Download - Building Your Future: Financing

Building Your Future:Financing

A Student and Teacher Resource for Financial Literacy Education

Copyright © 2009, 2011, 2013The Actuarial Foundation

About This BookPersonal finance is part knowledge and part skill – and the Building Your Future book series gives students a foundation in both. It addresses knowledge by covering the essential principles of banking in Book One, financing in Book Two, investing in Book Three, and succeeding in Book Four. The series also addresses the mathematical skills that students need to live a financially healthy life. Students will be able to see the real-world consequences of mastering their finances, which helps them understand the relevance of good mathematical skills. We hope you enjoy this Building Your Future book series.

The catalyst for this book series was based on an original book authored and donated to The Actuarial Foundation by an actuary, James A. Tilley, FSA, who was interested in financial literacy education in schools. We thank Mr. Tilley for his original works that inspired this Building Your Future series.

About The Actuarial FoundationThe Actuarial Foundation, a 501(c)(3) nonprofit organization, develops, funds and executes education, scholarship, and research programs that serve the public and the profession by harnessing the talents and resources of actuaries. Through Advancing Student Achievement, a program that seeks to improve and enhance student math education in classrooms across the country, we are proud to add Building Your Future, a financial literacy education curriculum for teachers and students, to our library of math resources. Please visit the Foundation’s Web site at: www.actuarialfoundation.org for additional educational materials.

What is an Actuary? Actuaries are the leading professionals in finding ways to manage risk. It takes a combination of strong math and analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk. “Actuary” was included as one of the Best Jobs of 2012 as reported in the Wall Street Journal. To learn more about the profession, go to: www.BeAnActuary.org.

Table of Contents

Chapter 1: Loans and Interest

Loan Basics ........................................................................................................................................................1 Interest Rates ...................................................................................................................................................4 The Truth in Lending Act and Selecting a Lender ...............................................................................4

Chapter 2: Home Loans

Getting a Home Loan ....................................................................................................................................7 Other Costs Associated with Home Loans ......................................................................................... 10 Refinancing and Foreclosure ................................................................................................................... 11

Chapter 3: Auto Loans

Car Buying Basics ......................................................................................................................................... 13 New vs. Pre-Owned .................................................................................................................................... 15 Leasing vs. Purchasing ............................................................................................................................... 16

Chapter 4: Insurance

Insurance Terminology .............................................................................................................................. 17 Life Insurance ................................................................................................................................................ 18 Health Insurance .......................................................................................................................................... 20 Auto Insurance ............................................................................................................................................. 21 Homeowner’s and Renter’s Insurance ................................................................................................. 23

Some of the activities in this book reference specific Web pages. While active at the time of publication, it is possible that some of these Online Resource links may be renamed or removed by their hosts at some point in the future. Note that these links were provided simply as a convenience; a quick search should reveal some of the many other online resources that can be used to complete these activities. Facts and opinions contained are the sole responsibility of the organizations expressing them and should not be attributed to The Actuarial Foundation and/or its sponsor(s).

Building Your Future

Building Your Future, Book 2: Loans and Interest 1


Key Terms:

• Loan • Variable interest rate

• Credit report • Truth in Lending Act

• Credit rating • Loan sharks

• Annual percentage rate/APR • Payday loan

• Fixed interest rate

What You’ll LearnWhen you decide to borrow money, there is always a cost associated with that borrowing. It is important to know about loans, and to understand that a loan can have a significant effect on the overall purchase price of whatever it is you are buying. Through exploring the laws and regulations in place to protect consumers from lender abuses, you can learn how to determine when you should take a loan and what type of loan would best meet your needs.

Loan BasicsBy learning about interest rates and loans, you can figure out:

• Why it takes so long to pay back a home mortgage loan• How much money has to be paid each month on a car loan

At one time or another, most people encounter situations where they must take a loan to pay for something they need. This is also true for companies and governments. As a consumer and a taxpayer, it is important that you understand loans and interest and how they can affect both the lender and the borrower.

Did You Know….

If you buy a $35,000 car and take a six-year loan at a rate of 7.9%, you will end up paying over $9,000 in interest on the car, making the total cost of the car $44,000.


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Career Link

Many auto and home insurers use something called an insurance score to help determine the premiums they charge for auto, homeowners, and other insurance policies. Insurance scores are calculated based on information that may be contained in a credit report, past insurance claims, your driving record, or other similar sources.

loanan amount of money

borrowed and repaid with interest

2 Building Your Future, Book 2: Loans and Interest

To help you better understand loans, interest and interest rates, imagine the following scenario. You have saved $400 from your part-time job. You want to go on a school-sponsored trip out of town next week, but the trip costs $700. You ask a classmate if you can borrow the $300 you need for the trip. (Note that in the following discussion, your classmate takes the place of a bank.) Before your classmate loans you the money, he or she asks several questions:

• Are you certain you will be able to repay the money?• When will you pay the money back?• Since your classmate is losing out on the chance to use the money for other things, what is a fair interest rate to charge you for borrowing the funds?• What will you do if you can’t pay your classmate back?

These questions are very similar to the types of questions that banks ask borrowers when they apply for a loan. Bankers must do their best to ensure that borrowers can and will repay loans that they take from the institution. Banks are not obligated to give borrowers a loan. Getting a loan is a privilege you must earn. When you apply for a loan, you have to show that you have the means to repay it. You can do this by presenting evidence that your income can support the loan payment. In addition, the lender will check your credit report.

In conjunction with the credit report, the lender will receive your credit rating. The higher your credit rating, the better chance you have of getting a loan and having a low interest rate. The lower the rating, the better chance you have of being rejected for the loan or being charged a high rate of interest.

Like a lending institution, your classmate must keep your ability and willingness to repay the loan in mind when considering whether to loan you the $300. He or she must also consider the amount of time you need to repay the loan. If your classmate thinks there is a high risk that you may not repay the loan, then he or she should not give you the loan at all.

Perhaps you will not be able to pay back all of the money at once, but instead choose to pay parts of the balance over time. Your classmate will want to keep

credit report a report detailing an

individual’s credit history, including payments

related to bills, loans, credit accounts and bankruptcies;

used to determine one’s creditworthiness

credit ratinga ranking, typically expressed

as a number or letter, based on one’s credit history and

used by financial institutions for loan and credit approval


this in mind when establishing the interest rate. He or she will need to continue to charge you interest on the outstanding amount you owe each month.

After considering your request, your classmate decides to loan you the money until the end of the year. It is September, so that will give you plenty of time to earn and pay back the $300. You have a part-time job earning about $160 a week, and you have always repaid people when you’ve borrowed money in the past. Based on the risks to them and the loan amount, your classmate decides to charge you 2% interest for each month that you borrow the money. On a $300 loan, that 2% equals $6 for the first month, then 2% on the unpaid balance each month thereafter.

When your classmate tells you the terms of the loan, you agree, but want to know what the annual percentage rate of interest will be. According to the monthly rate proposed (2%), the annual percentage rate comes to 24%. While this may seem high, it should encourage you to pay your classmate back in a timely manner while compensating him or her for loaning you the funds.

Examples and PracticeUsing the scenario presented above, let’s study the Personal Loan Spreadsheet and calculate the repayment of the $300 loan.

Personal Loan Spreadsheet

A B C D E F

1 Month Interest Rate

Beginning Outstanding

LoanInterest Charge

Loan Repayment

Ending Outstanding

Loan

2 Sept. 2.00% $300.00 $6.00 $60.00 $246.00

3 Oct. 2.00% $246.00 $4.92 $160.00 $90.92

4 Nov. 2.00% $90.92 $1.82 $80.00 $12.74

5 Dec. 2.00% $12.74 $0.25 $12.99

• HowdoyoucalculatetheInterestChargeamountincolumnD?Describe the mathematical steps for doing this along with the spreadsheet formula you would use.

• HowdoyoucalculatetheEndingOutstandingLoanamountincolumnF? Describethemathematicalstepsfordoingthisalongwiththespreadsheet formula you would use.

• WhydoestheBeginningOutstandingLoanamountchangefrommonth tomonth?Explain.

• IfyouwanttorepaytheloaninfullinDecember,howmuchwouldyou needtopay?Describethemathematicalstepsyouusedtocalculatethis amount.

• Whatwasthetotalamountofmoneyyouhadtopayyourclassmate whenyourepaidtheloan?Describehowyoucalculatedthisamount.

annual percentage rate/APR

yearly rate of interest; calculated by multiplying

the monthly interest rate by 12 (number of months in a year)

Try It!


Interest RatesAs you have learned, part of a loan is the interest rate. Interest rates can be fixed or variable. Variable interest rates change based on the current rates set by the financial market, so the amount of interest you must pay can go up or down. This means that your total monthly loan payment can go up or down as well.

Examples and PracticeUse the data from the spreadsheet above to create your own spreadsheet. Increase the interest rate by one percentage point each month. Study the spreadsheet and answer the following questions:

• HowdoeschangingthemonthlyinterestratechangetheEnding OutstandingLoanbalance?• Howdoeschangingthemonthlyinterestratechangethefinalamount youwouldhavetopayinDecemberifyouwantedtorepaythe outstandingbalanceontheloan?• Howdoeschangingthemonthlyinterestratechangethetotalamountof moneyyouhadtopaywhenyourepaidtheloan?• Basedonthisexample,whichdoyouthinkisbetter,afixedinterestrateor avariableinterestrate?Why?

The Truth in Lending Act and Selecting a LenderAs you can see, getting a loan can be a complicated process with many factors to consider. One of the ways consumers are protected is through the Truth in Lending Act. This legislation is designed to make sure that the borrower has enough information to understand the loan’s interest rate and terms.

Not all lenders are alike. Some offer better loan packages than others. When you decide to borrow money, you should always research the various types of loans available. Using the Internet or the phone to survey the interest rates

How Loans and Interest Affect You as a Consumer and a Taxpayer

Of all of the practices in finance and investments, the practice of charging or paying interest is probably the biggest and most important.

Companies throughout the world borrow substantial amounts of money. Interest rates determine how much those loans will cost them each year; these interest costs are just as real as the cost of goods used to produce the products consumers purchase. Therefore, the interest rates companies pay on their loans affect the

cost of the products sold in the marketplace. Countries, states, cities and towns throughout the world also borrow substantial amounts of money. The interest rates they have to pay on their loans affect the amount of taxes they have to raise.

Interest rates affect world affairs very much. Since interest rates change little from day to day, and often quite a lot from year to year, there are many people who spend a great deal of their time monitoring interest rates.

Try It!

Truth in Lending Actrequires lenders to explain

how they compute loan charges and list the annual percentage rate; also gives

the borrower three business days to opt out of the loan

fixed interest rateinterest rate that stays

the same over the course of the loan

variable interest rateinterest rate that can

change over the course of a loan


and fees associated with a loan is an effective way to narrow your search for a lender. When researching a lender, factors to consider should include:

• Loan fees charged to the borrower for processing and completing the loan transaction• Interest rate on the loan• Repayment terms on the loan (some lenders charge penalties for early repayment of the loan)

In addition, remember to select a reliable lender such as a bank or credit union if possible. Avoid taking loans from loan sharks, which are not regulated, and be aware that companies that offer payday loans tend to lend small amounts of money ($500 or less) and can include an APR of up to 400%. Regulations for payday loans vary from state to state. These loans are really just cash advances against the next paycheck you will receive from your employer.

loan sharksindividuals who charge

exorbitant interest rates on loans

payday loanshort-term, high interest loan

You want to purchase a laptop computer. You have done your research, and the computer you want to buy will cost $1,500. You are considering how you will pay for this purchase. Assume you earn $160 per week from your part-time job and have expenses that take 75% of this income.

