An S & l institution advertised a $10,000 new car loan at 7.99% APR with 48 monthly payments of $269.34. Jones read the ad and practiced using the present value formula for annuities, trying to come up with figures to match the advertised monthly payment.
Jones soon realized that the formula would not yield a matching payment of $269.34. He then called the institution to find out how people there had arrived at their figures. He was a little surprised to find that certain up-front fees and more than $20 per month for life and disability insurance had been figured into the payment! What was going on in this case? Why didn't the number Jones calculated match the number advertised by the S&I. Take a moment to answer the questions in the "Just in Case Cases" activity. Use your answers to discuss the "time value of money" with your fellow students.
In this lesson, you will figure monthly payments on a specified loan amount, and demonstrate your understanding of needs vs. wants and choices. You will also compare financial options, and make a financial decision based on your work and then justify it.
1. Check on Jone's calculations. Use the present value formula for annuities by using the "find payment" calculator to compute a monthly payment from the information advertised by the S&I: A payment of $269.34 for the $10,000 loan at a rate of 7.99% APR for four years.
2. The bank has added up-front fees and life and disability insurance cost, making the difference in the payments. Discuss with your class the following questions:
- Is Jones being cheated? Why or why not?
- Why might the bank require the life/disability insurance?
- Would the age of the borrower make a difference?
3. Complete the "Cost of a Car Loan" activity, comparing the costs and benefits of the loan amounts. Review and discuss the conclusions as a class.
4. Complete the "Just in Case Cases" activity and decide how to find the value left on the car loan. Make sure to answer the questions at the end of the worksheet. Use the amortization tables to help you to complete this activity.
Students should have discovered that loans vary considerably in their costs, that some costs may be apparent on the surface, and that no single loan package is right for all borrowers. Personal factors, dispositions, and risk factors are different for different people.
Complete "The Same Thing" activity.
Evaluate your own decision, defend it to others, and listen to the reasons given by others for their decisions.
1. "Retirement is in Your Future": Annuities can have future value, too. Learn to save now!
2. "Mortgage from Hell": Can this one be paid off--ever? The answer is no. The equation has no solution, therefore, no answer!
3. Students could be asked to find information regarding loans and what different institutions require. Be sure to check out lendingtree.com for their excellent information and calculators. The calculators can be accessed at this site by going to the mortgage section. The two most helpful calculators for this activity are the "How much will your payments be?" and the "Which loan is better?".