85 $20,901.85 $580.61

Completed chart for Exercise 17.1


CLOSUREConclude the lesson by reminding the studentswhat they have found. Rates for auto loans candiffer for many reasons, and it usually pays toshop for the best rate. The Internet has made itfairly easy to compare interest rates across awide range of potential lenders. Doing yourhomework to find the best deal can save you alot of money when you are purchasing a car. Re-mind the students that the same approach usedin identifying rates for auto loans can easily beapplied to comparing rates for auto insurance—and a lot of money can be saved by doing a lit-tle research.

ASSESSMENT

Give each student a copy of Exercise 17.3 fromthe Student Workbook. Tell the students thattheir homework assignment is to explore thecost of owning and operating a new and usedvehicle of their choice. For simplicity, studentsshould pick one model of vehicle and use it tocompare new- and used-car costs. The studentsshould read the instructions to Exercise 17.3and go to www.edmunds.com to collect the in-formation they will need to complete the activ-ity. When everyone has completed the activity,have the students report and discuss their find-ings with one another.

You may wish to identify the new car and usedcar which had the highest cost and the onethat had the lowest cost of ownership over thefive years.


• What are the two biggest expenses in owninga new car during the first five years? (Proba-bly depreciation and fuel.)

• What are the two biggest expenses in owninga used car in the first year? (Probably depre-ciation and fuel; as the car gets older, main-tenance becomes more important.)

• What is the total cost of owning the new carfor five years? (Answers will vary.)

• What is the total cost of owning the used carfor five years? (Answers will vary.)

• What is the difference in cost between pur-chasing a new car as compared to purchasinga two-year-old car? (Answers will vary.)

EXTENSION

Give each student a copy of Exercise 17.4from the Student Workbook. Assign the stu-dents to work on this activity individually or ingroups.

Have the students make a list of some of thebanks, savings and loan associations, creditunions, and finance companies in your area;then ask them to contact four of these lendinginstitutions and ask the loan officer at each insti-tution what the APR is for a $15,000 new-carloan.

The students should also ask if there are any ad-ditional fees that might add to the cost of theloan. Make sure the students ask whether cus-tomers with a checking or savings accountmight qualify for a lower rate.

Have the students fill in the chart for Exercise17.4 and compare their results to those found inExercise 17.2. When they have finished, theyshould answer the questions at the end of Exer-cise 17.4. Discuss these answers with the class.

Possible answers to Question f. from Exercise17.4:

• Advantages: Local institutions may offermore assistance and personal attentionthan online shopping.

• Disadvantages: The Internet provides awider range of choice for auto loans. TheInternet is available 24 hours a day; localinstitutions are not.

LESSON

17THEME 4 | Lesson 17: Shopping for an Auto Loan


EXERCISE

17.1THEME 4 | Lesson 17: Shopping for an Auto Loan

Getting the Best Deal on Your Auto Loan


Jill Winston shopped carefully for a new car. She found the model she wanted and negotiated a price of $22,000. She appliedher old car’s trade-in value to the down payment, which came to $5,000. Jill had toborrow $17,000 to buy the car.

Jill knew she should shop for credit just as she had shopped for the car. She tookthe following steps:

• Checked her credit rating: Jill made sure her credit rating was good and thatthere were no mistakes in her credit report.

• Made comparisons: She checked interest rates at her bank and at one otherbank. She also checked the rate the car dealer offered. She checked the rates at afinance company that advertised easy terms. Finally, she checked online for carloans offered at several websites.

• Compared loans for the same time period: Jill found an array of rates for differ-ent time periods. She decided that she should compare the rates for loans for thesame time period. She chose a three-year loan because longer loans mean highertotal finance charges over the life of the loan. She also thought she might buy anew car in three years, and she wanted the loan to be paid off by then.

