View
3
Download
0
Category
Preview:
Citation preview
Page 1 of 24
Unit 3: Vehicle Finance Lessons
Financing a New Vehicle
Buying a Used Vehicle
Leasing a Vehicle
Vehicle Maintenance & Repairs
Fuel Economy & Fuel Costs
Vehicle Depreciation
Vehicle Insurance
Page 2 of 24
Lesson 1: Buying a New Vehicle
Purchasing a new vehicle involves many decisions. There are many types of vehicles,
models, colours, and options from which to choose. Vehicles differ in terms of size,
fuel economy, reliability, price, warranty, and reputation/quality.
Questions to Consider when Looking for a Vehicle
1. Why Should You Buy a Vehicle?
Convenience – you can go anywhere you want whenever you want (assuming
you can afford the gas!)
Commuting to work or school
Feeling of independence – you do not need to ask other people for a ride
Trying to avoid expensive repair costs on your present vehicle
Replacing your present vehicle because it is getting old
2. Establishing Your Needs
When will you use this vehicle? For commuting to work daily or for weekend
pleasure driving?
Will you be doing more city driving or highway driving?
Will you be the only one driving this vehicle?
Will you be using this vehicle for a carpool?
Will you be towing anything (e.g., a camper) with this vehicle?
What types of vehicles appeal to you?
What features of a vehicle are most important to you?
3. What Can You Afford?
Monthly Housing Costs +
Total Debt Service ratio (TDSR) = All Other Monthly Debts x 100
Gross Monthly Income
The TDSR should never exceed 40%.
Page 3 of 24
TDSR EXAMPLE
Chaska and Jacy are a newly married couple who have just moved into their own
house. They are trying to decide if they can afford a new car.
The car they wish to purchase will cost them $149 biweekly.
They are currently living in a bungalow with a monthly
mortgage of $1200. Heating costs are $75 a month, and
property taxes are $1300 a year. Chaska also has a credit
card debt that she is paying off with monthly payments of $120.
Chaska and Jacy’s combined gross monthly income is $4600.
a) Calculate their TDSR.
b) Should Chaska and Jacy purchase this car?
Solution
Monthly Housing Costs +
a) Total Debt Service ratio (TDSR) = All Other Monthly Debts x 100
Gross Monthly Income
Biweekly Amount x 26 = Annual Amount / 12 = Monthly Car Costs
149 x 26 = 3874 / 12 = $322.83
TDSR = 1200 + 75 + 108.33 + 120 + 322.83 x 100
4600
TDSR = 39.7%
b) Since their TDSR is very close to 40%, purchasing the car may not leave
Chaska and Jacy enough money for unexpected expenses. They may want to
consider a car that has lower payments, unless, however, they have plans to
finish paying off their other debt (i.e. credit card debt) in the very near
future.
Biweekly is every 2 weeks
or 26 times a year.
Page 4 of 24
Shopping for a New Vehicle After determining the type of vehicle you need and the amount you can afford, you
are now ready to go shopping.
Choosing a Dealership
The following are some of the points you should keep in mind when shopping for a car:
Visit dealers that have a good reputation.
Friends or family members may provide some good advice, especially if this is
your first car purchase.
Do some comparison shopping. Many dealerships will advertise different prices
for the same vehicle. This is especially true if you are trading in your present
car.
The location of a dealership may also be a factor in which dealership you
choose. A dealership closer to your home is more convenient when your car
needs service or repairs.
Before You Buy
After you purchase a dealership and a vehicle, be sure to do the following before you
purchase the vehicle.
Check the sticker price of the vehicle.
Obtain written quotes of the vehicle.
Test drive the vehicle.
Read the owner’s manual of the vehicle.
Read the warranty agreement of the vehicle. Warranty agreements of most
vehicles are available online.
Read the contract before you sign it.
Check that your financing is in order.
Most car companies offer a three- to five-year “bumper-to-bumper” warranty on new
vehicles, and extended warranties can be purchased that take effect after the
original warranty expires. Extended warranties usually only cover manufacturing flaws
or defective parts; they do not cover wear and tear on the vehicle due to age or use.
