LIFE SITUATION CASE Financing Sophie's Honda Civic After shopping around, Sophie decided on a car, a used Honda Civic. The dealer quoted her a total price of $8,000. Sophie decided to use $2,000 of her savings as a down payment and borrow $6,000. The salesperson wrote this information on a sales contract that Sophie took with her when she set out to find financing. When Sophie applied for a loan, she discussed loan terms with the lending officer. The officer told her that the policy was to lend only 80 percent of the total price of a used car. Sophie showed the officer her copy of the sales contract, indicating that she had agreed to make a $2,000, or 25 percent, down payment on the $8,000 car, so this requirement caused her no problem. Although the lender was willing to make 48- month loans at an annual percentage rate of 15 percent on used cars, Sophie chose a 36-month repayment schedule. She believed she could afford the higher payments, and she knew she would not have to pay as much interest if she paid off the loan at a faster rate. The lending officer provided Sophie with a copy of the statement shown here. Statement (Loans) Finance Charge Amount Financed Total of Payments 36 Annual Percentage Rate The cost of your credit as a yearly The dollar amount the credit will cost you. The amount of credit provided o you or on your behalf. The amount you will have paid after you have made all payments as scheduled. rate. 15% $1,487.71 $6,000.00 $7,487.71 You have the right to receive at this time an itemization of the Amount Financed. x I want an itemization. Ol do not want an itemization. Your payment schedule will be: Number of Payments Amount of Payments When Payments Are Due 36 $207.99 1st of each month Sophie decided to compare the APR she had been offered with the APR offered by another lender, but the 20 percent APR of the second lender (Lender B) was more expensive than the 15 percent APR of the first lender (Lender A). Here is her comparison of the two loans: Lender A 15% APR Lender B 20% APR Amount of finance $6,000.00 $6,000.00 Finance charge $1,487.71 $2,027.33 Total of payments $7,487.71 $8,027.33 Monthly payments $ 207.99 $ 222.98 Questions 1. What is perhaps the most important item shown on the disclosure statement? Why? 2. What is included in the finance charge? 3. What amount will Sophie receive from the lender? 4. Should Sophie borrow from Lender A or Lender B? Why