Grades 3-5

### Concepts

Students will investigate unforseen costs of car loans and/or house loans. They will then evaluate the economics of decision making, the ramifications of their choices, and options available to them. Students will compute costs and savings for a car and/or house loan with or without added insurance costs.

### Introduction

Present the following anecdote to the students: An S & l institution advertised a $10,000 new car loan at 7.99% APR with 48 monthly payments of $269.34. Jones read the ad and practiced using the present value formula for annuities, trying to come up with figures to match the advertised monthly payment.

Jones soon realized that the formula would not yield a matching payment of $269.34. He then called the institution to find out how people there had arrived at their figures. He was a little surprised to find that certain up-front fees and more than $20 per month for life and disability insurance had been figured into the payment! What was going on in this case? Why didn’t the number Jones calculated match the number advertised by the S&I?

NOTE: The “Just in Case Cases” activity could be done in class as a discussion starter and an introduction to the “time value of money” concept.

### Learning Objectives

- Apply present and future value formulas for annuities.
- Identify the true costs of loans.
- Determine the cost of several loans, with and without added insurance.
- Determine the best personal option for a hypothetical loan.

### Resource List

- Lending Tree: This site is an excellent source of information about borrowing and lending. Several add-on activities could be developed from this web site.

https://www.lendingtree.com/ - Time Value of Money Calculator: By using the calculator entitled “find payment”, students can use this site to determine the monthly payments on loans.

https://www.bankofamerica.com/auto-loans/auto-loan-calculator/

- Loan Amortization: This site allows students to amortize their mortgage and view full amortization tables.

https://www.bankrate.com/mortgages/amortization-calculator/ - Cost of a Car Loan: This activity will allow students to compare the costs and benefits of car loan amounts and interest rates.

www.econedlink.org/lessons/docs_lessons/388_CostofaCarLoan1.pdf

Answer Key - Just In Case Cases: Students will use this worksheet to find the value left on the car loan.

www.econedlink.org/lessons/docs_lessons/388_JustinCaseCases1.pdf

Answer Key - The Same Thing Activity: This is an individual activity used to assess students understanding of the lesson.

www.econedlink.org/lessons/docs_lessons/388_TheSameThing1.pdf

Answer Key - Retirement Is In Your Future: Use this lesson to teach students about compound interest and saving for retirement.

www.econedlink.org/lessons/docs_lessons/388_Retirement2.pdf - Mortgage from Hell: Use this worksheet to show students the dangers of high mortgages and high interest rates.

www.econedlink.org/lessons/docs_lessons/388_MortgageFromHell1.pdf

Answer Key - Show Me The Money Advertisement: This document can be printed out and used to introduce this lesson.

www.econedlink.org/lessons/docs_lessons/388_ad2.pdf

### Procedure

Present the following anecdote to the students: An S & l institution advertised a $10,000 new car loan at 7.99% APR with 48 monthly payments of $269.34. Jones read the ad and practiced using the present value formula for annuities, trying to come up with figures to match the advertised monthly payment.

Jones soon realized that the formula would not yield a matching payment of $269.34. He then called the institution to find out how people there had arrived at their figures. He was a little surprised to find that certain up-front fees and more than $20 per month for life and disability insurance had been figured into the payment! What was going on in this case? Why didn’t the number Jones calculated match the number advertised by the S&I?

NOTE: The “Just in Case Cases” activity could be done in class as a discussion starter and an introduction to the “time value of money” concept.

*[NOTE: Use the following link** as a reference as you prepare to pre-teach the concept of *time-value-of-money https://www.lendingtree.com/*.]*

- Tell the students that, before they jump to conclusions, they should check on Jones’ calculations. Have them use the present value formula for annuities by using the “find payment” calculator to compute a monthly payment from the information advertised by the S&I: A payment of $269.34 for the $10,000 loan at a rate of 7.99% APR for four years.

*[The students will soon arrive at the conclusion that the payment should be around $244. Allow them to speculate about why the payments are different.]* - Explain that in calculating a monthly payment, the bank has added in some up-front fees AND life & disability insurance costs. Ask: “Is Jones being cheated? Why might the bank require the life/disability insurance? Would the age of the borrower make a difference?” Discuss all student responses.
- Show a schedule of life insurance rates. Emphasize that the rates shown do NOT include disability coverage (unless it is available to you). That such coverage would involve a higher premium. Find the cost for $100,000 of Life and disability coverage (or some amount – it could be the $10,000 to cover the loan) for the age of the students.
- Divide the students up into small groups and have them complete “Cost of a Car Loan” activity comparing the costs and benefits of the loan amounts. Review and discuss the conclusions as a class.

*[“**Cost of a Car Loan Answers**“]* - Give the students the “Just in Case Cases” and ask them to decide how to find the value left on the car loan. Emphasize the questions at the end of the worksheet. Use https://www.bankrate.com/mortgages/amortization-calculator/ to help you to complete this activity.

*[“**Just in Case Case Answers**“]*

*[NOTE: The “**Just in Case Cases**” activity can be done in class as a discussion starter. Students would have to be proficient at finding the remaining balance and/or using an amortization schedule, but the students should find out that you don’t just multiply the payment amount by the number of remaining payments. There are web sites that would figure this for the students, too.*

*You could just pick an amount to use for discussion purposes. If it fits your time frame and focus, you could have the students find an amortization schedule and discover the true amount.]*

### Conclusion

The students should discover that loans vary considerably in their costs, that some costs may not be apparent on the surface, and that no single loan package is right for all borrowers. Personal factors, dispositions, and risk factors are different for different people.

Go over the questions at the bottom of “Just in Case Cases“.

Have the students evaluate their own decision, defend it to others, and listen to the reasons given by others for their decisions.

### Extension Activity

- Retirement is in Your Future: Annuities can have future value, too. Learn to save now!
- Mortgage from Hell: Can this one be paid off–ever? The answer is no. The equation has no solution, therefore, no answer!

*[**Mortgage from Hell Answer**]* - Students could be asked to find information regarding loans and what different institutions require. Be sure to check out https://www.lendingtree.com/ for their excellent information and calculators. The calculators can be accessed at this site by going to the mortgage section. The two most helpful calculators for this activity are the “How much will your payments be?” and the “Which loan is better?”.

### Assessment

Use “The Same Thing” activity as an individual assignment.

*[“**The Same Thing Answers**“]*

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