Saving Money
Below are listed some options that can reduce your costs when you purchase a
vehicle:
Choose a smaller vehicle. Dealerships usually have lower prices for small
vehicles for various reasons.
Negotiate for options. Some dealerships may be more willing to provide free
options for your car, such as air conditioning, rather than a lower sale price.
Page 5 of 24
Avoid buying brand new vehicles as soon as they arrive at the dealer. New
vehicles are in high demand and thus have a higher price. If you wait a few
months, the price will usually go down.
Look for reduced prices at the end of the year. Dealerships need to make room
for the next year’s models. Therefore, last year’s models will be priced to sell
quickly.
Look for rebates and incentives. These can come from manufacturers or even
the government.
Before Driving Your New Vehicle Home
After you have purchased your vehicle, you still need to do two more things before
you leave the dealership.
Check your vehicle for dents or scratches. Make sure your vehicle is spotless!
If you have purchased a new vehicle, there should be no wear and tear on it.
Match the serial number on your contract with the serial number on your
vehicle. You don’t want to be driving away with the wrong vehicle!
A serial number of a vehicle is a unique 17-digit combination of letters and numbers
assigned to a vehicle to distinguish it from every other vehicle. Serial numbers of
vehicles are usually located on the dashboard, and are visible through the windshield.
Page 6 of 24
Purchasing a New Vehicle
Most people finance (as known as taking out a loan) through the dealership to pay for
their vehicle. If you have saved up enough money, it is also possible to “pay cash” for
the vehicle at the time of purchase.
When you buy a vehicle, you can drive the vehicle as often and as much as you want.
Also, once you have paid for the vehicle, you own it and are free to sell or trade it
whenever you wish.
Trade-in Allowance
If you already own a vehicle, the dealer may give you a trade-in allowance for your
older vehicle. For example, the dealer may decide that your current vehicle has a
trade-in value of $5000 and credit you this amount in your new vehicle.
Purchasing a New Vehicle Outright
Manufacturer’s Suggested Retail Price (MSRP)
- The selling price that the manufacturer recommends to the retailer, also known
as the sticker price.
The MSRP of a vehicle includes:
The base price is the suggested price of the vehicle without any additional
features.
Optional equipment may include any of the options listed on the Vehicle
Features Chart, which can be cheaper bought in option “packages”.
The air-conditioning excise tax is a $100 payment required for vehicles with
air conditioning that are purchased in Canada or imported from the United
States.
The freight charge covers the cost that a dealership must pay to transport
the vehicle from the manufacturing facility to the car dealership.
The MSRP of a particular vehicle model will be the same at all dealerships. However,
the actual sale price may vary by dealership (to earn more money or to encourage a
sale).
In addition to the MSRP, the total purchase price of a new vehicle will include a
number of fees and taxes. These include a documentation fee, a tire tax, the PST and
GST.
Page 7 of 24
Calculating the Cost to Buy a Vehicle
To Calculate the Cost of Buying a New Vehicle (use the following steps):
1. Calculate base price + options + freight + additional fees
2. Subtract trade allowance
3. Add PST (8%) and GST (5%)
Example 1: Jesse wants to buy a brand new El Camino at a base price of $18 200. He
adds option group 2 for $526. Freight on the car is $640. He can trade in his old
Pinto for $1000. What is the purchase price of the car?
Example 2: Jackie wants to buy a Toyota Celica which has a base price of $35 280.
She will be charged $600 for freight and she wants the following options to be
added: All Weather Mats ($103), CD Changer ($697), and Splash Guards ($86). If
she trades in her old car for $3 000, what is the purchase price for the car?
Page 8 of 24
Lesson 2: Financing a New Vehicle
Purchasing a New Vehicle through Financing (loan) Because vehicles are expensive, many consumers cannot afford to pay for a vehicle
outright. Instead, many consumers finance the purchase with a loan from the
automobile dealership or financial institution.
When you take out a loan from an automobile dealership or financial institution, the
total amount you pay is greater than if you were to pay for it outright at the time of
purchase.
The total you pay when you finance the purchase of a vehicle is the
deferred payment.