What Jill found.The Last National Bank, where Jill has her checking account, offered her a loan witha 6.65 percent APR and a finance charge of $1,799. An online lending site offeredJill a loan with a 5.27 percent APR and a finance charge of $1,416.17. The car dealeroffered her a loan with an APR of 7.24 percent and a finance charge of $1,964.01.Finally, the Friendly Finance Company offered her a loan with an APR of 13.95 per-cent and a finance charge of $3,901.85.


EXERCISE


Comparing the loans.Fill in the chart below to determine the best loan. Remember that the total cost ofthe loan is the principal ($17,000) plus the finance charge. For the purpose of thisexercise, the monthly payment is the total cost of the loan divided by the number ofmonths (36).

Kind of loan: ______________ Principal: _________ Repayment period: _________

Name of Place APR FinanceCharge

Total Cost MonthlyPayment

Last National Bank

Online Lending Site

Car Dealer

Friendly Finance Company

Questions:a. Which loan is the best deal?

b. Which loan is the worst deal?

c. Jill took the best loan. How much extra did she pay because she financed her car instead of buying it for cash?

d. How much money did Jill save by taking the best deal rather than the worst deal?


EXERCISE


Shopping Online for an Auto Loan


Now it’s time to shop online for a loan. Assume you want a loan to buy a new car. You will search for car loans and visit several websites. Your new car costs $20,000.Your trade-in and down payment total $5,000. Therefore, the principal of the loan is$15,000. The payment period is four years. Find four different online offers for afour-year new-car loan and identify the APR for each. You may wish to start bygoing to www.bankrate.com and checking new-car loans in your area, but check of-ferings in other areas as well.


Website APR

Questions:a. Which loan has the lowest APR?

b. How do the APRs on new-auto loans compare to APRs for used-auto loans?

c. Are the loan rates the same in all areas?

d. Are the loans quoted only in terms of their interest rate, or are there other costsinvolved?


EXERCISE


Use the Edmunds website calculator, True Cost to Own,® at www.Edmunds.comto compare the cost of owning a new car and the cost of owning a two-year-oldcar of your choice. Please select only one vehicle and compare its cost as a newand a two-year-old car. Use the chart below to record your findings. Answer thequestions that follow.


Identifying the True Cost of Car Ownership

Year 1 Year 2 Year 3 Year 4 Year 5 5-yr Total

Depreciation

Taxes and Fees

Fuel

Maintenance

Repairs

Financing

Insurance

Tax Credit

Yearly Totals

Five-Year Costs of a Used Two-Year-Old Car

Year 1 Year 2 Year 3 Year 4 Year 5 5-yr Total

Depreciation

Taxes and Fees

Fuel

Maintenance

Repairs

Financing

Insurance

Tax Credit

Yearly Totals

Five-Year Costs of a New Car


EXERCISE


Questions: a. What are the two biggest expenses in owning a new car during the first five

years?

b. What are the two biggest expenses in owning a used car in the first year?

c. What is the total cost of owning the new car for five years?

d. What is the total cost of owning the used car for five years?

e. What is the difference in cost between purchasing a new car as compared to pur-chasing a two-year-old car?


EXERCISE


Now it’s time to shop for a loan at lending institutions in your community. Somepossible places are banks, savings and loans, credit unions, and finance companies.Again assume that you are buying a new car for $20,000. Your trade-in and downpayment come to a total of $5,000, and the principal of the loan is $15,000. The re-payment period is four years.



Shopping in Your Community for anAuto Loan

Name of Place APR1.

2.

3.

4.

Questions:a. Which bank offers the lowest APR?

b. Which bank offers the highest APR?

c. Did any lender offer a lower APR if you had a checking or savings account at thatinstitution?

d. Are the loans quoted only in terms of their interest rate, or are there othercosts involved?

e. Would you get a better deal from a local lending institution or from an onlinesource?

f. Name one advantage and one disadvantage of shopping for a loan in your localcommunity compared to shopping for a loan on the Internet.

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