Upon researching loans, you learn that you can obtain a loan from the computer retailer at a rate of 10.99% APR. You call the bank to find out how much you can earn on your savings account. They are running a special and you can earn 2.75% on your money per year, paid monthly. You currently have no savings.

Use spreadsheets to help you analyze how much you will pay for the computer if you wait to save the entire amount vs. taking the loan from the computer store. If you save the entire amount, how long will it take?

Decide which option you would choose and be prepared to explain why you selected this option.

Independent Practice

Building Your Future, Book 2: Home Loans 7


Key Terms:

• Mortgage • Amortization schedule

• Down payment • Closing costs

• Interest • Pre-payment penalties

• Principal • Escrow

• Interest rate • Truth in Lending Act

• Credit rating • Refinancing

• Fixed interest rate • Delinquent

• Variable interest rate • Workout

• Lifetime cap • Foreclosure

• Equity What You’ll LearnPurchasing a home is one of the biggest investments a person will ever make. A home is also an important asset when determining your financial health. There are many factors to consider when purchasing a home, such as down payments, interest rates and the terms of the loan. These factors affect the overall price paid for the home. We’ll look at all the things that need to be considered when it comes to financing a home.

Getting a Home LoanRegardless of their size and location, homes are expensive: they are probably the most expensive items that most of us will ever purchase. Whether you’re talking about a $100,000 home or one that costs millions of dollars, the simple fact is that most people do not have enough money saved to purchase a home outright. Because of this, most home buyers turn to banks, credit unions or finance companies to get a mortgage to purchase their home.

Did You Know….

For the vast majority of American homeowners, their home is their most important financial asset. Some 34% of homeowners say their home accounts for “all or most” of their personal financial worth and another 34% say it represents about half of their worth.


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Career Link

Most mortgage companies require a borrower to have enough homeowners insurance coverage to pay off the mortgage’s outstanding balance, which is not always enough to cover the home’s value. Basic insurance pricing assumes that the home’s full value is being insured. Actuaries make the adjustments necessary to price the insurance when this is not the case.

mortgage a loan used to

purchase a home

8 Building Your Future, Book 2: Home Loans

Part of purchasing a home involves saving up enough money to make a down payment. Most banks and finance companies require buyers to make a down payment; depending on a buyer’s qualifications, this down payment may be anywhere from 5% to 20% or more.

Examples and PracticeA family decides to purchase a home for $150,000. They currently have $30,000 in savings, but they are only willing to make a down payment of $25,000 on the house. In order to buy the home, the bank must agree to give the family a loan for $125,000.

Using the information above, calculate the following:

• Ifthefamilyputs$25,000downonthehouse,whatpercentageofthe purchasepriceofthehomedoesthisamountrepresent?

• Doyouthinkitisagoodideaforthefamilytoputmorethan5%downfor thehouse?Whyorwhynot?

Once the down payment and loan amounts have been determined, it is important for home buyers to think about the loan repayment process. Since

down paymentthe amount of money

a buyer pays in cash for the purchase of a house

Try It!


they are borrowing a very large amount of money, they cannot expect to pay it back quickly. Instead, they should plan to pay back small amounts on the loan month by month over a long period of time. Since most people have to pay the loan back in small amounts, home loans are considered long-term loans. Borrowers typically select loans that are repaid over 15 to 30 years.

As with any other loan, the bank is going to charge interest on the loan. Since borrowers pay interest on the loan each month, part of the borrower’s mortgage payment will be interest paid to the bank, and the remainder of the payment will be applied to the loan principal. Interest rates can vary widely from lender to lender. They are typically based on the borrower’s credit rating, the length of the loan and the down payment amount. The interest rate can make a big difference on the amount of money paid each month and the overall cost of the home, so it is important to take the time to research various lenders and get interest rate quotes from them to secure the best loan with the most ideal terms.

When borrowers apply for a home loan, part of the loan review process involves a credit check so that the lender can assess the borrower’s creditworthiness. One of the tools used to assess creditworthiness is called a credit rating. A high credit rating means that you have a history of making timely payments to people who have loaned you money in the past. The higher your rating, the better chance you have of getting a loan and having a low interest rate. Consumers with lower ratings have been less reliable as borrowers in the past, and risk being rejected for the loan or getting the loan at a higher rate of interest.

While most people prefer to have a fixed interest rate, or conventional mortgage, people will sometimes opt for variable interest rate mortgages. Fixed rate loans offer the borrower peace of mind, because the loan’s rate, and the monthly payment amount, will always remain the same. With a variable rate mortgage, the initial rate is usually lower than that of a conventional loan; the disadvantage is that borrowers don’t know whether their monthly payments will increase or by how much they will increase, though they have some protection based on the loan’s lifetime cap.

When considering a mortgage loan, borrowers must think about how long they want to spend repaying the loan. The longer the period of time a borrower is given to repay a loan, the smaller the monthly payment will be. However, the longer the loan, the more the borrower will end up paying in interest. Most people choose a 15- or 30-year home loan. The advantage of a 15-year loan is that borrowers can usually get a lower interest rate and will build equity in the home more quickly. The advantage of a 30-year loan is that payments are lower and the borrower will have more money to use for day-to-day expenses and saving.

interest money that is paid to

the lender by the borrower for the use of the lender’s money

principalthe original borrowed

amount

interest ratepercentage paid to the lender

for the privilege of borrowing the money

credit ratinga ranking, typically expressed

as a number or letter, based on one’s credit history and

used by financial institutions for loan and credit approval

fixed interest rateinterest rate that stays

the same over the course of the loan

variable interest rateinterest rate that can

change over the course of a loan

lifetime cap a limit on how much the

interest rate of a variable-rate loan can increase

equity a home’s market value

less the outstanding mortgage balance


Examples and PracticeTo better understand how loans work, create a spreadsheet showing the amortization schedule by accessing http://www.loanscalculator.org or another online loan calculator and inputting the information related to the loan. We’ll use the earlier example: a $150,000 house purchased with a $25,000 down payment, resulting in a loan for the difference of $125,000. See the sample spreadsheet that illustrates the first four months of the loan at the bottom of this page.

For this activity, we are going to assume that the borrower is making monthly payments on a 30-year fixed-rate loan. The interest rate is 8.00%. Input the necessary information into the calculator to calculate the loan costs.

Answer the following questions based on what you learned when you calculated the loan data:

• Discusswhathappenstotheinterestpaymentandloanrepayment amounts over the course of the loan.

• Calculatethetotalcostofthehomebythetimetheentireloanhasbeen repaid.Don’tforgettoincludetheinitial$25,000downpaymentinthecost.• Whatdoyouthinkwouldhappentothecostofthehouseifyouapplied $100extratotheloanrepayment(principal)columneachmonth? Explainwhy.• Assumeyouhaveavariableinterestratethatbeganat4%andrisesa¼% ayearforthefirst10yearsoftheloanandthendeclines¼%everytwo years for the remaining life of the loan. What is the total cost of the loan repaymentoverthecourseoftheloannow?• Ifyouhadthechoice,wouldyouselectafixedorvariablerateofinterest?

Why?

Other Costs Associated with Home LoansWhen shopping for a home loan, there are other factors to consider besides interest rate and the term of the loan. Borrowers should also pay attention to closing costs and pre-payment penalties. Closing costs include a wide range of fees in addition to the cost of the home, such as title searches, deed filings,

closing costsfees paid in addition to the

cost of the home

pre-payment penalties

fees designed to keep the borrower from

paying the loan off early

Try It!

amortization schedule

a schedule for repaying the loan

A B C D E F G H

1 MonthLoan

Interest Rate

Loan Payment Principal Interest

Principal +

Interest

Calendar Year

InterestLoan

Balance

2 1 8.00% $917.20 $83.87 $833.33 $917.20 $833.33 $124,916.13

3 2 8.00% $917.20 $84.43 $832.77 $917.20 $1,666.11 $124,831.70

4 3 8.00% $917.20 $84.99 $832.21 $917.20 $2,498.32 $124,746.70

5 4 8.00% $917.20 $85.56 $831.64 $917.20 $3,329.96 $124,661.14


property surveys and lawyer’s fees. Some loans with low interest rates have pre-payment penalties which require the borrower to keep the loan and pay interest on it for a set number of years.

When purchasing a home, you may be asked to put money into escrow. This lets the seller know that the buyer is committed to purchasing the house. In turn, the buyer does not risk losing his or her money if the seller cannot meet the conditions necessary to sell the house (such as passing a house inspection).

As you can see, getting a loan can be a complicated process with many factors to consider. One way consumers are protected is through the Truth in Lending Act. This legislation is designed to make sure that the consumer has enough information to completely understand the interest rate and terms of the loan.

Refinancing and ForeclosureIn our previous example, the fixed interest rate on the home loan was 8%, which is locked in for the life of the loan. As time goes by, interest rates change. Sometimes rates enter a trend where they become lower and lower. As interest rates decrease, the number of people interested in refinancing tends to increase since a new loan will ultimately be less costly to the borrower. Just like with the initial loan, borrowers must shop around and pay attention to the costs associated with refinancing. Since the borrower is still seeking a loan, the borrower will again pay many of the same types of fees paid when the original loan was processed. If a borrower is planning to sell the property in the next few years, then refinancing may not be a wise decision because of the costs of securing a new loan; additionally, there may be prepayment penalties in effect which would increase the cost of getting a new loan.

Examples and PracticeUsing the calculator at http://www.loanscalculator.org, experiment with the loan by inputting the following data and analyzing the results shown in the loan amortization schedule.

• Theinitialfixedinterestrateontheloanwas8%.Let’ssaytheborrower decidestorefinanceafter5yearstoa6.5%fixedrateloanforthe remainderoftheloan.Howwillthisaffecttheborrower’sannual payment?Theoverallpricepaidforthehome?HINT: Remember to include the$2,500ofclosingcostsincurredwhenthehomewasrefinanced.

• Theinitialfixedinterestrateontheloanwas8%.Afterpayingthisratefor 8years,theborrowerdecidedtorefinanceatarateof5%.Afterpaying $2,000inclosingcostsandmakingthenewloanpaymentfor2years,the borrower sells the house. What happened to the borrower’s annual paymentafterthehomewasrefinanced?Intheend,howmuchmoneydid theborrowerendupsaving/losingasaresultofthisdecision?

escrowproperty or money held

by a third party until the terms of a contract

are met

Truth in Lending Actrequires lenders to explain

how they compute loan charges and list the annual percentage rate; also gives

the borrower three business days to opt out of the loan

refinancingpaying off the original loan by

taking out a new, typically more favorable loan

Try It!


Sometimes borrowers are unable to meet their financial obligations and pay their loans on time. When a borrower is delinquent and unable to fulfill the loan contract as negotiated, lenders have two choices: they can either establish a workout or initiate a foreclosure. When a borrower has a property foreclosed upon, this becomes part of his or her credit report for a period of seven years and can prevent the borrower from obtaining loans in the future.

delinquentpast due on a scheduled

loan payment

workoutformal repayment or

loan forgiveness arrangement between a borrower and

lender

foreclosurelegal process that allows

a lender to seize property if the mortgage loan is not paid;

typically, the lender sells the property and applies

the proceeds to the outstanding debt

You are buying your first home and want to select the best possible mortgage loan.Your home is one of the biggest investments you will ever make, and making surethat you can repay the loan is of primary importance. Use the loan calculator at http://www.loanscalculator.org/ and the experience you gained from the Try It activities on pages 10 and 12 to compare a fixed rate loan of 5.5% and a variable rate loan that starts at 3.25% and increases ¼% yearly for the duration of the loan.

