The Cost of Credit: Financing an Automobile

Lesson Content

• Lesson Plan Template:

  CTE Lesson Plan

• CTE Course Info and Benchmark Notes

  
  

  Program Title (as applicable): N/A

  Course Title: Economics and Financial Services

  Course Number: 8815110

  Career Cluster: Finance

  CIP Number: 0252080110

  Course Type: Career Preparatory

  Standard(s) or benchmarks

  Focus:

  • 38.03: Describe the long-term implications of borrowing at unfavorable interest rates.
  • 38.09: Explain the concept of compound interest as it relates to consumer debt.

  Supporting

  • MA.912.FL.1.1: Extend previous knowledge of operations of fractions, percentages and decimals to solve real-world problems involving money and business.
  • MA.912.FL.3.10: Analyze credit scores qualitatively. Explain how short-term and long-term purchases, including deferred payments, may increase or decrease credit scores. Explain how credit scores influence buying power.
  • SS.912.FL.4.4: Describe why people often make a cash payment to the seller of a good – called a down payment – in order to reduce the amount they need to borrow. Describe why lenders may consider loans made with a down payment to have less risk because the down payment gives the borrower some equity or ownership right away and why these loans may carry a lower interest rate.

• Unit Outline

  
  

  This lesson can be taught within a unit focused on the cost of credit and/or compound interest. The unit can begin with exploring various financial services offered by financial institutions, specifically lending money to consumers. This lesson could be taught after students have had experience performing calculations with compound interest and have explored the concept of interest rates in relation to borrowing money.

• Career Connection

  
  

  Students will apply academic and critical thinking skills by calculating the cost of credit and use decision-making skills to decide if the cost of credit is worth purchasing an automobile.

• Learning Objectives

  
  

  Students will be able to:

  • Explain how compound interest affects the cost of credit
  • Explain how down payments minimize the size of financing needed
  • Describe and analyze how a credit score is used by lenders to make credit decisions
  • Analyze how various factors influence the monthly payment of an automobile loan
  • Compare scenarios to explore the long-term implications of borrowing at various interest rates
  • Explain why they would or would not finance an automobile given specific parameters

• Prior Knowledge

  
  

  Students should be familiar with:

  • The concept of sales tax
  • The concept of compound interest
  • The concept of credit scores, the range of credit scores, and what they imply
  • Knowing a down payment reduces the overall cost of an item
  • Approximate values of vehicles they are interested in purchasing

• Guiding Questions

  
  
  • Why is the cost of the automobile more than the original advertised price?
  • Why does the cost of financial services vary from consumer to consumer?
  • What are the benefits and drawbacks of financing an automobile?
  • How do credit scores impact a consumer's access to financial products?

• Procedure

  
  

  1. To introduce the lesson, display the Credit Decisions attachment on the board for all to see.

  • Ask students to review the credit profiles and choose 1 that they feel is the best credit profile. Remind students that there is no correct answer, and they should be prepared to explain their choice.
  • Allow student volunteers to share their choice and reasoning. Review some of the components included in a credit report and how those various components influence a lender’s credit decision.

  2. Explain to students that they will be using a Scratch program/simulation to explore financing an automobile. Be sure each student has a computer and pass out an Auto Loan Simulation handout to each student.

  • Review the handout with students and answer any questions they may have about how to fill it out. If needed, play at least 1 simulation with students to show them how the Scratch program/simulation works and how to record the information using the handout.
  • Address any questions and/or misconceptions about the activity before students play the Scratch program themselves.

  3. Allow students time to run the Scratch program/simulation and record each scenario using the handout. Students should have an idea of the cost of an automobile they are interested in but other inputs such as down payment and credit score will be estimated or made up by students for use in the simulation. The Scratch program/simulation can be accessed using this link: https://scratch.mit.edu/projects/802349379

  • Students can work individually, in pairs, or in small groups at the teacher’s discretion. The guiding questions may be used during this time to facilitate small group or individual discussions with students.
  • Be sure students understand that their numerical inputs should not include any commas, percent symbols, or dollar signs and questions should be answered with a yes or no input or the Scratch program/simulation will not run correctly.
  • As students are working, move around the room to monitor student progress, answer any questions, and/or address any inputs that aren’t being entered correctly.

  4. As students finish running the Scratch program/simulation, bring the class back together to discuss the Scratch program/simulation. In addition to the guiding questions, the following questions can be used to assess student knowledge:

  1. How did the down payment change the cost of the automobile?
  2. How is a consumer’s credit score related to an interest rate?
  3. Are some interest rates “better” than others? Explain your reasoning.
  4. Why do similar credit scores have different monthly payments?
  5. What’s the most important factor to consider when financing an automobile? Explain your reasoning.
  6. How did you determine the cost of credit?
  7. How does the interest rate impact the cost of credit?
  8. How does compound interest impact the cost of credit?
  9. How does the life of a loan impact the cost of credit?
  10. How could you minimize the cost of credit?
  11. Did you choose not to continue purchasing an automobile? Why or why not?
  12. For each scenario what was the cost of credit? How did you determine that?

  5. To bring the lesson to a close, have students reflect on the lesson by responding to one or both of the following journal prompts:

  • Is financing beneficial to consumers? Explain your reasoning.
  • Explain the advantages and disadvantages of financing an automobile.

• Teacher Notes

  
  
  • Students will be using a Scratch program to simulate buying and financing an automobile. The teacher may remix the Scratch program to add additional layers to the simulation. The Scratch program/simulation can be found using this link: https://scratch.mit.edu/projects/802349379
  • Be sure to include explicit discussion on the cost of credit in step 4. Students should determine the cost of credit by subtracting the financed amount from the total value of the loan. Additional “hidden” costs of credit may include hard inquiries on their credit report, monthly payments that may take away from other possible expenditures, and late fees or penalties if the payment is not made on time.

• Optional

  
  

  Formative Assessment Ideas:

  • The handout can be collected and assessed for accurate mathematical calculations.

  Extension Ideas:

  • Students can rank the simulations in order of most appealing to least appealing and state their reasoning for their rankings.
  • Students can be grouped by similar attributes such as credit scores, advertised prices, length of the loan, etc. used in their simulations and compare the outcomes of each scenario. Students could discuss possible reasons for varying outcomes given similar components of the scenario.
  • Students can revisit the Credit Decisions scenarios and use their simulations to match a simulation to each consumer profile and explain their reasoning for each pair.