The difference between the deferred payment and the total purchase price is the
finance charge.
A car loan is a type of personal loan. In order to calculate monthly payments based on
this loan, you need to consult an amortization table.
The amortization
table indicates the
monthly payment
required to pay a
$1000 loan for a
given time period
and at a given
interest rate.
Page 9 of 24
Example 1: Moira Wheeler is able to make a down payment of $5000 on the new mid-
size automobile she purchases in for $20 340.32. In order to finance the remaining
amount, she takes out a three-year car loan at a fixed interest rate of 6.25%
a) Calculate her monthly payment for the automobile.
b) Calculate her deferred payment for the automobile.
c) Calculate her finance charge for the automobile.
Solution:
a) Amount of the loan = Purchase Price – Down Payment
_____________________________________________________________
Using the amortization table on the previous page, along with the interest rate of 6.25% and the loan period of 3 years, we find the rate of $30.54 per $1000 of loan.
_____________________________________________________________ Note: This calculation is similar to finding the monthly mortgage payments.
b) Since Moira is repaying the loan in 3 years and there are 12 payments per year,
she makes 36 payments overall.
_____________________________________________________________
To calculate the deferred payment, we do the following:
Deferred Payment = Loan Payment + Down Payment
_____________________________________________________________ This is the amount Moira pays over the life of the loan (this includes paying the purchase
price and interest).
c) The Finance Charge = Deferred Payment – Total Purchase Price
_____________________________________________________________ This is the amount of interest Moira pays over the 3-year period of the loan.
Page 10 of 24
Example 2: The cost of Toyota Four Runner is $54 000 plus taxes. Toyota is offering
7% financing for a 3-year loan with a down payment of $4 050. Use the table to
determine the monthly payment and the total cost of purchasing the vehicle.
a) Total Cost (Price + taxes) =
b) Loan Required (cost – down payment) =
c) Monthly Payment (using chart) =
d) Total Cost of Purchasing Vehicle
(monthly payment x # of months + down payment) =
e) Re-Answer part c and d but change the financing term to 5 years.
Monthly Payment =
Total Cost of Purchasing Vehicle =
Page 11 of 24
Lesson 3: Leasing a new Vehicle
You may have already noticed that leasing a vehicle is not the same as purchasing a
vehicle. When you purchase a vehicle, you own the vehicle once you are done paying
back your vehicle loan. When you lease a vehicle, you do not own the vehicle at the
end of the lease. Instead, you have just paid for the use of the vehicle. This is why
you have a lower monthly payment when you lease a vehicle.
Conditions of a Lease Different car dealerships offer different leases that have different conditions. If
you violate the terms of your lease, you may be responsible for paying extra fees for
things like:
Extra kilometres driven
Excessive wear and tear on the vehicle
Ending your lease early
At the end of the lease, you can return the vehicle or you can purchase the vehicle.
Definitions
Residual Value:____________________________________________________
________________________________________________________________
________________________________________________________________
Depreciation:______________________________________________________
________________________________________________________________
________________________________________________________________
Page 12 of 24
Making the Decision to Lease a Vehicle The following are some factors you should consider when trying to decide whether or
not it is best to lease a vehicle:
1. Repair costs to the vehicle.
LEASE repairs are usually covered by a
warranty offered by the manufacturer.
If, at the end of the lease, the vehicle
appears to require a number of major
repairs, you should probably not
purchase the vehicle.
PURCHASE the vehicle and repairs will
be covered by warranty for a similar
period of time. However, when the
warranty has expired, you are
responsible for any repair bills, and you
may decide to trade the vehicle or sell
it.
2. How much do you drive the vehicle?
LEASE has limited mileage and if you
drive the vehicle more than the amount
specified in your lease agreement, you
will likely have to pay for the extra
kilometres at the end of the lease.
PURCHASE the vehicle and the number
of kilometres you drive does not affect
the amount you pay for the vehicle. It
may, however, reduce the trade-in value
of the vehicle.
3. What are the monthly payments for the vehicle?
LEASING is generally more attractive
because the down payment and regular
monthly payments are less than if you
buy the vehicle and have to finance it.