Assume the loan is for a $200,000 home with a 20% down payment, and that youare requesting a 30-year loan. Also assume that the variable rate loan has a lifetimecap of 6%, which means that the interest rate cannot exceed 9.25%.

Once you have used the calculator at http://www.loanscalculator.org to compare the loan scenarios, select the one that you believe is best in terms of the real cost of the home. Justify your loan selection in writing by answering the following questions on a separate sheet of paper.

• Whatistheoverallcostofthehomebasedontheloanscenarioyouselected? Howdoesthiscomparewiththeoverallcostoftheotherscenariospresented?• Whydidyouselectthisloanscenarioasthebestoptionforyou?Explain.• Whatrisksdoyoufacebyselectingthisloanscenario?• Atwhatpointmightyouconsiderrefinancingtheloanyouselected?Why?


Building Your Future, Book 2: Auto Loans 13


Key Terms:

• Trade-in value • Lease

• Book value • Purchase

• Incentives

What You’ll LearnThere are many factors to consider when purchasing a car. Given the potentially significant costs, it is important to consider a wide range of factors when selecting a vehicle and determining how you’ll pay for it. By learning about concepts such as trade-in and book value and knowing how to analyze dealer incentives, you’ll be able to determine whether leasing or purchasing is the more sensible, cost-efficient method of obtaining a car.

Car Buying BasicsWhen it comes to buying a car, most people don’t have enough money on hand to pay cash for the vehicle they want. Since this is a major purchase, you should look for ways to save money while still obtaining the car that best meets your needs. When purchasing a car, there are some terms that you should understand in order to get the most for your money and select the financing that is most cost-effective.

Many car buyers have a used car they want to trade in to the dealer for the new car they wish to purchase. While the used car is not worth as much as it was when it was new, it still has some value. Many times the trade-in value of a used car is called the book value. Pricing information can be found through various sources, such as guides like the Kelley Blue Book (www.kbb.com) or

Did You Know….

According to the Department of Labor’s Bureau of Labor Statistics, the annual cost of car ownership and operation is 17% of the average household’s expenditures, ranking second only to the cost of housing.


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Career Link

Carownersarerequiredtocarryliabilityinsurance;thisinsuranceisanimportantfactorindetermining a vehicle’s overall operating cost. In addition, many lenders require collision and comprehensive insurance coverage as a condition of receiving a loan to purchase a car. Actuaries develop car insurance pricing plans to help encourage careful driving. They determine how to adjust car insurance prices to reflect various kinds of risk factors.

trade-in valueamount the dealer gives you

for the car you’re providing as partial payment for

the car you wish to purchase

book valuehow much a particular car is

worth based on its condition, mileage and other factors

14 Building Your Future, Book 2: Auto Loans

services such as Edmunds (www.edmunds.com). These and other similar resources offer a starting point for determining book value.

New car dealers sometimes offer incentives to encourage people to buy. Incentives can include discounts, credits, reduced interest rates or reduced down payment requirements, and should be compared by the buyer to determine which one will save him/her the most money on the vehicle.

Examples and PracticeSuppose you are buying a new car. The dealer’s price on the car is $20,000. The trade-in value on your four-year-old used car is $7,000. You have $1,000 cash to use as a down payment. In addition, there are special incentives being offered by the manufacturer. You can select either 1.9% financing over the course of the loan, which is 48 months, or you can elect to receive a rebate of $4,500 cash back on the vehicle, applied to the amount due at purchase. If you choose the cash back offer, you can take a loan from your bank, which has quoted you a rate of 6.5% on a 48-month loan. Whichever option you select, you will still need to get a loan to pay for the vehicle.

Create a spreadsheet like the one below and use it to determine the total cost of the car under both incentive scenarios. (If you have completed the chapter on buying a home, you’ll notice this spreadsheet looks exactly like the one created for a home loan.) When computing the interest portion (Column E) of your monthly loan payment, remember to multiply the previous month’s ending loan balance (Column H) by the loan interest rate (Column B) and divide by 12 since these are monthly calculations.

Answer these questions:• Calculateyourtotalcostofthecarafteryourdownpaymentand trade-in. This is the amount for which you’ll need a loan under either scenario.• Whatisthetotalcostofthecarforeachincentivescenario?• Accordingtoyourcalculations,whichincentiveismoreeconomical—the lowinterestrateorthecashrebate?Why?Explain.

incentivesfactors such as

special finance rates, rebates or other offers

designed to encourage buyers to purchase a vehicle

Try It!

A B C D E F G H

1 MonthLoan

Interest Rate

Loan Payment Principal Interest

Principal +

InterestCumulative

InterestLoan

Balance

2 1 1.9% $259.82 $240.82 $19.00 $259.82 $19.00 $11,759.18

3 2 1.9% $259.82 $241.20 $18.62 $259.82 $37.62 $11,517.98

4 3 1.9% $259.82 $241.58 $18.24 $259.82 $55.86 $11,276.40

5 4 1.9% $259.82 $241.96 $17.85 $259.82 $73.71 $11,034.44


New vs. Pre-OwnedWhen buying a car, one of the first decisions you must make is whether to purchase a new car or a pre-owned (used) vehicle. There are advantages to each. New cars offer the latest in technology, features and design and typically have a warranty; however, they also cost more, and typically lose some of their value as soon as they leave the lot. A used car is generally less expensive, but it may lack certain features you are seeking; it may not be in the best shape; and it may have high mileage, limited items covered by warranty, and a history of repairs or problems. When considering whether to purchase a new or used car, you must consider all of these things along with what you can comfortably afford.

And don’t forget about the “hidden” costs of car ownership. Paying for the car is only part of the cost: you must also keep in mind that you will need to pay insurance premiums, maintenance costs, repair costs, the cost of gasoline, and taxes and licensing fees. These expenses can add up to thousands of dollars each year, so you should include them in your calculations when deciding what you can realistically afford.


Leasing vs. PurchasingIf you’ve decided that it’s time for a new car, you’ll also need to decide whether you want to lease the car or purchase it. There are several differences between the two in areas such as ownership, maintenance, payments, and more; the chart below presents the pros and cons of each option.

Examples and PracticeUse the data from the Auto Loans: Lease vs. Purchase Worksheet provided by your teacher to answer the questions below.

• Basedonyourdatafromtheworksheet,doyouthinkyouwouldpreferto purchaseorleaseavehicle?Why?

• Whattypeofpersonisbettersuitedtoleasingthantobuying?Whatkind of lifestyle do they have, what kind of work might they do, and what are theirfinancialgoals?Whataboutpeoplewhoarebettersuitedtobuying?

You want to purchase your first car. You can either buy a new car or a pre-owned, low-mileage car. Using the data on the Independent Practice Worksheet provided by your teacher, determine which car you will select. Be prepared to share your decision and the process you used for making it.


Try It!

Lease vs. Purchase: Pros and Cons

LEASE PURCHASEPros

• Usuallylittleornodownpayment required

• Fewerup-front,out-of-pocket fees (ex: sales tax)

• Lowermonthlypayments

• Newcareveryfewyears

• Nochanceofbeing“upside down,” or owing more on the car loan than the car is worth

• Allowsyoutohaveamore expensive car

• Somedealerswillcoverregular maintenance

• Taxadvantagesifusedfor a business

Cons

• Youalwayshaveacarpayment

• Youneverownthecar

• Mileagerestrictions(usually12,000-15,000per year) and fees for overages(usually15-25cents per mile)

• Higherinsurancecoverage costs

• Chargesforexcesswearand tear

• Highercreditscorerequirements

• Dependingonyourstate,youmustbeatleast18tolease a car

Pros

• Youownthecarafteryoumake all the payments (usually48-60payments)

• Canownthecarforaslong as you want

• Candriveasmanymilesas you want

• Insurancecostsareusually lower

Cons

• Downpaymentrequired

• Up-front,out-of-pocketcosts (ex.: sales tax)

• Highermonthlypayments

• Canendup“upsidedown,” or owing more on the car loan than the car is worth

• Loanlimitsforthepriceof the vehicle (usually not morethan$30,000allowed)

• Havetopayforvehiclemaintenance

leasepaying only a portion of the

vehicle’s sales price and returning it to the dealer at

the end of the specified time

purchasepaying the car’s full price and

keeping it as long as you want

Building Your Future, Book 2: Insurance 17


Key Terms:

• Insurance • Estate

• Insurer • Health insurance

• Insurance policy • Coverage

• Policyholder • Benefits

• Premium • Co-pay

• Claim • Co-insurance

• Deductible • Flexible Spending Account/FSA

• Life insurance • COBRA

• Risk • Auto insurance

• Beneficiary • Homeowner’s and renter’s insurance

What You’ll LearnInsurance of all types is important in preventing financial ruin due to illness, injury, property loss, and even death. Learning about the different types of insurance will help you manage your financial risk through purchasing and utilizing insurance policies that best meet your financial needs and goals.

Insurance TerminologyTo understand various types of insurance, you need to know a handful of key terms, as listed below.• Insurance: promised payment for specific future losses should they occur in

exchange for a payment called a premium• Insurer: a company that pays to compensate the policyholder for losses or

damages as described in an insurance policy as long as the premium is paid• Insurance policy: a written contract between an insurer and a customer

(the policyholder) describing the term of the insurance, what is covered, the cost of the premium and the deductible amount

• Policyholder: the owner(s) of an insurance policy• Premium: the periodic payment for an insurance policy

Did You Know….

Nearly 48 million nonelderly Americans were uninsured in 2011, a decline of 1.3 million since 2010. In total, nine in ten of the uninsured are in low- or moderate-income families.


?

18 Building Your Future, Book 2: Insurance

• Claim: a policyholder’s official notification to the insurance company requesting payment of an amount due for a covered loss

• Deductible: a dollar amount a policyholder pays before the insurer starts to make payments for a covered loss

Life InsuranceNearly everyone needs life insurance, and people buy this type of insurance for a variety of reasons. Some choose life insurance as a means of replacing lost income to support their families in the event of their death. This way, if a parent dies, there is money available to pay expenses and support the family. Others purchase life insurance to pay the cost of their final expenses such as funeral and burial costs, debts, medical bills, taxes and so on. Still others purchase life insurance as a way to provide heirs with an inheritance. The reasons for purchasing life insurance are as varied as the people who buy it. In order to decide if you need life insurance, you should ask yourself, “If I died tomorrow, would it be a financial hardship on the people I care about?” If the answer is yes, then you probably need life insurance.

Many employers offer life insurance as one of the benefits of working for the company. Amounts differ from employer to employer, and sometimes these amounts can be selected by the person being insured. Many employers offer life insurance benefits at no expense. Others offer employees the opportunity to purchase life insurance for themselves and their family members through the company at a reduced rate.

When you purchase life insurance, a medical exam is typically required by the insurance company. This exam helps the company determine the risk associated with issuing a policy to you. Risk can vary due to family characteristics (such as a history of illness), your personal characteristics (age), or your lifestyle choices (smoking). Actuaries use sophisticated techniques to measure risk.

