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4.04 Auto Loans and Mortgages

Last updated 2 months ago
33 questions
Note from the author:

PROMPT: Household Debt & Credit Report đź“·1 min

The Federal Reserve Bank of New York maintains these graphs every quarter to depict total household debt in the US. Review the first two graphs (skip the third on delinquency) using the link above and use them to answer the question that follows.
1

Based on this data, what observations can you make about household debt in the US?

FINCAP FRIDAY: What’s Buy Now, Pay Later? 📷9 min

In recent years, a different type of installment loan has become popular on online shopping checkout screens and even in some stores. It’s commonly referred to as “Buy now, pay later.”
1

If Buy Now, Pay Later loans are just breaking your payment into 4 equal parts, how could this deal possibly become problematic to the borrower?

1

As you move through your payment schedule on an amortized loan, what will happen to the interest portion of each month’s payment?
  1. The interest portion will grow
  2. The interest portion will shrink
  3. The interest portion will stay the same
  4. The interest portion will sometimes grow and sometimes shrink

1

It’s time for Roxanne to start repaying her student loans, which are amortized over the next ten years. Her first month’s payment due is $396. How much should she expect to owe next month?
  1. Substantially less than $396
  2. Slightly less than $396
  3. Exactly $396
  4. Slightly more than $396

1

You’re debating whether to buy a trendy fall jacket that costs a whopping $200! You have it sitting in your online cart, and you see there’s a “Buy Now, Pay Later” option available for the jacket. Which best describes an example of how that would work?
  1. You pay the full $200 now, but they wait a month to send it to you, giving you the chance to cancel, penalty free, if you change your mind
  2. You pay $100 right now, you receive the jacket, and you owe $100 more a year later on the anniversary of your purchase date
  3. They ship you the jacket now, and you owe four $50 payments, once every 2 weeks, until the jacket is paid in full
  4. You reserve the jacket now, you pay as much or as little as you want in each payment, and when you eventually get to $200, they send you the jacket

EDPUZZLE: All About Car Loans đź“·11 min

A car, just like a mortgage, is a secured loan. That means if you fail to make payments, the lender can repossess the property, leaving you with a horrible credit score — and no car! For that reason, it’s especially important that you understand how auto loans work. Watch this video and follow your teacher's directions to answer the questions either in your student activity packet or within the EdPuzzle itself.
2

How can making a larger down payment save you money when purchasing a car? (Choose two correct answers)

1

A higher credit score...
  1. Will help you obtain a lower interest rate on an auto loan
  2. Will help you obtain a higher interest rate on an auto loan
  3. Has no impact on the interest rate on an auto loan

1

A longer term length will make your monthly payment lower and you will pay _______ interest when compared to a shorter term length and higher monthly payment.

1

Which statement most accurately describes the difference between leasing and owning a vehicle?
  1. Leasing is a term used when you purchase a car for the longest term possible
  2. Leasing a car is making monthly payments to use a car for a fixed period of time, but then you return it without owning it
  3. Leasing is a term used when you take the car for an initial test drive
  4. Leasing a car requires a very large down payment, while purchasing a car does not

1

According to the video, what is the first step in purchasing a new vehicle?
  1. Take multiple vehicles for a test drive to see what features you like best
  2. Create a budget and check your credit score
  3. Get an insurance quote for you new vehicle
  4. Decide which color vehicle you want most

INTERACTIVE: Auto Loan Calculator đź“·7 min

Auto loans are amortized installment loans, so once the terms of your loan are set, your payments should stay the same month after month. Assume you are taking a $20,000 car loan, for a term of 48 months, with an interest rate of 4%. Use this calculator to answer the following questions.
1
What is your estimated monthly payment?_______ (screen shot your calculator)
8
Experiment with the values in the calculator to complete the chart. Use up or down arrows to indicate how the Action impacts the Monthly Payment and Total Cost of the Car Loan

Increase the amount of down payment:
Monthly Pmt: __________
The Cost of the Car Loan: __________

Secure a Lower APR:
Monthly Pmt: __________
Total Cost of the Car Loan: __________

Extend the Term of your Loan:
Monthly Pmt: __________
Total Cost of the Car Loan: __________

Pay more than the minimum monthly bill:
Monthly Pmt:__________
Total Cost of the Car Loan: __________
2

What are two reasons someone might purposely choose a HIGHER monthly payment?

1

Antonio has $4000 saved to use for a down payment, and he’s about to buy a car that costs $29,000. How much would you expect his loan principal to be?
  1. $4000
  2. $25,000
  3. $33,000
  4. $29,000 x his interest rate

1

If you were offered two auto loan options with the same principal and interest rate, but one was a 48-month loan and one was a 72-month loan, which outcome below will reflect the impact of that difference in term?
  1. The 48-month loan will cost less money overall
  2. The 48-month loan will have lower monthly costs
  3. The 48-month loan will take longer to pay off
  4. The 48-month loan will always be a better choice

1

Shonda’s mom recommends that she spend a year building her credit history and boosting her credit score before she applies for a loan to buy her dream car, which costs $54,000. Why is that good advice?
  1. A good credit score will reduce her down payment
  2. A good credit score will reduce her principal
  3. A good credit score will reduce her interest rate
  4. A good credit score will allow her to pay the full $54,000 in cash

CALCULATE: The Cost of Auto Loans

Hudson got a raise and is looking to upgrade his car. Help him avoid expensive pitfalls!