However, at the end of the lease, you
must return the car to the dealer,
which usually means that you now have
to buy the car you leased, buy another
car, or lease another car.
PURCHASE the vehicle and you must pay
for the entire vehicle, but after it is
paid you own the vehicle, and can
continue to use it as long as you want
without making any monthly payments.
4. How often do you change vehicles?
LEASING is better if you plan to drive
a new vehicle every two or three years.
PURCHASE the vehicle, take proper
care of it, and keep it for a number of
years or until it is worn out. You will
spend a lot less money than if you leased
new cars for the same period of time.
Page 13 of 24
Leasing a New Vehicle versus Purchasing a New Vehicle
Advantages of Leasing Lower monthly payments – capitalize by investing the monthly “savings”
Lower monthly payments – more affordable in the short term
Business owner – write off lease payments (if car is proven to be a business
“tool” or “need”)
Under warranty while being driven (no repair costs, covered by dealership)
Shorter commitment period – can return the car after the lease is up if you do
not like it
Can continually drive a new car (subsequently re-enter into new lease
agreement)
Disadvantages of leasing Penalized for excessive distance/mileage
Penalized for excessive wear and tear
No equity building
More expensive in the long run if purchasing following lease or continuously
leasing
Advantage to Buying a Vehicle No charge for excessive distance/mileage
No charge for excessive wear and tear
Monthly payments will provide equity
Less expensive in the long run if purchasing
Purchasing is less restrictive
No monthly payments, once paid off
Option to personalize/customize the vehicle
The car becomes an asset
Disadvantage of Purchasing Higher monthly payments
Owner assumes repair costs once the warranty expires
Stuck with the vehicle if it turns out to be unreliable
If you want to sell it, you have to do the work (not just give it back to the
dealer like in a lease)
Page 14 of 24
Calculating the Total Cost of Leasing a Vehicle
Example: The cost of a Toyota Four Runner is $54 000 plus taxes. The monthly lease
payment is $459 plus taxes for a lease term of 36 months. For leasing, a down
payment of $4 050 is required.
Total monthly payment = monthly payment x 1.13 (sales taxes)
Total Lease Payment = monthly Payment (after tax) x # of Months + Down Payment
Calculate the residual value at the end of the lease if the residual value rate for this
type of vehicle is 75% after three years.
Residual Value = Cost of Vehicle x Residual Value Rate x 1.13 (sales taxes)
If you decide to purchase the vehicle at the end of the lease the total cost would be
the Total Lease Payment plus the Residual value.
Total Cost of Purchasing Leased Vehicle =
Page 15 of 24
Lesson 4: Fuel Costs and Fuel Economy
Fuel Economy (Fuel Consumption) A major operating cost of a vehicle is the gasoline. Different vehicles require
different amounts of gasoline to drive the same distance.
The number of litres of gasoline a vehicle requires to travel 100 km is known as
its fuel economy rate.
The fuel economy rate of your vehicle affects
your gasoline costs. A higher fuel economy rate
corresponds to a higher cost of driving your
vehicle a certain distance (and a lower rate costs
lower costs).
The fuel economy rate of your vehicle will vary depending on: When you drive
How you drive
The type of vehicle you drive
The types of optional equipment installed
The condition of your vehicle
Most manufacturers voluntarily place
a fuel economy rate label on new
vehicles. The labels state the city
and highway fuel economy rates for
that particular model. The fuel
economy rate is higher for city
driving than highway driving
because of stop-and-go driving.
Extra fuel is used while a vehicle is
idling during a red light, and while
accelerating.
(*Note: when bought new, it could take up to 10 000 km for the vehicle to reach the
stated fuel economy rate)
For example,
a fuel economy rate of
7.4L/100 km means that
7.4 litres of gasoline are
required to travel 100 km.
Page 16 of 24
The following is the formula for determining the fuel economy of a vehicle:
Fuel economy rate is expressed in L/100 km.
Example 1: A sedan uses 18.4 L of gasoline to drive 225 km. Find the fuel economy
rate for the sedan.
Example 2: The Fender family is planning a vacation where they will drive a distance
of about 5000 km. The family has a van with a fuel economy of 12.7 L/100km.