Insurance companies are not required to insure everyone who applies, nor are they required to charge the same premium to everyone they insure. If an insurance company completes a physical examination and determines you have a high mortality risk (such as if a terminal disease is found, for example), they can reject your application and deny you coverage. If you are in good health and have a healthy lifestyle (i.e., don’t smoke, avoid alcohol, don’t have dangerous hobbies such as skydiving), then you can be insured for a relatively small premium. On the other hand, if you have health issues, an unhealthy lifestyle, are elderly, participate in dangerous activities, or hold a high-risk job, the cost of the insurance policy may be higher. The insurance company considers all of this before they issue a policy and determine the premium they will charge for it.

life insurancemoney paid to a designated

person/group of people when you die

riskthe probability that

something negative may happen


Many people are unsure about how much life insurance they should purchase. There are many resources, such as the Life and Health Insurance Foundation for Education at http://www.lifehappens.org/, that can be consulted to determine how much life insurance one needs. It truly varies based on each person’s circumstances and needs.

When selecting life insurance, consumers have several options available to them. Below you will find a chart that highlights the various types of life insurance that are available.

When purchasing life insurance, you must designate a beneficiary. Typically, there is a primary beneficiary and a secondary beneficiary. You designate these people when you purchase the policy. By appointing a secondary beneficiary, you eliminate the risk of losing the insurance payout in the event that the primary beneficiary also dies. For example, married people will typically name their spouses as primary beneficiary and their children as secondary beneficiaries. You can also name your estate as the beneficiary.

Life Insurance Options

Type of Insurance Key Characteristics

Term Life

• Least expensive form of life insurance• Covers you for a set period of time, known as a “term” (for example, 10 years)• Requires renewal, usually at a higher rate, at the end of the term• The cost tends to rise at each renewal• Pays if you die• You can select the amount of coverage you want at the start of each term

Whole Life

• The premium you pay always stays the same• The value of the policy increases over time because you build cash value that

is tax-deferred• You are not allowed to select the investments; the insurance company controls how the money is invested• You cannot change the amount of coverage you have after the initial selection

Universal Life

• You can adjust the amount of coverage you have• You can adjust the amount you pay for your premium• The value of the policy increases over time because you build tax-deferred

cash value• The insurance company guarantees a certain rate of return on your money• You cannot decide how the money is invested• If you lower the amount you pay for your premium for too long, then the

coverage could lapse and you would no longer have the policy

Variable Life

• You can select the investment options you want • You are not taxed on the earnings until you redeem the policy• You can use the interest earned on the investments to pay the premiums• If you select bad investments, you could lose money on the policy

beneficiarythe person(s) who will receive

the insurance payout in the event that you die

estatewealth and possessions

left by someone to be divided after they die


Health InsuranceHealth insurance provides coverage for medication, doctor and emergency room visits, hospital stays, medical equipment and other medical expenses. Policies vary widely, and there are limits on coverage depending on the type of policy. In addition to coverage limits, most policies require the insured to meet a deductible or to make reduced payments for services.

At one time or another, all of us need medical care, and it can be very expensive. A typical office visit to a doctor can cost anywhere from $80 to $220. If you have health insurance, then some of the cost of the visit and any medications or additional treatments you may require as a result of that visit will probably be covered, at least in part, by the health insurance provider. The benefits are described in the policy and can vary widely.

Some health insurance policies require a co-pay for services. For example, if you go to the doctor for an office visit, you might pay a $25 co-pay. If medication is prescribed, you may have to pay the pharmacy a $10 co-pay to get the medication. The insurance company pays the remaining cost of the office visit and the prescription.

health insuranceprotects you from monetary

losses associated with illness or bodily injury

coveragewhat the insurance company

includes as part of the insurance policy

benefitsspecific services the insured is

entitled to under the policy

co-paya form of cost-sharing that

requires the insured to pay a fixed dollar amount

for a medical service or prescription

Career Link

ActuaryActuaries are concerned with risk: looking at the likelihood of bad events happening, quantifying the cost of those events, and setting up financial models to protect clients at a reasonable price. While risk is a factor in all industries, no other industry handles the financial impact of risk more than the insurance industry.

Actuaries have traditionally specialized in life, health, property, and casualty insurance, where they work on developing, pricing, and managing insurance products. They are involved in defining and creating pension and retirement plans. Some are finding roles as financial planning advisors. Actuaries must have a bachelor’s degree, typically in fields like math or finance, and must pass a series of exams to be certified in the field. These jobs consistently rank as being among the best in America.

Insurance UnderwriterAs an insurance underwriter, you would review applications for insurance policies. It would be your job

to understand the amount of risk, or the chance that the applicant would file an insurance claim, associated with each application. Insurance underwriters typically have a bachelor’s degree in business or math, and some knowledge of basic accounting principles. They also possess strong interpersonal and communications skills, as the work involves working with other people in a variety of ways.

Insurance AgentYour job as an insurance agent would include meeting with potential clients to determine their insurance needs. You could be a captive agent, working for one insurance company and only selling that company’s products, or you could be an independent insurance agent, or broker, represent several companies. In either case, you could select the policy that is best suited for your client. You would then help your client fill out an insurance application, which you would forward to an underwriter. After the company issued the policy, you would deliver it to the client and review it to make sure your customer fully understood the coverage.


Another common feature of most health insurance plans is a deductible. Deductibles range from several hundred to several thousand dollars, depending on the type of coverage you have and the type of service you receive. In addition to deductibles, many insurance companies now require policy holders to pay co-insurance.

Many people obtain health insurance through their employers as a benefit. In most cases, the employer pays some or all of the insurance premium, and the employee pays for the remaining costs associated with purchasing the health insurance plan. Individuals can also purchase health insurance, but this is usually at a much higher rate. For this reason, many people select insurance that covers only catastrophic events, not the everyday illnesses and injuries that typically send people to a doctor.

As you have learned, even with health insurance, medical expenses can add up quickly through the accumulation of co-pays, deductibles, co-insurance and premiums. To help people pay some of these expenses, the law allows employers to offer their employees Flexible Spending Accounts, or FSAs. These accounts are basically tax-deferred savings accounts that can be used to pay unreimbursed medical expenses. The monies in a FSA must be completely used by the end of each calendar year or they are forfeited, so careful record-keeping is essential.

Sometimes people are forced to leave a job that has provided them with health insurance. This could be because of retirement, relocation, dismissal or a number of other reasons. When an employee leaves a company that has previously provided health insurance, that person can maintain insurance coverage through COBRA.

Auto InsuranceAuto insurance is required by nearly every state. An automobile accident can be financially devastating if it involves serious injuries and/or damage to the vehicles. By carrying auto insurance, drivers protect themselves and others from bearing the burden of unexpected costs due to an accident, vandalism or fire.There are several major types of auto insurance summarized for you in the

co-insurancea form of cost-sharing that requires the insured to pay

a set percentage of medical expenses after

the deductible has been met

Flexible Spending Account/FSA

allows people to put a set amount of wages into a special account without

paying taxes on those wages; money in this account can be

used to pay for uncovered medical expenses such as

co-pays, the deductible, and co-insurance payments

COBRAa law that allows a person to

continue to be covered under the company’s health

insurance plan for a specified amount of time as long as

he or she pays for that coverage

auto insurancea means of protecting

you and others in the event of an accident, theft, etc.


chart below. Study the chart to familiarize yourself with the various types of auto insurance, noting which are required and which are optional.

Like all types of insurance, auto insurance policies cost money. The factors that affect the price you will pay for auto insurance are listed below.

• Driving record (good record = lower rate, bad record = higher rate)• Driver’s age (younger drivers have more accidents, so their insurance costs

are higher because they pose a greater risk to the insurance company)• Type of coverage selected

Types of Auto Insurance

Type of Coverage Key Characteristics

Bodily Injury and Property Damage

Liability

• Most states (48) require this type of insurance for all vehicles• Pays for damage you cause including bodily injuries, property damage and

legal bills resulting from lawsuits related to the damages• Listed on policies in the form of three numbers such as 25/50/25: the first

number represents the bodily injury coverage for each individual in thousands of dollars; the second number lists the maximum amount that will be paid for bodily injury per accident in thousands; the third number represents the property damage coverage per accident

• If you do not carry enough insurance coverage, you can be sued for additional funds if the liabilities exceed what the insurance company has agreed to pay

Personal Injury Protection

• Less than half of all states require this type of insurance• It pays for medical expenses, funeral expenses and lost wages for you and

any passengers in your vehicle

Collision

• This coverage is not required in any state• If you have an accident and it is your fault, this type of coverage will pay for

the repairs to your vehicle• If your car is completely destroyed, the insurance company provides you a set

percentage of the car’s value

Comprehensive

• This coverage is not required in any state• No matter what causes the damage to your vehicle, whether it is vandalism,

theft, fire, a natural disaster, etc., the insurance company will pay for the damages

• This type of insurance is expensive, and people who have it usually choose to have a high deductible to keep the cost lower

Uninsured/Underinsured

Motorist

• This type of coverage is required in many states• If you are in an accident involving an uninsured motorist, a motorist who

doesn’t have enough insurance to cover the costs of the accident or you are the victim of a hit and run driver, this type of policy will pay for your medical bills and property damage

Miscellaneous Coverage

• While not required, many policies offer extra features such as roadside assistance and towing or the cost of rental car in the event of an accident

• This type of coverage adds cost to a policy, but is also very convenient if you are in an accident or have mechanical difficulties


• Where you live (key factors include crime and accident rates in your area) • Make/model of your vehicle• Deductible (choosing a higher deductible will generally decrease your premium

payment but means you pay more out of pocket in the event of a claim)• Claims history (making several claims in a short time period could raise your premium)• Payment history

As a young driver, your premium will typically be higher because drivers age 16-24 are typically involved in more accidents than more experienced drivers. To help lower the cost of auto insurance premiums, some insurance companies offer young driver discounts for taking certified driver’s education courses or maintaining good grades in school.

Homeowner’s and Renter’s InsuranceAs we discussed in an earlier chapter, the most valuable asset owned by most people is their home. Since homes cost so much money, it is important that they are insured. Homeowner’s insurance is required by lenders until the home is paid for in full. Even after you own your home, maintaining homeowner’s insurance is important to protect you from financial loss. (Homeowner’s insurance is often referred to within the insurance industry as homeowner’s and condominium owner’s insurance because it covers condominiums as well.)Homeowner’s insurance prices vary based on several factors, including the age of the home, what the house is made of, and the home’s proximity to a fire station. The deductible amount also affects the insurance premium. Choosing a higher deductible decreases the premium, but increases your out-of-pocket costs in the event of a loss. In addition, discounts are often available if the

homeowner’s and renter’s insurance

protects you from financial loss if your home is damaged

or destroyed, a theft occurs, or you face certain types of

medical or liability claims


home has specific safety features such as alarm systems and working smoke detectors. You may also receive discounts by having your insurance bundled, that is, by purchasing several policies (for example, auto and homeowner’s) from the same agent, broker or insurance company.

When selecting insurance coverage, it is important to know how much your home is worth, what it would cost to rebuild it if it were destroyed, the value of your home’s contents, and specific coverages necessary because of the location of your home (such as flood insurance).

If you are renting a home, townhouse or apartment, you should consider having renter’s insurance on your personal property in the event of a fire, theft or some other event. Renter’s insurance will pay for losses incurred while you are living in a rented residence by providing you with a cash payment to replace the items that have been lost or the damages incurred. Renter’s insurance can be purchased inexpensively and, like most other policies, has a deductible that must be met before a claim is paid. Many leasing companies require their tenants to purchase renter’s insurance before they are approved for the lease.

