Unit 6: Auto Loan Web Quest - Mr. Mize



Unit 6: Auto Loan

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, 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.

| |  2014 |$ |

|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

Take you (loan amount) from above and divide it by 48

| $ |

|Loan Amount |

| $ |

|Principle |

Divide by 48 =

Now take this principle number and divide it by 94.5%

| $ |

|Principle |

| $ |

|Monthly Payment |

Divide by 0.945 =

| $$ $ |

o What is your monthly payment?

o Now, determine the total amount you will pay overr 48 months.

| $ |

|Monthly Payment |

| $ |

|Total Amount Paid |

Step 3: Effects of the fed funds rate

a. Go to

b. Find “Federal Funds” in the Instrument column, and select “Weekly” as the Frequency.

o What was the Fed Funds rate for the week of Nov. 28th , 2012?

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

|  0.09% |

|FFR 11/28/12 |

|  2.8 |

| Avg. Interest Rate |

| $ |

| ≈ i rate spread |

d. Now, find the Fed Funds Rate for the week of Nov. 28th , 2007.

o Add the approximate (≈) i rate spread and the 11/1/06 Fed Funds Rate to determine the

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

|  |

| ≈ i rate spread |

| $ |

|Avg. Interest Rate |

|  5.25% |

|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 |

Step 5 – Drawing conclusions

| $ |

| $$ $ |

a. Total amount Five 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 |

Now go to . Choose, Browse US Salaries from the green box on the left of the screen. Your task is to locate no less than 5 specific careers that interest you, that would allow you to afford this car and pay you at least your "Min. Annual Income" located above.

(Use the median income found in the paragraph just below the graph)

Title

Date

Author

URL

-----------------------

minus (-)

x48

=

=

plus (+)

x48

1.

2.

3.

4.

5.

x2 =

................
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