What is a loan?
"Loan" is a thing that is borrowed, such as money.  "Contract" is written and signed 
agreement between two parties (such as you and auto dealership) enforc
eable by 
law.  "Lender" gives money to "borrower," and borrower agrees to make 
"payments" of money plus "interest" for a time period, such as 36 months (3 years).  
Lender may be a bank or car dealership that gives you the loan to buy a 
car.  Loan 
payments are required every month by the deadline date (for example, pa
yments 
must be made before or on first day of each month).  If you make the loan payment 
late, you are charged a late payment fee (penalty) of $30 to $50 extra.
What is loan interest?
Loan interest is extra money you pay back for the right to use somebody else's money .  If you buy car that 
costs $5,000, you can:  a) Pay $5,000 cash.  b) Get $5,000 loan from b
ank or car dealership.  c) Make cash 
down payment (such as $700), then take out a loan on the balance of $4
,300.  When bank or car dealership 
lends you money NOW so that you may drive the car NOW, you are required to make a payment every 
month to pay back the loan and interest on the money you borrow.  Loan interest (also called "finance 
charge") is a percent — for example, 4% to as much as 25% per year.  If you borrow $5,000 at 12% 
interest, you pay $600 interest for first year of the loan ($5,000 times .12).  
What  is APR?
Lenders are required to tell you APR (Annual Percentage Rate).  APR is the real loan interest rate after all 
extra fees are added to the loan.  Car loan is advertised at 8% on car d
ealer's website, but you will see 9% 
APR in the sales contract you must sign.  The extra 1% is extra fees the car dealership adds to the loan to 
make the real (or APR) interest rate 9%.  Laws require lenders to tell borrowers in writing: 1) Basic interest 
rate; 2) APR real interest rate. 
Costs of owning a car
Cost of a car loan is only one of the costs of owning a car.  Other costs are: 1) Down 
payment;  2) Sales tax;  3) Car license;  4) Car insurance;  5) Main
tenance/repairs;  6) Gas.
What loan interest will I need to pay for a car loan?
Lenders decide on a loan interest rate (2% to 18% or more)  for you based on the following: 
1) Credit Score — also called FICO score:  Your credit, or FICO score may be from 300 (lowest) to 850 
(highest).  Your FICO score is given to you by a company that keeps track of how well you pay your bills.  
Your FICO score is based on -- a) your payment history; b) amount of money you 
owe;  c) how long you have credit history; d) if you have any new cred
it bills recently.  
If your credit score is high (good or over 700), bank or dealership will of fer you a low 
loan interest rate, such as 4%.  If your credit score is low (bad), the bank or dealership 
will offer you a high loan interest rate, such as 12%.	
Your Money: Auto Loan Contract (page 1 of 2)	
Your Money: Auto Loan Contract

Permission to use with usworkworld.com subscription.  
1. a) What is a loan?  b) What is a contract? 
2.  a) What does a lender do?  b) What does the 
borrower agree to do?  c) Give 2 examples of 
lenders that loan money to buy a car.  d) What 
happens if you do not pay on time?
3.  a) What is loan interest?  b) What is loan 
  interest also called?
4.  If you borrow $5,000 at 14%, how much 
  interest will you pay the first year? (5000 x .14)
5.  a) For what words are the initials APR used?  
b) What is APR?  c) Why does car dealership 
advertise 8% car loan, but sales contract says 
APR car loan interest rate is 9%?  d) What 2 
things do laws require lenders tell borrowers? 
6.  List 6 costs of owning a car.
7.  What is another name for "credit score"?
8.  What is lowest and highest FICO score?
9.  List 4 things on which your FICO is based.
10.  If your FICO score is low, what will the bank or 
car dealership offer you?
QUICK CHECK:
Example of Car Loan:  You are buying $6,000 sharp-looking pre-owned car from car dealership
APR  Length of Loan     Monthly Payments   Total Interest Paid Loan End/Total You Pay Back
4%  60 months (5 years)     $110.50     $629.95   $6,629.95
4%  36 months (3 years)     $177.14     $377.18   $6,377.18
4%  12 months (1 year)     $510.90     $130.79   $6,130.79
6%  60 months (5 years)     $116.00     $959.81   $6,959.81
6%  36 months (3 years)     $182.53     $571.14   $6,571.14
6%  12 months (1 year)     $516.40     $196.78   $6,196.78
9%  60 months (5 years)     $124.55     $1,473.01   $7,473.01
9%  36 months (3 years)     $190.80     $868.74   $6,868.74
9%  12 months (1 year)     $524.71     $296.51   $6,296.51
From: onlineloancalculator.org	
11. What happens to interest rate you are offered if 
you are at the same job for one year or more?
12.  a) What is divided by income to get debt-to-
income ratio?  b) If you earn $3,000 and bills 
are $1,600 each month, what is debt-to-income 
ratio?  c) What debt-to-income ratio do most 
loans require?  d) If you earn $3,000 monthly, 
how much in monthly bills give you a debt-to-
income ratio of 36%?
13.  YOU BUY: $6,000 a car at 9% APR: 
  What are monthly payments: 
  a) For 3 year loan?  b) For 5 year loan?  
  What is total interest paid:  
  c) For 3 year loan?  d) For 5 year loan?   
  What is total you pay back at loan end:
  e) After 3 years?  f) After 5 years?  
14.  a) How much CASH must you save each month 
to save $6,000 in 36 months?  b) To save $6,000 
in 60 months?  c) Would you rather save and 
pay cash for a car or make payments?   d) Give 
a reason for your choice.	
Your Money: Auto Loan Contract (page 2 of 2)	
2) Job Stability: If you are at same job for one year or more, interest rate dealership or bank of fers is lower.
3) Debt-to-Income Ratio: Monthly debt (bills) divided by your income.  For example, if you ear
n $3,000 
monthly and your bills are $1,600 monthly, your debt-to-income ratio is 53%.  Loans require you have a 
debt-to-income ratio of 36% or less.  That means for $3,000 monthly income, you need $1,080 or less in 
monthly bills for 36%.
4) Size of Down Payment: Interest rate is lower if you make a large down payment.
5) Age of Car: Loan interest rate will be lower for newer car. 
6) Payment Method: Loan interest rate may be lower if you allow the bank or dealership to t
ake automatic 
payments from your bank.