Unit 6: Auto Loan Web Quest



How Does Monetary Policy Affect My Personal Finance?

When the Fed cuts interest rates, it not only affects the economy but it also affects your personal finance. Generally, the Fed Funds Rate directly influences interest rates on home equity loans, credit cards, and car loans. Through this web quest, you will collect data and use quantitative analysis to determine how the Fed Funds Rate influences monthly auto loan payments.

Pre-Reflection: Considering what we’ve discussed about the impact of monetary policy economy-wide, how effective do you think that changes in the Fed Funds Rate will significantly impact the cost of an auto loan? Explain.

Directives Follow the steps below to determine how Monetary Policy affects you!

Step 1: Purchasing a new car

a. What kind of car do you want? How much will it cost you?

o Use the manufacturer’s website or a generic website

such as to determine the cost.

| |  |$ |

|Car Make/Model |Year |Price |

| $$ $ |

Car Make / Model Year Cost

b. Add 6% sales tax to the cost of your car. What would the new price be?

| $$ $ |

c. Add an additional $250.00 for the tags & title. What is the grand total?

d. Assume the seller wants a 10% cash down payment; you will take out a loan for the remaining cost.

| $ |

|Down Payment Amount |

| $ |

|Loan Amount |

Do

Step 2: Determining your monthly payment

a. Go to AAA ►scroll to the bottom and change the fields to reflect your car buying situation. (loan amount from above)

Decide how long you want the loan to last. The longer the time the lower the payment. But what the interest rate!

b. Determine your monthly payment!

| $$ $ |

o What is your monthly payment?

o Now, determine the total loan amount for the months you chose.

| $ |

|Total Amount Paid |

| $ |

|Monthly Payment |

| $$ $ |

o How much in interest will you pay in addition to the original cost of the car?

Step 3: Effects of the fed funds rate

a. Go to

b. Find “Federal Funds” in the Instrument column.

o What was the Fed Funds rate for Wednesday May 22nd , 2018?

c. Now, subtract the Fed Funds Rate from the average interest rate you found in Step 2a above.

| $ |

|FFR 5/22/18 |

| $ |

| Avg. Interest Rate |

| $ |

| ≈ i rate spread |

NOTE: The “i rate spread” is the banks profit for making the loan. This is typically an industry standard based a person’s qualifications as a borrower. Here we are assuming you have the best qualifications.

d. Now, scroll up and find the link.

o Locate the and select the (weekly averages) and format packages.

o Locate the dates section and enter date range Nov. 19th - 28th , 2007 to compare to rates 11 years ago. Then enter that rate in the FFR box below.

o Add the approximate (≈) i rate spread and the 11/28/07 Fed Funds Rate to determine the

approximate average interest rate for a 48 month auto loan ten years ago.

| $ |

|Avg. Interest Rate |

| $ |

| ≈ i rate spread |

| $ |

|FFR 11/28/07 |

Step 4 – Comparing the effects of varying interest rates on an auto car loan

a. Revisit the auto loan payment calculator you used in Step 2b above.

b. Follow the same steps to calculate your average monthly payment for this time in 2007.

❖ The interest rate is the approximate interest rate you found in Step 3d above.

❖ The auto loan start date should be changed to Nov. 28, 2007.

| $$ $ |

o What is your monthly payment?

o Now, determine the total loan amount for 48 months.

| $ |

|Monthly Payment |

| $ |

|Total Amount Paid |

o How much in interest will you pay in addition to the cost of the car?

| $ |

Step 5 – Drawing conclusions

| $$ $ |

a. Total amount paid Ten years ago Total amount today:

b. How do these values compare?

c. Re-read your pre-reflection. Has your opinion of the impact of monetary policy on personal finance changed? Support your response with 2-3 facts, and respond in at least 3 well-considered sentences.

Developing a Personal Finance Strategy for Owning this Car.

Most financial planners would instruct you not to exceed 6 months worth of income when calculating the total amount borrowed to purchase a car. Another way of putting this is that your car loan should be no more than 1/2 your annual income. Considering you are putting 10% as a down payment, use the loan amount from Step 1. Determine, based on the above information what you would need to earn a year to comply with this advice.

| $ |

|Loan Amount |

| $ |

|Min. Annual Income |

Step 6 - Making a Budget and sound decisions

• Did your car loan meet this requirement or did you exceed the recommendations?

• Lastly, let’s look at your developing budget. Combine the two payments you have arrived at between this assignment and your career path.

• Car Payment ______________ + Student Loan Payment _________________

| $ |

|Comb. Mthly Resp. |

Combined monthly responsibilities =

• Using your annual income from the career path worksheet, divide that amount by 12 and enter your monthly income here.

| $ |

|Monthly Income |

| $ |

|Loan Amount |

REMEMBER: Taxes will take about 20% of this number, so multiple (x) by 80%

| $ |

|Monthly Income |

|  $ |

|Net Mthly Income |

x .8 =

• Now subtract your car payment and student loan payment from this new monthly amount

| $ |

|Net Mthly Income |

| $ |

|Remaining Income |

| $ |

| Comb. Mthly Resp. |

Title =

D

Using you remaining monthly income make a rough budget for Food, Housing, Utilities, Clothing, Fun and other monthly items.

Reflect: Comment one how you further income makes you feel as you look over these figures. Focus on realizations, new thoughts and other ideas you had during and after this assignment. (2 paragraphs)

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Author

URL

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X_____ months

=

minus (-)

plus (+)

=

x48

x2 =

/ 12 =

minus (-)

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