Calculate the amount of gasoline required by the sedan to complete the trip.
FOR YOUR INFORMATION ONLY (NOT TESTABLE):
In the US, fuel economy is measure in miles per gallon, and many Canadians still use
the term “gas mileage” to describe fuel economy as miles per (imperial) gallon
instead of litres per 100 km.
Page 17 of 24
Fuel Costs Fuel costs vary across North America. Fuel costs can even vary within the city.
COST (in $) = Litres of Gas X Cost of Gas per Litre (in dollars)
Understand these three calculations:
Example 3: How much does it cost to fill a 40L tank at
$1.21/L?
Example 4: What is the cost per litre if a 50L tank costs
$58 to fill?
Example 5: How many litres does it take to fill a tank that costs $60 to fill at a
price of $1.10 / L?
Example 6: The odometer of a mid-size car reads 34 719 at the beginning of a trip
and 34 853 at the end. The car consumes 12.4 L of gasoline during the trip. Recall
that the odometer of a car tells you the total distance (in km) the vehicle has been
driven during its entire life.
a) Determine the fuel economy of the sedan.
b) If the cost of gasoline is 112.94 ¢ per litre, find the cost of driving 100 km.
Cost
($)
Gas
(L)
Cost/
Litre
($/L)
Page 18 of 24
Lesson 5: Maintenance, Repairs, and Vehicle Depreciation
Maintenance The following are regular maintenance tasks you should perform in order to upkeep
your vehicle and ensure it is running efficiently.
Regular oil change
Check the fluid levels
Change all fluids at intervals suggested by the
manufacturer
Check that your tires are inflated to the proper
pressure
Check for leaks under and around the vehicle
Repairs The older the vehicle, the more likely it is to need repairs, and the less likely it is to
be under warranty. Vehicle repair is unavoidable; therefore, knowing a technician you
can trust is invaluable.
Repair costs include the following three things:
Parts
Labour
Taxes (PST + GST)
Example 1: Melissa took in her vehicle to get
serviced. She had the oil and oil filter changed. She also had two headlights and her
muffler replaced. The costs were as follows:
Four litres of oil at $2.50 per litre
One oil filter at $6.25
Two headlights at $30.25 each
A muffler for $45.00.
The time required for servicing was 1.4 hours. The shop rate for labour was $62 per
hour. Calculate the total cost.
Page 19 of 24
Depreciation All vehicles lose value as they get older. This is called depreciation.
Resale Value
The value of the vehicle after years of depreciation (Note: A car may actually sell for
more or less depending on its condition and the demand to buy the car).
Example 2: Find the resale value of a $21 000 Honda Civic in 5 years if it
depreciates 20% every year.
Solution:
First year: $21000 x 0.20 = $4200
$21000 - $4200 = $16800
Second Year: $16800 x 0.20 = $3360
$16800 - $3360 = $13440
Third Year: $13440 x 0.20 = $2688
$13440 - $2688 = $10752
Fourth Year: $10752 x 0.20 = $2150.40
$10752 - $2150.40 = $8601.40
Fifth Year: $8601.40 x 0.20 = $1720.32
$8601.40 - $1720.32 = $6881.28
Alternate Solution:
Resale Value = Original value x (1 - % depreciation)# yrs
= 21000 x (1 – 0.20)5
= 21000 x (0.80)5
= $6881.28
The new Resale Value of the vehicle is ___________________________.
What is the total depreciation at the end of the five years?
Depreciation (loss in value) = Original Value – Resale Value
Page 20 of 24
Lesson 6: Buying a Used Vehicle
A new car depreciates in value as soon as you drive it off the dealership lot. The
resale value of the car is not only effected by the age of the car, but also the
condition, the mileage, and the demand from buyers.