2
Hudson has saved $2,500 for a down payment and is looking at a new Volkswagen Jetta. If he subtracts the cash allowance from the cost , how much of a loan would he need for…
Offer A:_______
Offer B: _______
9
  1. Use the Loan Amortization Calculator to complete the table with the costs of each offer.
  2. Enter the loan amount, interest rate and loan term. Then, click Calculate.
  3. To start a new calculation, click Show Calculator and update the inputs.
  4. Screen shot each option in Show Your Work

Option A
Monthly Pmts:_______
Total Interest:_______
Total Cost of Loan (Principal + Interest)=_______

Option B
Monthly Pmts:_______
Total Interest: _______
Total Cost of Loan (Principal + Interest)=_______

How much MORE will Hudson pay in total with Offer B?_______

Which offer do you think Hudson should go for? _______ Explain_______
1

Part II: The Fine Print

Hudson heads to the dealership to take advantage of Offer B, but it’s not what he expected.
The dealership tells Hudson the offer was only for “well-qualified buyers”. Because of his credit history, he’s only eligible for an 11.4% interest rate and $400 cash offer.
  1. How much of a loan does Hudson now need?_______
  2. Complete the table for his new offer using the Loan Amortization Calculator.
Offer C:
Interest Rate: 11.4%
Term: 60 Months (5 years)
Down Payment: $2,500
Special Offers: $400
Monthly Pmt: _______
Total Interest: _______
Total Cost of the Loan=Principal + Total Interest = _______
1

Part III: Reflection
  1. What did Hudson learn about auto financing?

1

Hudson desperately wants a Volkswagen Jetta, but the monthly payment with the dealership’s offer is above his monthly budget. What could he do?

VIDEO: Demystifying Mortgages đź“·9 min

Since the start of the 21st century, over half of US households have been homeowners rather than renters. What you may or may not know is that most homeowners can’t afford to buy their homes in one cash payment; instead, they take out a mortgage. Watch this video to answer the questions about mortgages.
1

How does an annual percentage rate (APR) for mortgages differ from a more traditional interest rate?

1

One downside of an adjustable-rate mortgage is that it is riskier than a fixed-rate mortgage. Explain why.

1

In the video’s amortization example, the borrower makes a $711 payment, where $375 goes toward paying interest and $336 goes toward paying the principal. Should the borrower be worried that they’ll never pay off the mortgage? Why or why not?

1

Why is choosing an appropriate mortgage potentially even more important than choosing an appropriate auto loan?

CALCULATE: Mortgage Costs
Buying a house is likely the biggest purchase you’ll ever make. To get ready, find out what the price tag will mean for your monthly budget.

Part I: Down Payment & Interest Rate

  1. Tremaine wants to buy a one-bedroom condo in his small city’s downtown. Use the Bankrate Mortgage Calculator to complete the table comparing his options.
Tremaine
  • Home price: $170,000
  • Down payment: TBD
  • Loan term: 30-year fixed mortgage
  • Interest rate: TBD
  • ZIP code: 37307
3
Option A: Buy a home now
  • Down payment: $17,000
  • Interest rate: 7.55%
Screen Shot each Calculator
Monthly Payment
“Payment Breakdown” tab_______
Total Interest
“Amortization” tab_______
3
Option B: Wait until he has saved more for a down payment
  • Down payment: $34,000
  • Interest rate: 7.55%
Screen Shot each Calculator:
Monthly Payment “Payment Breakdown” tab_______
Total Interest
“Amortization” tab_______
1
Option C: Wait until he has saved more for a down payment AND improve his credit score to get a lower interest rate
  • Down payment: $34,000
  • Interest rate: 7.18%
Screen Shot each Calculator:
Monthly Payment “Payment Breakdown” tab_______
Total Interest
“Amortization” tab_______
1

Summarize: How does Tremaine’s down payment and interest rate impact his cost of buying a condo?

Part II: House Price & Monthly Payment

Carlin
  • Home price: TBD
  • Down payment: $30,000. Saved $20,000 + $10,000 in down payment assistance
  • Term: 30-year fixed mortgage
  • Interest rate: 7.07%
  • ZIP code: 64116
3
Carlin is looking for an affordable three-bedroom house for her and her family. Calculate her costs if she buys a $200,000 house using the Bankrate Mortgage Calculator.
How much will her monthly payment be?_______
How much will she pay in total interest? Open the “Amortization” tab._______
When will she pay off her loan?_______
Screen Shot your Calculator
1
  1. Carlin had budgeted more for housing. In the “Amortization” tab, add an additional $100 monthly payment. Bankrate Mortgage Calculator.
With the additional payment…
How much less will she pay in total interest?_______
Approximately how much faster will she pay off her loan?_______ When will that be: _______
3
If Carlin could afford the extra payments, she could also afford a more expensive house.
What is the most expensive house she could afford with a $1,500 monthly payment? Note: Check the down payment amount is correct and round to the nearest $1,000._______
Do you think she should buy the more expensive house? _______ Why or why not?_______
2

Part III: Reflect

If you’re preparing to buy a house…
  1. What is one strategy you can use to reduce your overall cost?_______
  2. What is one tradeoff of using that strategy?_______