Chapter 8

Question 1

What are the two components to car payments?

Answer 1

down payment (cash, trade-in, or both); monthly payment

Question 2

What is a car monthly payment?

Answer 2

35% or less of gross income should service all debt (and rent)

Question 3

How should we decide between a dealer loan and a bank loan?

Answer 3

dealer loan may be lower rate, but don’t get rebate, so bank loan may be cheaper

Question 4

What is the recommended term for a car loan?

Answer 4

no longer than 4 years

Question 5

What percentage should be budget for registration/taxes/other out-of-pocket fees?

Answer 5

extra 7-8%

Question 6

What is the Texas tax on the sale of automobiles?

Answer 6

6.25%

Question 7

What are the three types of traction control?

Answer 7

2WD, 4WD, AWD

Question 8

What are the three types of “style factor?”

Answer 8

2-door vs. 4-door, convertible vs. hard top, color combination

Question 9

Give 6 general characteristics/practices you should observe when checking out a car.

Answer 9

tires; brakes; check engine light on; A/C + heat; car fax; don’t look at night or in rain

Question 10

Give three examples of car extras you don’t need.

Answer 10

fabric protection; paint protection; etching of VIN on windows

Question 11

Is car extended warranty recommended?

Answer 11

not recommended if you purchase a quality automobile

Question 12

Asking price =

Answer 12

MSRP + options + destination charge

Question 13

Define invoice.

Answer 13

dealer’s cost

Question 14

Define rebates.

Answer 14

amount returned to buyer

Question 15

Define dealer incentives.

Answer 15

rebates, low financing rates, etc.

Question 16

Define holdback.

Answer 16

typically 2-3% of price paid to dealer by manufacturer to reduce dealer’s costs

Question 17

Define dealer’s true cost.

Answer 17

dealer’s true cost = invoice - rebates - holdback

Question 18

What is the tradeoff with trade-ins?

Answer 18

you’ll get a better price if you sell on your own, but it’s more convenient to trade in your vehicle

Question 19

What is the tax advantage of car trade-ins?

Answer 19

you get tax savings when you trade in (pay tax on net value of new vs. old autos)

Question 20

What is an auto lease?

Answer 20

contractual agreement with monthly payments to use the auto, typically 3-5 years

Question 21

The cost of an auto lease is a function of

Answer 21

interest and depreciation

Question 22

Define capitalized cost.

Answer 22

vehicle price, which is about 96% of MSRP (about 92% of MSRP for purchase)

Question 23

Define money factor.

Answer 23

interest rate

Question 24

Define residual value.

Answer 24

expected value at end of the lease

Question 25

Define closed-end lease.

Answer 25

return vehicle at the end of the lease and “walk away,” regardless of residual value

Question 26

Define open-end lease.

Answer 26

at lease’s end, pay extra if sale price is less than residual expected value set in lease

Question 27

What’s the deal with insurance premiums on auto leases?

Answer 27

insurance premiums are generally higher on leased autos

Question 28

What are three advantages of leasing autos?

Answer 28

no or low down payment; drive higher-priced car than you can afford to buy; almost always covered by manufacturer’s warranty

Question 29

What are six disadvantages of leasing autos?

Answer 29

costs more because of financing; payments go on forever; limited miles; early termination fees; higher insurance rates; no customization

Question 30

The average used car costs what compared to a new car?

Answer 30

average used car costs about $10,000 less than a new car

Question 31

A used car costs how much to operate per mile, compared to a new car?

Answer 31

costs about $0.35 per mile for a used auto, versus $0.50 per mile for a new one

Question 32

Is a service contract recommended for new cars?

Answer 32

No

Question 33

How much should you pay for a new car in relation to the dealer invoice price?

Answer 33

pay only +/- $200 in relation to dealer invoice price

Question 34

What is lowballing?

Answer 34

dealer quotes a very low price, but add-on costs occur

Question 35

What is highballing?

Answer 35

dealer offers very high trade-in value, but increases cost of new car

Question 36

(T/F) Lemon Laws apply to both new and used cars.

Answer 36

False, they only apply to new cars

Question 37

What are the advantages of used cars?

Answer 37

let someone else take depreciation hit; lower insurance cost; can buy more car for th emoney

Question 38

What are the cons of used cars?

Answer 38

unsure of maintenance history; can be a lemon; can’t pick out options or color

Question 39

Review the last slide of Chapter 8.

Answer 39

review