PT - Buying a Car Lesson
Buying a Car
Introduction
So, you’ve saved up some money now and built up your credit. It’s time to buy yourself a car! A car might very well be someone’s first big purchase and you don’t want to make a mistake. These kinds of mistakes might end up costing you a lot of money!
It’s important to research and be well-informed on the type and brand of car that you want. You should compare some prices online before even approaching a car dealership. Let’s take a look at just some of the factors that go into purchasing a vehicle.
Sticker Price
Automobile manufacturers are required by law to place a sticker on the window of each car to show all charges for the car. The base price is the price of the engine, chassis, and any other piece of standard equipment. Options are extras or add-ons you may choose to purchase for convenience, safety, or appearance. The destination charge is the cost of shipping the car from the factory to the dealer. In order to find the sticker price, or total cost, of the car one must add the base price, the options, and the destination charge.
Sticker Price = Base Price + Options + Destination Charge
Example: Alan is shopping around for a new car. What is the cost of the options listed on the sticker below? What is the sticker price for the Hawk?
Step 1: Find the cost of the options.
Cost of options = $650.00 + $2,150.00 + $180.00 + $1,130.00
Cost of options = $4,100.00
Step 2: Find the sticker price.
Sticker Price = Base Price + Options + Destination Charge
Sticker Price = $17,890.00 + $4,110.00 + $510.00
Sticker Price = $22,510.00
That's a hefty price tag! Alan would most likely need to take out a loan to cover this purchase. Using the monthly payment formula, how much would he need to pay each month if he financed the full amount at a 4% annual interest rate for 5 years?
Step 1: Find the periodic interest rate:
i=rn
i=0.0412=0.0033
Step 2: Use the monthly payment formula:
M=22510⋅0.0033(1+0.0033)5⋅12(1+0.0033)5⋅12−1
M=90.51860.2186
M=414.08
That's a lot to pay each month. How much interest will Alan end up paying once he's paid off the loan?
Step 1: Determine the total amount by multiplying the monthly payment by the number of payments.
Total Amount = $414.08 * 12 months * 5 years
Total Amount = $24,844.80
Step 2: Subtract the original loan amount.
Total Interest = $24,844.80 - $22,510.00
Total Interest = $2,334.80
Dealer's Cost
Dealers pay less than the prices on the sticker for both the car and the options. Consumer magazines often report the dealer's cost as a percent of the sticker price. You may save money by offering a dealer more than the dealer's estimated cost but lower than the sticker price.
Dealer's Cost = Percent of Base Price + Percent of Options Price + Destination Charge
Example: Phil wants to purchase a new truck. The truck has a base price of $20,990.00, options that total $5,600.00, and a destination charge of $480.00. He read that the dealer's cost for that particular truck is about 85% of the base price and about 75% of the options price. What should he estimate as the dealer's cost?
Step 1: Find the percent of the base price that the dealer pays.
Percent of base price paid by dealer = $20,990.00 x 0.85
Percent of base price paid by dealer = $17,841.50
Step 2: Find the price for options paid by the dealer.
Percent of options paid by the dealer = $5,600.00 x 0.75
Percent of options paid by the dealer = $4,200.00
Step 3: Find the dealer's cost.
Dealer's Cost = Percent of Base Price + Percent of Options Price + Destination Charge
Dealer's Cost = $17,841.50 + $4,200.00 + $480.00
Dealer's Cost = $22,521.50
Sticker Price and Dealer's Cost Practice
Click on the gray arrows in the bottom right corner to move between questions.
Become a Car Buying Pro!
Watch the following video for excellent tips on how to make the best choice when purchasing a vehicle.
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