WHAT TO DO WHEN YOU ARE LOOKING TO PURCHASE A USED VEHICLE:
Lien Search – a search to check if the owner owns the vehicle outright or if
there is money owing against it
Safety Inspection (certificate of inspection) – when a vehicle is inspected to
ensure that it conforms to provincial safety regulations.
o A mandatory procedure in Manitoba for vehicle registration
o The safety inspection cannot be more than a year old
o It covers brakes, windows, tires, lights, exhaust system, seatbelts, turn
signals, horn, and other components and systems related to safety and
emissions.
o Only subject to GST when done for the purpose of registering a vehicle
Diagnostic Test – an inspection of a vehicle by a certified technician to
determine the quality of the vehicle and whether the vehicle will need repair
work (optional procedure)
o Testing includes engine, transmission, suspension, body (to check for
evidence of accidents), exhaust system
Test drive the vehicle (both city and highway)
Phone MPI to see if it’s been in an accident
Consult Blue Book value – average monetary value of
a specific year, make, and model of a vehicle (roughly
what you expect to pay, depending on the condition)
======================================================
Costs When Buying Used from a Dealership ------------------------------------------------------------------
Dealer’s price plus PST and GST
Safety Inspection and Lien Search included in price
Diagnostic Test fee is extra
Page 21 of 24
==========================================================================
Costs When Buying Used through a Private Sale (NOT a dealership) ------------------------------------------------------------------------------------------------- Private sales can be found through Auto Trader, Kijiji, newspaper, and various forms of advertising. Use caution when purchasing privately (especially when the reliability of the seller is uncertain).
Taxes on Used Vehicle Purchased Privately
Item PST 8% GST 5%
Price of vehicle PST on the greater of the blue
book value or selling price
no GST
Lien Search no PST no GST
Diagnostic Test (optional) PST GST
Safety Inspection (required) no PST GST
Repairs on Vehicle PST GST
*This information is included in the Provincial Exam formula sheet
Example: Kevin wants to buy a used car from a private owner for $2100. He will need
to do a lien search for $3 and get a diagnostic test from a mechanic for $25. He also
needs to do $400 of repair. The book value of the car is $2600 and the car will need
to be safetied ($40). How much will the car cost Kevin?
1. Selling Price of Vehicle (paid to seller) =
2. PST use GREATER OF Book Value OR Selling Price (paid to MPI) =
3. Diagnostic Test and Repairs (paid to mechanic) =
4. Safety Check (paid to mechanic) =
5. Lien Search (paid to MPI) =
6. Total (add #1-5) =
Page 22 of 24
Lesson 7: Vehicle Insurance
GUIDE TO AUTOPAC
Access the MPI website at
https://www.mpi.mb.ca/en/Reg-and-Ins/Insurance/Pages/insurance.aspx
Click on the link to the 2018 Guide to Autopac and answer the following questions:
1. List the 4 major factors that affect your Autopac premiums (p. 57)
i.
ii.
iii.
iv.
2. Insurance works through grouping. Read the subheadings “How your
Autopac premium is set” on page 56. List the 3 risk factors that determine
who you are grouped with for insurance plans (p. 56).
i.
ii.
iii.
3. Describe Autopac’s definition of “pleasure passenger vehicle”. (p.58)
Pleasure passenger vehicle –
4. Describe Autopac’s definition of “all purpose passenger vehicle”. (p.59)
All purpose passenger vehicle –
Page 23 of 24
5. List 2 major communities in each of Autopac’s 4 territories (p.57)
i.
ii.
iii.
iv.
6. Why is Autopac cheaper in Territory 3 compared to Territory 1?
7. The highest driver safety rating of 15 results in a _________% decrease
on registration costs. The more merits a driver accumulates, the
___________ the discount. The more demerits a driver has, the
_____________ the discount.
Page 24 of 24
VEHICLE INSURANCE
Basic Insurance
1) $500 deductible on all driver at fault
accidents
Lower deductibles are available if
you buy into a more expensive
insurance package above Basic (page
30)
2) Third Party Liability (TPL) coverage
($1 000 000 to $10 000 000)
damage to someone else’s property
injury to another individual from an
accident outside of Manitoba
See more on page 31.
Determining Insurance Costs
Visit www.mpi.mb.ca to view more information about Autopac and vehicle insurance.
Visit http://apps.mpi.mb.ca/Irc/intro_2.asp?Lang=0 to get to the MPI Insurance
Rate Calculator.
Recommended