Both homeowner’s and renter’s insurance policies typically provide protection if personal property kept within your residence is lost or stolen; they also often provide coverage for certain medical and liability risks, such as “slip and fall” types of injuries in your home, as well as claims against you for libel or slander.

You are just starting your first job and need to get insurance. You have an insurance line item in your budget of $2,000 per year. Using that budget along with the Insurance: Independent Practice Worksheet that you’ll receive from your teacher, research the cost of life, health, auto and homeowner’s/renter’s insurance. Use your findings to make decisions about the types of insurance coverage you will be able to afford, knowing that they are all important. Your goal should be to prioritize the types of insurance you need and then to find pricing that will enable you to purchase life, health, auto and homeowner’s/renter’s insurance. Be prepared to discuss your findings with classmates.


Building Your Future, Book 2: Appendix 25

Appendix: Online Resources

Below you will find a list of additional resources related to the chapters in this book. These resources can be used to extend your understanding and study of the subjects in each section.

Chapter 1: Loans and InterestFinancial Industry Regulatory AuthorityUse a loan calculator to determine the monthly payment on a fixed-rate loan.http://apps.finra.org/Calcs/1/Loan

Chapter 2: Home LoansLoan CalculatorFree tool with a number of loan calculators that can be utilizedhttp://www.loanscalculator.org/

American Land Title AssociationArticle “Should You Refinance”http://www.alta.org/consumer/refinance.cfm

Chapter 3: Auto LoansCredit Union National Association (CUNA)Find free auto loan calculators that illustrate the cost of leasing vs. purchasinghttp://cucalc.cuna.org/10562/lease_vs_buya.html

Chapter 4: InsuranceLife and Health Insurance Foundation for EducationFind specific information about health and life insurance along with calculators for determining coverage and costhttp://www.lifehappens.org

Insurance Information InstituteIncludes information about all types of insurance, a glossary of insurance terms, and important facts and statistics related to insurancehttp://www.iii.org/


Building Your Future:Financing

A Student and Teacher Resource for Financial Literacy Education

Copyright © 2009, 2011, 2013The Actuarial Foundation

About This BookPersonal finance is part knowledge and part skill – and the Building Your Future book series gives students a foundation in both. It addresses knowledge by covering the essential principles of banking in Book One, financing in Book Two, investing in Book Three, and succeeding in Book Four. The series also addresses the mathematical skills that students need to live a financially healthy life. Students will be able to see the real-world consequences of mastering their finances, which helps them understand the relevance of good mathematical skills. We hope you enjoy this Building Your Future book series.

The catalyst for this book series was based on an original book authored and donated to The Actuarial Foundation by an actuary, James A. Tilley, FSA, who was interested in financial literacy education in schools. We thank Mr. Tilley for his original works that inspired this Building Your Future series.

About The Actuarial FoundationThe Actuarial Foundation, a 501(c)(3) nonprofit organization, develops, funds and executes education, scholarship, and research programs that serve the public and the profession by harnessing the talents and resources of actuaries. Through Advancing Student Achievement, a program that seeks to improve and enhance student math education in classrooms across the country, we are proud to add Building Your Future, a financial literacy education curriculum for teachers and students, to our library of math resources. Please visit the Foundation’s Web site at: www.actuarialfoundation.org for additional educational materials.

What is an Actuary? Actuaries are the leading professionals in finding ways to manage risk. It takes a combination of strong math and analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk. “Actuary” was included as one of the Best Jobs of 2012 as reported in the Wall Street Journal. To learn more about the profession, go to: www.BeAnActuary.org.

Table of Contents

Teacher’s Guide

Chapter 1: Loans and Interest ....................................................................................................................1 Chapter 2: Home Loans ................................................................................................................................8 Chapter 3: Auto Loans ............................................................................................................................... 11 Chapter 4: Insurance .................................................................................................................................. 20

Appendices

Online Resources ......................................................................................................................................... 25 “Did You Know?” Sources ......................................................................................................................... 26

Some of the activities in this book reference specific Web pages. While active at the time of publication, it is possible that some of these Online Resource links may be renamed or removed by their hosts at some point in the future. Note that these links were provided simply as a convenience; a quick search should reveal some of the many other online resources that can be used to complete these activities. Facts and opinions contained are the sole responsibility of the organizations expressing them and should not be attributed to The Actuarial Foundation and/or its sponsor(s).




Looking AheadWhen someone decides to borrow money, there is always a cost associated with that borrowing. It is important to know about loans, and to understand that a loan can have a significant effect on the overall purchase price of whatever it is you are buying. Through exploring the laws and regulations in place to protect consumers from lender abuses, students can learn how to determine when they should take a loan and what type of loan would best meet their needs.

Getting Organized• Studentswillneedapproximatelyoneclassperiodtocompletetheactivitiesforthislesson.• Whiletheuseofindividualcomputerswithspreadsheetsoftware(suchasExcel)bestfacilitatesthislesson’s activities, they can be completed as pencil/paper tasks. • MakecopiesoftheLoans and Interest: Independent Practice Spreadsheet if computers are unavailable.• MakeacopyoftheLoans and Interest Worksheet: Student Handout for each student. (optional)

Learning ObjectivesAs students focus on loans and interest, they will:

• Examinetheimportanceofestablishinggoodcreditandmaintainingtheircreditrating• Explorebothfixedandvariableinterestrateloansandhowtheseloansaffectthecostofanitem• Readaboutlawsdesignedtoprotectconsumerswhoutilizeloansforpurchases• Learnhowtoselectreputablelenders• Discusskeytermsassociatedwithloans,interestandlenders• Calculateinterestpaymentsonbothfixedandvariableinterestrateloans• Explorethepositiveandnegativeconsequencesofborrowingandlendingmoney• Createaseriesofspreadsheetstoanalyzetheprosandconsofborrowingvs.saving

Teacher’s Guide

Standards

JumpStart:

• Applyreliableinformationandsystematicdecisionmakingtopersonalfinancialdecisions Standard 2: Find and evaluate financial information from a variety of sources Standard 3: Summarize major consumer protection laws Standard 4: Make financial decisions by systematically considering alternatives and consequences• Organizepersonalfinancesanduseabudgettomanagecashflow Standard 4: Apply consumer skills to purchase decisions

NCTM:

• Understandmeaningsofoperationsandhowtheyrelatetooneanother• Computefluentlyandmakereasonableestimates• Usemathematicalmodelstorepresentandunderstandquantitativerelationships• Analyzechangeinvariouscontexts• Formulatequestionsthatcanbeaddressedwithdataandcollect,organize,anddisplayrelevantdatato

answer them• Developandevaluateinferencesandpredictionsthatarebasedondata


Key Terms• Loan:an amount of money borrowed and repaid with interest• Creditreport:a report detailing an individual’s credit history, including payments related to bills, loans, credit accounts and bankruptcies; used to determine one’s creditworthiness• Creditrating:a ranking, typically expressed as a number or letter, based on one’s credit history and used by financial institutions for loan and credit approval• Annualpercentagerate/APR:yearly rate of interest; calculated by multiplying the interest rate by 12 (number of months in a year)• Fixedinterestrate: interest rate that stays the same over the course of the loan• Variableinterestrate:interest rate that can change over the course of a loan• TruthinLendingAct:requires lenders to explain how they compute loan charges and list the annual percentage rate, also gives the borrower three business days to opt out of the loan• Loansharks:individuals who charge exorbitant interest rates on loans• Paydayloan:short-term, high interest loan

Teaching Strategies1. Discuss the “Did You Know” factoid and build on it to open a discussion of loans and interest. • Ask:How many of you would offer to pay the clerk at a store more than the amount due for an item you had just purchased with cash? Why? • Discussstudentanswerstothisquestion.Sincemostwillprobablyagreethattheywouldnotpay more money for the item, read the “Did You Know” factoid and then facilitate a short discussion using questions such as: If you aren’t willing to pay more money for an item when you purchase it with cash at a store, why would people be willing to pay over $9,000 more for a car? • Remindstudentsthattherewillbetimesinlifewhentheywillwantorneedtomakepurchasesforwhich they do not have the cash. In these situations, they are left with few options other than taking a loan. • Explainthattomakeinformeddecisionsabouttakingaloan,studentsmusthaveathorough understanding of what it means to take a loan in terms of responsibility and financial obligations.

2. Practice activities throughout the chapter are cumulative and will assist students with the completion of the Independent Practice assignment. You can facilitate these activities using a computer and projector, with students at individual computers, or longhand on the board or overhead.

3. Direct students to complete the Independent Practice assignment. All students should answer the question: Which loan option did you select? Why?Use the Loans and Interest: Independent Practice Answer Keys page for grading/discussing the assignment.

• Ifindividualcomputersareavailable,directstudentstocompletetheactivityusingcomputers.They should print out their final copies for submission upon completing the activity. • Iftheassignmentistobecompletedwithoutacomputer,directstudentstoconstructtheirown spreadsheets longhand on the Loans and Interest: Independent Practice Spreadsheet and show their calculations in writing.

4. For additional practice on each concept in the chapter, distribute the Loans and Interest Worksheet: Student Handout as homework or as an additional classroom practice activity.


5. Correct the Loans and Interest Worksheet: Student Handout as a group, encouraging volunteers to share andexplaintheiranswers.Answerquestionsasneededduringthisreviewactivity.UsetheLoans and Interest Worksheet: Answer Key for this activity.

6. To extend student learning, invite a local lender into the classroom to show students a typical loan application and talk to them about the process of obtaining a loan. Have students prepare questions in advance so they can ask the lender about specific topics relating to loans for young people. Have the lender explain in more detail the laws that are designed to protect borrowers.

Assessment Recommendations1. Students could be assigned participation/completion grades for doing the in-class activities and the “ExamplesandPractice”activities.

2. Students should receive individual grades for their completion of the Independent Practice assignment and Loans and Interest Worksheet. These could be completion grades, accuracy grades or a combination of both based on teacher discretion.

3. Assess participation, completion and/or accuracy grades for the extended student learning activity in step 6, above.


Loans and Interest: Independent Practice Spreadsheet

Name Date

A B C D E F G

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32


Loans and Interest: Independent Practice Answer Key

Independent Practice Answer Key A

Independent Practice Answer Key B

A B C D E F

1 Bank Loan


BeginningOutstanding

BalanceInterest

PaymentLoan

PaymentEnding

Outstanding Loan

3 1 0.92% $1,500.00 $13.80 $160.00 $1,353.80

4 2 0.92% $1,353.80 $12.45 $160.00 $1,206.25

5 3 0.92% $1,206.25 $11.10 $160.00 $1,057.35

6 4 0.92% $1,057.35 $9.73 $160.00 $907.08

7 5 0.92% $907.08 $8.35 $160.00 $755.43

8 6 0.92% $755.43 $6.95 $160.00 $602.38

9 7 0.92% $602.38 $5.54 $160.00 $447.92

10 8 0.92% $447.92 $4.12 $160.00 $292.04

11 9 0.92% $292.04 $2.69 $160.00 $134.72

12 10 0.92% $134.72 $1.24 $135.96 $0.00

13

A B C D E F

1 Savings Account


BeginningAccount Balance

Interest Payment Deposits

Ending Account Balance

3 1 0.23% $0.00 $0.00 $160.00 $160.00

4 2 0.23% $160.00 $0.37 $160.00 $320.37

5 3 0.23% $320.37 $0.74 $160.00 $481.10

6 4 0.23% $481.10 $1.11 $160.00 $642.21

7 5 0.23% $642.21 $1.48 $160.00 $803.69

8 6 0.23% $803.69 $1.85 $160.00 $965.54

9 7 0.23% $965.54 $2.22 $160.00 $1,127.76

10 8 0.23% $1,127.76 $2.59 $160.00 $1,290.35

11 9 0.23% $1,290.35 $2.97 $160.00 $1,453.32

12 10 0.23% $1,453.32 $3.34 $160.00 $1,616.66

13 11 0.23% $1,616.66 $3.72 $160.00 $1,780.38

14 12 0.23% $1,780.38 $4.09 $160.00 $1,944.48

15


Loans and Interest Worksheet: Student Handout

Name Date

Directions:Usewhatyouhavelearnedaboutloansandinteresttosolveeachproblembelow.Beprepared to discuss your answers.

