Understanding car financing

Understanding car financing, some of the basic terms used when finacing a car, and some of the basic mathematics involved is the goal of this lesson.

Most people who buy a car cannot pay cash at the time of purchase, so the common thing to do is to make a down payment.

A down payment means that you can trade in an old car, or give some money out of your pocket, or both.

The amount left will be financed and paid in monthly installments

The sum of the down payment and all monthly installments is called the deferred payment price.

Let's take an example to illustrate:

The sticker price of a car 15000 dollars. You make a down payment of 25% and you are asked to make 60 monthly payments of 350 dollars

Question #1: What is the amount to be financed?

Question #2: What is the deferred payment price?

Down payment = sticker price × 25%

Down payment = 15000 × 0.25 = 3750

Amount to be financed = sticker price − down payment

Amount to be financed = 15000 − 3750 = 11250 dollars

Deferred payment price = Down payment + all monthly installments

If a monthly installment = 350, 60 monthly installments = 60 × 350 = 21000

Thus, Deferred payment price = 3750 + 21000 = 24750

The car was worth 15000, yet you ended up paying 24750 dollars! Almost twice the sticker price.

Test your knowledge with the quiz below:

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