Buying a CarProject (50 Maximum Points)

Due: Tuesday, 4/20/2010

The purpose of this project is for the students to get an idea of the prices of new automobiles, and to calculate the amount of each monthly payment as well as the total that would be paid

over the life of the loan.

  • You must type upor print neatlythe following directions(can be abridged) and write up all the computations for each direction to earn full credit. You can also download this project sheet from and cut & paste the directions.
  • You may work on the project individually or with a maximum of 2 partners. If you work with someone, you must each turn in your own project report and indicate who you collaborated with on the cover sheet.
  • ALLlate projects will be marked one grade down (-6 points).

1. Visit a car dealership or look for classified ads in newspapers (or online) to find a brand-new2010car that you would liketo buy. (This may be a practical choice for the assignment or the “car of your dreams.”) From the advertised sticker price, copy a brief description of the car as well as its price. Ask or call someone at the dealership what the tax and license fees are (typically 11%) for that car if it is purchased at the sticker price.

2. Contact a bank, credit union, dealership, or other financial institution (You can either do this

in-person, access website, or by phone). Find out the rates for 3-year, 4-year, and 5-year new auto loans (This could be modified to 5-year, 6-year or 7-year auto loan, depending on the bank’s policy). Also, find out what percentage down payment is required to buy a new car. Also, find out the rates for a personal loan. (Hint: this is always higher than the auto loan)

3. Contact an insurance agent (phone or website) and ask what the basic automobile insurance would be for that car. You will have to give the agent the year, model number, and the purchase price of the car. If you are uncomfortable revealing your personal information, you can just get a standard quote for the project.

CALCULATION OF LOAN PAYMENTS

4. Calculate the down payment you will need to make. (This varies, depending on your credit rating.) This is where you start to show computation after typing/printing each direction.

5. Calculate the amount of your auto loan as follows.

[Loan = Sticker Price of the car (do not include tax and license fees)minus the down payment].

6. Use the loan formulaL (sec. 9.5)to calculate your monthly payment on the auto loan: r = monthly rate = annual interest rate/12

Calculate the payments for:(A) 3-year auto loan, (B) a 4-year auto loan, (C) a 5-year auto loan.

Again, you may modify it to 5-year, 6-year, and 7-year auto loan if that’s the information you are using for Step 2.

7. Calculate the amount of money that you will need before you can take possession of the car. (Amount = Down payment + tax and license fees)

8. Assume that you’re broke and have to borrow this money (the amount from Step 7) from a financial institute to take possession of the car. Now calculate what the monthly payments would be on thispersonal loanfor 3 years by using the loan formulaLand the personal loan rate (Step2):

r = monthly rate = annual interest rate/12

9. Assume that you are allowed to pay your auto insurance in monthly payments. Divide the auto insurance annual premium by 12 or semi-annual premium by 6 to compute what this payment will be.

10. Add the payments from Steps6, 8, and 9 above, to calculate the amount you must pay monthly for the first 3 years. (You should have 3 different answers, one for each part of Step 6).

11. Using the payments from each part of Step 6 above (payment on the main “auto” loan), calculate in each case the amount of the first payment that will actually go toward paying off the ”standard” loan. Remember although the monthly interest rate is the same, the first month’s interest is always higher than the second month‘s interest because the principal is higher.

So there will be less money go toward paying off the principal during the first month than all the other monthsin a “standard” loan. To do so, use the following formula to compute:

(Amount toward paying off the

principal in the first payment = PMT–monthly interestrater timesAuto Loan Amount)

12. Using the payments from each part of Step 6 above, calculate the total amount that you will pay for each of the auto loans over the three, four, or five-year period (Again, you may modify it to over the five, six, or seven-year period).

13. Using the payment from Step 8 above, calculate the total amount that you will pay for the personal loan over its 3-year period.

14. For each lengthautoloan, add the results from Step 12 and Step 13above to find out the total you will pay for this car, excluding insurance, if you have to borrow lots and lots of money.

15. What have you learned from doing this project?