1. When a person applies for a loan at a bank, the bank must decide whether or not the person will be able to repay the loan. List at least three things the bank will consider before making the loan.

2. When shopping for a loan, what types of questions should the borrower ask? List at least three specific questions.

3. You need to take a one-year loan. At the moment the fixed interest rate is high at 8.75% APR. The bankoffersyouanadjustablerateloanwitharatebeginningat6.5%APR.Theinterestratecould increase as much as 3% over the course of the loan. Which loan would you select? Why?


Loans and Interest Worksheet: Teacher Answer Key

Directions:Usewhatyouhavelearnedaboutloansandinteresttosolveeachproblembelow.Beprepared to discuss your answers.

1. When a person applies for a loan at a bank, the bank must decide whether or not the person will be able to repay the loan. List at least three things the bank will consider before making the loan.

Answers will vary but could include: Ability to repay the loan (i.e. income), credit rating, amount being requested in the loan, interest rate the borrower might be charged, etc.

2. When shopping for a loan, what types of questions should the borrower ask? List at least three specific questions.

Answers will vary but could include: interest rate, cost of getting the loan, pre-payment penalties, amount of time allowed to repay the loan, etc.

3. You need to take a one-year loan. At the moment the fixed interest rate is high at 8.75% APR. The bankoffersyouanadjustablerateloanwitharatebeginningat6.5%APR.Theinterestratecould increase as much as 3% over the course of the loan. Which loan would you select? Why?

Answers will vary based on the amount of risk a borrower is willing to take. Things to take into consideration include current loan trends—whether rates are going up or down—as well as whethertheborrowercanreallyaffordtheloanat9.5%ifinterestratesrise.Creatingaspreadsheet to illustrate possible scenarios would be one way for students to determine which loan would best suit their needs.



Looking AheadPurchasing a home is one of the biggest investments a person will ever make. A home is also an important asset to include when determining one’s financial health. There are many factors to consider when purchasing ahome,suchasdownpayments,interestratesandthetermsoftheloan.Thesefactorsaffecttheoverallpricepaid for the home. We’ll look at all the things that need to be considered when it comes to financing a home.

Getting Organized• Studentswillneedapproximatelyoneclassperiodtocompletetheactivitiesforthislesson.• AccesstotheInternetand/orcomputerswithspreadsheetsoftwarewouldmakecompletionofthelesson more efficient. • Ifspreadsheetsoftwareisnotavailable,considertheuseofcalculators(onlineorhandheld)forloan comparison purposes in the activities.

Learning ObjectivesAs students learn about home loans and how to select a home loan that best suits their needs, they will:

• DiscusskeytermsassociatedwithhomeloansandtheTruthinLendingAct• Practiceusingformulasandcalculationstocomparefixedandvariableinterestrateloansofvaryingterms• Analyzeinformationabouttheoverallcostsofvarioushomeloanoptionsandselecttheloanthatbest suits their needs and their ability to repay the loan• Examinevarioustypesofloaninterestoptionsandtheeffecttheyhaveonthehome’soverallprice

Teacher’s Guide

Standards

JumpStart:

• Applyreliableinformationandsystematicdecisionmakingtopersonalfinancialdecisions Standard 2: Find and evaluate financial information from a variety of sources Standard 3: Summarize major consumer protection laws Standard 4: Make financial decisions by systematically considering alternatives and consequences• Organizepersonalfinancesanduseabudgettomanagecashflow Standard 4: Apply consumer skills to purchase decisions• Maintaincreditworthiness,borrowatfavorableterms,andmanagedebt Standard 1: Identify the costs and benefits of various types of credit Standard 4: Summarize major consumer credit laws

NCTM:




Learning Objectives (continued)• Considerothercostsassociatedwithobtaininghomeloans• Readaboutrefinancingoptionsandhowtopreventforeclosureonahomeloan

Key Terms• Mortgage: a loan used to purchase a home• Down payment: the amount of money a buyer pays in cash for the purchase of a house• Interest: money that is paid to the lender by the borrower for the use of the lender’s money• Principal: the original borrowed amount• Interest rate: percentage paid to the lender for the privilege of borrowing the money• Creditrating:a ranking, typically expressed as a number or letter, based on one’s credit history and used by financial institutions for loan and credit approval• Fixedinterestrate: interest rate that stays the same over the course of the loan• Variableinterestrate:interest rate that can change over the course of a loan• Lifetime cap: a limit on how much the interest rate of a variable-rate loan can increase • Equity: a home’s market value less the outstanding mortgage balance• Amortization schedule: a schedule for repaying the loan• Closing costs: fees paid in addition to the cost of the home• Pre-payment penalties:feesdesignedtokeeptheborrowfrompayingtheloanoffearly• Escrow: property or money held by a third party until the terms of a contract are met• TruthinLendingAct:requires lenders to explain how they compute loan charges and list the annual percentage rate, also gives the borrower three business days to opt out of the loan• Refinancing:payingofftheoriginalloanbytakingoutanew,typicallymorefavorableloan• Delinquent: past due on a scheduled loan payment• Workout: formal repayment or loan forgiveness arrangement between a borrower and lender• Foreclosure: legal process that allows a lender to seize property if the mortgage loan is not paid; typically, the lender sells the property and applies the proceeds to the outstanding debt

Teaching Strategies1. Practice activities throughout the chapter are cumulative and will assist students with the completion of the Independent Practice assignment. You can facilitate these activities using a computer and projector, with students at individual computers, or longhand on the board or overhead.

2. Have students brainstorm a list of specific things they can do, even at a young age, to establish and maintain a good credit history. Record the items on the board/overhead.

3.Bynow,studentsprobablyhaveagoodunderstandingofinterestrates.Explaintheconceptofafixedrate/ conventionalloanvs.avariablerate/adjustableloan.Usealoancalculator(suchastheoneavailableat http://www.loanscalculator.org) to illustrate the amount of money saved or spent over the course of a loan simply because of the interest rate.


4.Usingtheloancalculatorathttp://www.loanscalculator.org/, Work as a class to complete the Try It activities on pages 10 and 11 of the student guide, using the data to address the questions related to the overall cost of the home based on the page 10 questions and the questions related to refinancing on page 11. Note that when calculating variable interest rates, students will need to use the ending balance for the previous year for the new loan amount. This will require inputting a new loan amount each time the interest rate variesontheloan.Usethisasanopportunitytodiscusstheimportanceofshoppingforthebestinterest rate, loan terms, and the type of loan that will best match one’s ability to repay. If time allows, use this opportunity to visit http://www.alta.org/consumer/refinance.cfm to read and discuss the article “Should You Refinance?”

5. Direct students to the Independent Practice assignment and review the instructions. Students should use the calculator at http://www.loanscalculator.org/ to assess the various loan scenarios. Remind students that they simply need to shop for a loan. They will need to compare a fixed-rate loan to a variable-rate loan using the same process practiced in the Try It activities from the chapter. In both cases, they will be financing a $200,000 home with a 20% down payment. Students should answer the four questions related to their loan selection on a separate sheet of paper and be prepared to share their findings with classmates.

6. When all students have completed the assignment, divide students into two groups. Those who selected fixed rate loans should go to one side of the room, those who selected variable rate loans should go to the other side. Select students from each group to answer the four questions related to their loan. Compare the reasons why some students chose fixedrates and others chose variable rates.

Assessment Recommendations1. Students could be assigned participation/completion grades for all discussion and group activities.

2. Accuracy grades should be assigned for the spreadsheets and calculations completed for the Independent Practice activity.

3. A completion grade could be assigned for the answers students wrote for the four questions pertaining to their loan selection in the Independent Practice activity.

Extension Activities1. So that students can better understand the loan process and the importance of a good credit rating, have the students complete a loan application and discover the types of documentation and information a home buyer must provide to the lender to secure a home loan.

2. Invite a lender in to speak about the mortgage loan process and the importance of good credit.



Looking AheadThere are many factors to consider when purchasing a car. Given the potentially significant costs, it is important to consider a wide range of factors when selecting a vehicle and determining how to pay for it. By learning about concepts such as trade-in and book value and knowing how to analyze dealer incentives, students will be able to determine whether leasing or purchasing is a more sensible, cost-efficient method of obtaining a car.

Getting Organized• Studentswillneedapproximatelyoneclassperiodtocompletetheactivitiesforthislesson.• Whiletheuseofindividualcomputerswithspreadsheetsoftware(suchasExcel)bestfacilitatesthe activities in the lesson, activities can be completed by hand as well. • MakeacopyoftheAuto Loans: Lease vs. Purchase Handout for each student.• MakeacopyoftheAuto Loans: Independent Practice Handout for each student.

Learning ObjectivesAs students learn about the basics of auto loans, they will:

• Discusskeytermsassociatedwithmakingacarloan• Considerwhethertobuyaneworpre-ownedvehicle• Applytheprosandconsbetweenleasingandpurchasingavehicle• Calculateautoloanandleasepaymentsbycreatingandanalyzingspreadsheetsandutilizingonline calculators• Makedecisionsaboutautofinancingoptionsbasedondatarelatedtoindividualneedsandfinancial situations

Teacher’s Guide

Standards

JumpStart:

• Applyreliableinformationandsystematicdecisionmakingtopersonalfinancialdecisions Standard 2: Find and evaluate financial information from a variety of sources Standard 4: Make financial decisions by systematically considering alternatives and consequences• Organizepersonalfinancesanduseabudgettomanagecashflow Standard 4: Apply consumer skills to purchase decisions• Maintaincreditworthiness,borrowatfavorableterms,andmanagedebt Standard 1: Identify the costs and benefits of various types of credit

NCTM:




Key Terms• Trade-in value: amount the dealer gives you for the car you’re providing as partial payment for the car you wish to purchase• Book value: how much a particular car is worth based on its condition, mileage and other factors• Incentives:factorssuchasspecialfinancerates,rebatesorotheroffersdesignedtoencouragebuyersto purchase a vehicle• Lease: paying only a portion of the vehicle’s sales price and returning it to the dealer at the end of the specified time • Purchase: paying the car’s full price and keeping it for as long as you want

Teaching Strategies1. Select a student to read the “Did You Know” factoid aloud. • Ask:What are the hidden costs of owning a car that people sometimes overlook? • Recordthislistontheboardoroverhead.Someitemsthatshouldbeincludedare: • Insurance • Maintenance(oilchanges,tires,etc.) • Salestax(attimeofpurchase) • Propertytax(annually,ifapplicable) • Inspectionandlicensingfees(annual,ifapplicable) • Gasoline • Discussbrieflywhythesecostsshouldbeconsideredaspartofthecarbuyingprocess.

