Answer: 16.84%

Question:

• Give one example of an action a borrower can take to have “bad credit?”
• How does the interest rate affect the monthly payment on a car loan? Explain.
• Assume a borrower with bad credit took out a $20,000 car loan. Estimate what the total cost of the loan would be for a 60 month loan. 
  • If you want to know the answer, here's an auto loan calculator. 

Here's the ready-to-go slides for this Question of the Day that you can use in your classroom.

Behind the numbers (USA Today):

Subprime buyers got substantially better rates even a year ago. The average subprime [Poor Credit] rate of 5.91% last year has jumped to 16.84% today, Smoke says. For a 60-month loan of $20,000, that means a monthly payment hike of more than $100, to $495. [Editor's note: Have your students fact check that 5.91% rate as it seems inconceivable that rates would have jumped almost 10% in a year; guessing that was a typo in the USA Today article]

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Want to extend this activity so students can calculate for themselves the cost of bad credit? Check out this NGPF Activity, Calculate: Impact of Credit Score on Loans

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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