2. Practice activities throughout the chapter are cumulative and will assist students with the completion of the Independent Practice assignment. You can facilitate these activities using a computer and projector, with students at individual computers, or longhand on the board or overhead.

3. Review the “Lease vs. Purchase: Pros and Cons” chart in the student materials and distribute the Auto Loans: Lease vs. Purchase Handout to each student. Have students work in pairs or small groups to complete the spreadsheet created earlier and answer each question. Discuss the answers as a group, pointing out the pros and cons of purchasing and leasing as you go. See Auto Loans: Lease vs. Purchase Handout Answer Key.

4. So that students can apply what they have learned and practice their consumer decision-making skills, distribute the Auto Loans: Independent Practice Handout as homework or as an additional classroom practice activity.

5. Discuss the Auto Loans: Independent Practice Handout as a group, encouraging volunteers to share and explain their answers. Ask students to share the processes they used for calculating the cost of the vehicles and how the prices of the vehicles relate to the overall funds available. Refer back to the “factoid” and discuss the percentage of income that will be spent on the purchase option the student selected. Discuss reasons why young buyers may be able to spend more of their income on cars than their parents can. See Auto Loans: Independent Practice Answer Key.


6. To extend student learning, use newspapers or the Internet and review current “sales” and “specials” on cars. Useonlinecalculatorsorthespreadsheetcreatedfortheassignmentandhavestudentsdetermine whether or not these “deals” are truly money savers for potential buyers.

Assessment Recommendations1.Studentscouldbeassignedparticipation/completiongradesforthein-classand“ExamplesandPractice” activities.

2. Students should receive accuracy and participation grades for their completion of the Auto Loans: Lease vs. Purchase Handout and related activities.

3. Assign completion and participation grades for the Auto Loans: Independent Practice Handout and related discussion.

4. Assess participation, completion and/or accuracy grades for the extended student learning activity in step 6, above.


Auto Loans: Lease vs. Purchase Handout

Name Date

Directions:Belowyouwillfindtwodifferentscenarios:oneforpurchasingacar,oneforleasingthesamecar.Usethedataprovidedtoanswerthequestionsbeloweachscenario.Bepreparedtousethisinformationinclassdiscussion.Usetheautoloancalculatorathttp://www.loanscalculator.org/auto-loan-calculator.html to assist you with calculating loan costs.

Scenario 1You want to buy a car that costs $25,000. You will take a 48-month loan. You have $2,000 saved for a downpayment.Thedealerisalsoofferinga$6,000rebateasanincentive.Youdonothaveacartotrade in. You also qualify for a first-time buyer incentive of $500. Your interest rate on the loan will be 6.5%. You will have to pay 7.5% sales tax on the car when you purchase it, and it will cost you $25 per year to license the car. You will pay property tax of $480 on the car each year. Your monthly insurance premium on the car is $56 per month.

1. What is the total cost of the car over four years including all principal, interest, taxes, insurance and fees?

2. What is your monthly loan payment for the car including principal and interest?

3. After you have repaid the loan, what will you pay annually for taxes, insurance and fees?

4. If you keep the car for seven years, how much money will you have spent in principal, interest, taxes, insurance and fees?


Name Date

Scenario 2You want to lease a $25,000 car for 48 months. You will not make a down payment. You must pay a $500 security deposit on the car before you leave the dealership. There is an additional fee of $250 for the cost of completing the dealer lease paperwork. Your total monthly lease payment is $383 per month. In your lease agreement, it has been determined that the value of the car will be $14,000 at the end of the lease term. You are allowed 12,000 miles per year for the car, and the mileage fee for overages is $.25 per mile. You pay $68 per month for insurance, and it costs you $25 per year to license the car. There is a $1,500 early termination fee on the lease. There is a $500 penalty if you turn the car in with “excess wear and tear.”

1. What is the total cost of the car over four years including all payments, insurance and fees?

2. You are in a car accident during the last year of the lease and the car is a total loss, thus ending the leaseearly.Howwillthisaffectyou?

3.Attheendofyour48-monthlease,yougotothedealertotradethecarinforanother.Upon reviewing the odometer, the dealer notices that it reads 59,825 miles. What will happen?

4. When you go to return the car, you decide you like it and want to purchase it. How much will this cost you?

Auto Loans: Lease vs. Purchase Handout


Auto Loans: Lease vs. Purchase Handout Answer Key

Directions:Belowyouwillfindtwodifferentscenarios:oneforpurchasingacar,oneforleasingthesamecar.Usethedataprovidedtoanswerthequestionsbeloweachscenario.Bepreparedtousethisinformationinclassdiscussion.Usetheautoloancalculatorathttp://www.loanscalculator.org/auto-loan-calculator.html to assist you with calculating loan costs.

Scenario 1You want to buy a car that costs $25,000. You will take a 48-month loan. You have $2,000 saved for a downpayment.Thedealerisalsoofferinga$6,000rebateasanincentive.Youdonothaveacartotrade in. You also qualify for a first-time buyer incentive of $500. Your interest rate on the loan will be 6.5%. You will have to pay 7.5% sales tax on the car when you purchase it, and it will cost you $25 per year to license the car. You will pay property tax of $480 on the car each year. Your monthly insurance premium on the car is $56 per month.

1. What is the total cost of the car over four years including all principal, interest, taxes, insurance and fees? $26,875.63 (based on auto loan calculator at http://www.loanscalculator.org/auto-loan- calculator.html) Down Payment = $2,000.00 Principal = $16,500.00 Interest = $2,280.13 Sales tax = $1,387.50 ($18,500 x 7.5% ) Property tax = $1,920 ($480 x 4 years) Insurance = $2,688 ($56 x 48 months) Fees (licensing) = $100 ($25 x 4 years)

2. What is your monthly loan payment for the car including principal and interest? $391.30 (financed $16,500 at 6.5% for 48 months)

3. After you have repaid the loan, what will you pay annually for taxes, insurance and fees? $1,177 ($480 for property taxes + $56 x 12 = $672 for insurance + $25 for licensing)

4. If you keep the car for seven years, how much money will you have spent in principal, interest, taxes, insurance and fees? $30,256.63 (Answer to question 1 above + answer to question 3 above x 3)


Scenario 2You want to lease a $25,000 car for 48 months. You will not make a down payment. You must pay a $500 security deposit on the car before you leave the dealership. There is an additional fee of $250 for the cost of completing the dealer lease paperwork. Your total monthly lease payment is $383 per month. In your lease agreement, it has been determined that the value of the car will be $14,000 at the end of the lease term. You are allowed 12,000 miles per year for the car, and the mileage fee for overages is $.25 per mile. You pay $68 per month for insurance, and it costs you $25 per year to license the car. There is a $1,500 early termination fee on the lease. There is a $500 penalty if you turn the car in with “excess wear and tear.”

1. What is the total cost of the car over four years including all payments, insurance and fees? $22,498 Payments = $18,384 ($383 x 48 months) Insurance = $3,264 ($68 x 48 months) Licensing = $100 ($25 x 4 years) Fees = $750 (security deposit and paperwork)

2. You are in a car accident during the last year of the lease and the car is a total loss, thus ending the leaseearly.Howwillthisaffectyou? You will potentially have to pay the $1,500 for early lease termination along with the $500 for “excess wear and tear.”

3.Attheendofyour48-monthlease,yougotothedealertotradethecarinforanother.Upon reviewing the odometer, the dealer notices that it reads 59,825 miles. What will happen? You will have to pay a mileage overage charge of $2,956.25 because you exceeded the 48,000 miles you were allowed (12,000 x 4 years) by 11,825 miles (59,825 – 48,000) and the cost per mile is $.25 (11,825 x .25)

4. When you go to return the car, you decide you like it and want to purchase it. How much will this cost you? The car will be worth $14,000 at that time, so you will have to finance $13,500 at the current rate and for a period of time that you select. (This is $14,000 less the refundable $500 security deposit.)

Auto Loans: Lease vs. Purchase Handout Answer Key


Auto Loans: Independent Practice Handout

Name Date

Directions: You want to purchase your first car. Below is data related to the two cars you are considering. Study the data, use spreadsheets you have created, and use the online calculators at http://cucalc.cuna.org/1/lease_vs_buya.html to help you determine which car you will purchase. Be prepared to defend your selection in class discussion.

Buyer Data:• Highschoolsenior• Has$1,500savedforadownpayment• Workspart-timeearningapproximately$150perweek• Planningtoattendcollegeawayfromhomeaftergraduation• Hasagooddrivingrecordandhasmaintainedgoodgrades,soqualifiesfordiscountsoninsurance, making monthly insurance premiums $100• Doesnotcurrentlyownacar

Car 1:• New,currentmodelyearcompactcar• Priceis$16,000• Dealerincentives=$2,000cashrebateor3.9%financingfor60months• Dealeroffersafirst-timebuyerdiscountof$500• Interestrateona48-monthloanis6.5%• Youcouldleasethevehicle

Car 2:• Usedcar,threeyearsold,40,000miles• Priceis$9,000• Interestrateona48-monthloanis7%• Leasingthevehicleisnotanoption

1. Which car did you decide to purchase? Why?

2. How will you be paying for the car?

3. What will your total cost for the car be at the end of your loan/lease?

4.Whatfactorsinfluencedyourbuyingandfinancingdecisions?


Auto Loans: Independent Practice Answer Key

Directions: You want to purchase your first car. Below is data related to the two cars you are considering. Study the data, use spreadsheets you have created, and use the online calculators at http://cucalc.cuna.org/1/lease_vs_buya.html to help you determine which car you will purchase. Be prepared to defend your selection in class discussion.

Buyer Data:• Highschoolsenior• Has$1,500savedforadownpayment• Workspart-timeearningapproximately$150perweek• Planningtoattendcollegeawayfromhomeaftergraduation• Hasagooddrivingrecordandhasmaintainedgoodgrades,soqualifiesfordiscountsoninsurance, making monthly insurance premiums $100• Doesnotcurrentlyownacar

Car 1:• New,currentmodelyearcompactcar• Priceis$16,000• Dealerincentives=$2,000cashrebateor3.9%financingfor60months• Dealeroffersafirst-timebuyerdiscountof$500• Interestrateona48-monthloanis6.5%• Youcouldleasethevehicle Option 1: Do a four-year lease and use the calculator to find a lease payment of $210.10 per month. Option 2: Take the $2,000 cash rebate and finance the remainder at 6.5% for 48 months for a payment of $284.58 per month. Option3:Usethe3.9%financingfor60monthsforapaymentof$257.20,notingthatthepayments will continue for five years, not four.

Car 2:• Usedcar,threeyearsold,40,000miles• Priceis$9,000• Interestrateona48-monthloanis7%• Leasingthevehicleisnotanoption Option: Purchase car at 7% for 48 months for a payment of $179.60 knowing that by the time the car ispaidoffitwillbesevenyearsoldandprobablyhavenearly90,000milesonit.

1. Based on the buyer data and information about each car, which one did you decide to purchase? Why? Answers will vary.

2. How will you be paying for the car? Answers will vary.

3. What will your total cost for the car be at the end of your loan/lease? Answers will vary.

4.Whatfactorsinfluencedyourbuyingandfinancingdecisions?Answers will vary.



Looking AheadInsurance of all types is important in preventing financial ruin due to illness, injury, property loss, and even death. By learning about the types of insurance, students will be able to minimize their financial risk through purchasing and utilizing insurance policies that meet their financial needs and goals.

Getting Organized• Studentswillneedapproximatelyoneclassperiodtocompletetheactivitiesforthislesson.• MakeacopyoftheInsurance: Independent Practice Handout for each student.

Learning ObjectivesAs students learn about the basics of insurance, they will: • Discusskeytermsassociatedwithlife,health,autoandhomeowner’s/renter’sinsurance• Learnwhattypesofinsurancearerequiredbylawandwhytheyarerequired• Describethespecificneedsaddressedbyeachtypeofinsuranceandthecostfactorsforeachtype of policy• Weighthecostofinsurancepremiumsagainsttherisksassociatedwithnotcarryingvarioustypes of insurance• Discoverwaystosavemoneyoninsurancepremiumswithdiscounts,bundlingpoliciesandselecting cost-saving options• Makedecisionsonpurchasingvariousinsurancepoliciesbasedoncostandindividualneeds

Teacher’s Guide

Standards

JumpStart:

• Applyreliableinformationandsystematicdecisionmakingtopersonalfinancialdecisions Standard 2: Find and evaluate financial information from a variety of sources Standard 4: Make financial decisions by systematically considering alternatives and consequences• Organizepersonalfinancesanduseabudgettomanagecashflow Standard 4: Apply consumer skills to purchase decisions• Useappropriateandcost-effectiveriskmanagementstrategies Standard2:Explainthepurposeandimportanceofpropertyandliabilityinsuranceprotection Standard3:Explainthepurposeandimportanceofhealth,disability,andlifeinsuranceprotection

NCTM:

• Understandmeaningsofoperationsandhowtheyrelatetooneanother• Computefluentlyandmakereasonableestimates• Usemathematicalmodelstorepresentandunderstandquantitativerelationships• Analyzechangeinvariouscontexts• Formulatequestionsthatcanbeaddressedwithdataandcollect,organize,anddisplayrelevantdata to answer them• Developandevaluateinferencesandpredictionsthatarebasedondata


Key Terms• Insurance: promised payment for specific future losses should they occur in exchange for a payment called

a premium• Insurer: a company that pays to compensate the policyholder for losses or damages as described in an

insurance policy as long as the premium is paid• Insurance policy: a written contract between an insurer and a customer (the policyholder) describing the

term of the insurance, what is covered, the cost of the premium and the deductible amount • Policyholder: the owner(s) of an insurance policy• Premium: the periodic payment for an insurance policy• Claim: a policyholder’s official notification to the insurance company requesting payment of an amount

due for a covered loss• Deductible: a dollar amount a policyholder pays before the insurer starts to make payments for a covered

loss• Life insurance: money paid to a designated person/group of people when you die• Risk: the probability that something negative may happen• Beneficiary: the person(s) who will receive the insurance payout in the event that you die• Estate: wealth and possessions left by someone to be divided after they die• Health insurance: protects you from monetary losses associated with illness or bodily injury• Coverage: what the insurance company includes as part of the insurance policy• Benefits: specific services the insured is entitled to under the policy• Co-pay: a form of cost-sharing that requires the insured to pay a fixed dollar amount for a medical service or prescription• Co-insurance: a form of cost-sharing that requires the insured to pay a set percentage of medical expenses

after the deductible has been met• FlexibleSpendingAccount/FSA: allows people to put a set amount of wages into a special account

without paying taxes on those wages; money in this account can be used to pay for uncovered medical expenses such as co-pays, the deductible, and co-insurance payments

• COBRA: a law that allows a person to continue to be covered under the company’s health insurance plan for a specified amount of time as long as s/he pays for that coverage

• Auto insurance: a means of protecting you and others in the event of an accident, theft, etc.• Homeowner’s and renter’s insurance: protects you from financial loss if your home is damaged or

destroyed, a theft occurs, or you face certain types of medical or liability claims

Teaching Strategies1. Divide the class into four small groups and assign each group one of the four types of insurance discussed

in the chapter: life, health, auto or homeowner’s/renter’s. Provide the groups with 15-20 minutes of class time to read and discuss the content and create a poster that represents what they learned about their particular type of insurance. In addition, the group should devise a concise way of reinforcing key concepts forclassmates.Encouragecreativitythroughtheuseofskits,songs,acronyms,etc.tohelpstudentsremember key concepts. Finally, each group should develop three to five quiz questions related to the type of insurance they presented.


2. Provide five minutes for each group to present their type of insurance. To engage the students in the audience while the reports are being given, direct them to the particular section of the chapter or the chart that summarizes the insurance information in that section. You can put a checkmark by each of the key characteristics as they are orally presented by the reporting group. Collect the quiz questions from each group as they finish their presentations.

3. After all groups have presented their work, direct students to take out a sheet of paper and label it “Insurance Quiz.” Read the quiz questions provided by each group and provide students with time to answereachquestion.Uponcompletionofthequiz,discusseachquestionandusethequestionsascatalysts for further discussion.

4. So that students can apply what they have learned and practice their consumer decision-making skills, distribute the Insurance: Independent Practice Handout as homework or an additional classroom practice activity. Discuss the activity directions and guide students using questions such as: • Ofthefourtypesofinsurancelisted,whichdoyouthinkismostimportanttoyou?Why? • Whataresomeofthepossiblenegativeconsequencesofnothavingeachofthefourtypesofinsurance? • Whatfactorsdoyouthinkwillhaveaneffectonthecostofeachofthefourtypesofinsurance(i.e.poor driving record = higher auto premium, bad habits such as smoking could = higher health premiums) • Wouldyouconsidertakinghigherdeductiblessoyoucouldaffordallfourtypesofcoverage?Why?

5. Discuss the Insurance: Independent Practice Handout as a group, encouraging volunteers to share and explaintheiranswers.Usequestionssuchasthefollowingtoguidethediscussion. • Polltheclasstofindouthowmanystudentswereabletoaffordallfourtypesofinsurancecoverage. • Ask: What did you have to do in order to be able to meet your $2,000 budget and still get life, health, autoandhome/rentersinsurance?Encouragestudentstotalkabouttakinghigherdeductibles,having good habits and “bundling” policies with the same insurance provider in order to get lower rates. • Pollstudentswhodidnotoptforallfourtypesofcoverage;seewhichtypeofcoveragewasmost often eliminated and why. Discuss the reasons and the possible consequences for these students. • Ask: If insurance is important, what can you do now so you will be have access to all types of coverage when you leave home? (Maintaining a safe driving record, shopping around for rates, etc.)

Assessment Recommendations1. Students could be assigned participation/completion grades for the in-class activities.

2. Students should receive accuracy grades for completion of the Insurance: Independent Practice Handout since it requires precise calculation and analysis of information. Note: As individual answers will vary, no answer key has been provided for this worksheet.

3. Assign participation or completion grades for the extended student learning activity below.

Extension ActivityTo extend student learning, use newspapers or the Internet to monitor insurance-related issues in your city,state,andthecountry.Encouragestudentstobringinexamplesofstoriesthatillustratetheimportance of the various types of insurance discussed and share them with the class. Post these stories on an insurance awareness bulletin board for others to see.


Insurance: Independent Practice Handout

Name Date

You are just starting your first job and need to get insurance. You have an insurance line item in your budgetof$2,000peryear.Usingthechartbelow,conductresearchaboutthecostoflife,health,autoandhomeowner’s/renter’sinsurance.Useyourfindingstomakedecisionsaboutthetypesofinsurancecoverageyouwillbeabletoafford,knowingthattheyareallimportant.Yourgoalshouldbetoprioritize the types of insurance you need and then to find pricing that will enable you to purchase life, health, auto and homeowner’s/renter’s insurance. Be prepared to discuss your findings with classmates. Some helpful research links are shown below.

Life and Health Insurance Foundation for Educationhttp://www.lifehappens.orgInsurance Information Institutehttp://www.iii.org/

ResearchFindingsType of

Insurance Coverage Deductible ApproximateCost

Life

Health

Auto

Home


Insurance: Independent Practice Worksheet

1. Based on your $2,000 annual budget, what type(s) of insurance did you elect to purchase?

2. Why did you select these types of insurance?

3. What risks do you manage by selecting these types of insurance?

4. What risks do you run by not selecting the remaining types of coverage(s)?

5. Of the four types of insurance researched, which do you think is most important? Why? How might this change in the next five years? How might this change 10 years from now? Why?

6. Why do you think the cost of health insurance is so high?

7. Do you think it’s fair that everyone does not pay the same amount of money for life, health, auto and homeowner’s/renter’s insurance? Why?

8. In your opinion, what is the best type of life insurance for you? Why?

9. Based on what you have learned, what types of insurance do you think you will purchase as an adult? Why?

10. What questions do you still have about insurance?

Insurance: Independent Practice Handout

Building Your Future, Book 2: Appendix 25

Appendix: Online Resources

Below you will find a list of additional resources related to the chapters in this book. These resources can be used to extend your understanding and study of the subjects in each section.

Chapter 1: Loans and InterestFinancialIndustryRegulatoryAuthorityUsealoancalculatortodeterminethemonthlypaymentonafixed-rateloan.http://apps.finra.org/Calcs/1/Loan

Chapter 2: Home LoansLoan CalculatorFree tool with a number of loan calculators that can be utilizedhttp://www.loanscalculator.org/

American Land Title AssociationArticle “Should You Refinance”http://www.alta.org/consumer/refinance.cfm

Chapter 3: Auto LoansCredit Union National Association (CUNA)Find free auto loan calculators that illustrate the cost of leasing vs. purchasing http://cucalc.cuna.org/10562/lease_vs_buya.html

Chapter 4: InsuranceLife and Health Insurance Foundation for EducationFind specific information about health and life insurance along with calculators for determining coverage and costhttp://www.lifehappens.org

Insurance Information InstituteIncludes information about all types of insurance, a glossary of insurance terms, and important facts and statistics related to insurancehttp://www.iii.org/


26 Building Your Future, Book 2: Appendix

?Appendix: “Did You Know” Sources

Below you will find a list of sources for the “Did You Know” statements at the beginning of each chapter in the student guides.

Chapter 1: Loans and InterestIf you buy a $35,000 car and take a six-year loan at a rate of 7.9%, you will end up paying over $9,000 in interest on the car, making the total cost of the car $44,000. Source: Cars.com Auto Loan Calculator http://www.cars.com/go/advice/financing/calc/loanCalc.jsp?mode=full

Chapter 2: Home LoansFor the vast majority of American homeowners, their home is their most important financial asset. Some 34% of homeowners say their home accounts for “all or most” of their personal financial worth and another 34% say it represents about half of their worth.Source: Pew Research Center Social Trends Report, December 6, 2006

Chapter 3: Auto LoansAccording to the Department of Labor’s Bureau of Labor Statistics, the annual cost of car ownership and operation is 17% of the average household’s expenditures, ranking second only to the cost of housing. Source: Bureau of Labor Statistics http://www.bikesatwork.com/carfree/cost-of-car-ownership.html

Chapter 4: InsuranceNearly 48 million nonelderly Americans were uninsured in 2011, a decline of 1.3 million since 2010. In total, nine in ten of the uninsured are in low- or moderate-income families.Source: Kaiser Family Foundation, September 2012 http://www.kff.org/uninsured/upload/7806-05.pdf


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