3. How much car can I afford? How much car can I afford? Before buying a car, it is critical that you determine both the complete price of the vehicle and what you can afford to spend. This information is essential in deciding whether to pay cash or finance the vehicle with a loan. The difference between these two methods of payment, however, is the difference between paying the car's full price versus making a much smaller down payment and fitting the monthly payments into your budget. There are two schools of thought about how much car you can afford. Financial experts recommend that the amount of your car payment should not exceed 20% of your net monthly income. Others suggest that if you can accommodate the payment in your budget, then it's acceptable-although you shouldn't obligate yourself to eating rice cakes for the next four years. Eileen is 24 years old, and her current gross monthly income is $2,500. Given an average personal tax rate of 32% for her federal, state, and local taxes, Eileen's net monthly income is . If she follows the advice of financial experts, what is the maximum amount that she should spend to purchase a new vehicle? (Note: Round your answers to the nearest whole dollar.) 5354 S884 $1,768 An alternative to the 20% rule is to evaluate your budget, determine a monthly payment that you can reasonably afford, and then incorporate that information with the maturity and interest rate of a possible loan to determine the value of the potential loan. When this value is added to a saved amount of a down payment, you know the total amount that you can reasonably afford to spend on a new car. To review this process, consider the following case: Eileen's Car-Buying Decisions Eileen, who lives in St. Louis, is trying to decide between the following car models: Brand and Model Cost Ford Fiesta $13,580 Toyota Prius 19,895 Kia Sorento 23,150 Porsche Boxster 48,100 An alternative to the 20% rule is to evaluate your budget, determine a monthly payment that you can reasonably afford, and then incorporate that information with the maturity and interest rate of a possible loan to determine the value of the potential loan. When this value is added to a saved amount of a down payment, you know the total amount that you can reasonably afford to spend on a new car. To review this process, consider the following case: Eileen's Car-Buying Decisions Eileen, who lives in St. Louis, is trying to decide between the following car models: Brand and Model Cost Ford Fiesta $13,580 Toyota Prius 19,895 Kia Sorento 23,150 Porsche Boxster 48,100 a She's currently accumulated a down payment of $3,000 and she has determined that she can afford maximum payments of $525 per month. Her initial research on the current cost of auto loans has found that her lowest cost loan would be made by a credit union and would require an interest rate of 12% for five years. Given this information, the maximum amount that Eileen can afford to pay for her new car is afford to purchase, without stretching her budget, is: , and the most expensive car that she can The Porsche Boxster The Toyota Prius The Ford Fiesta The Kia Sorento However, she could upgrade to a more expensive model by undertaking several activities. Which of the following activities would allow this upgrade? Check all that apply. Purchase the more expensive car now and then ask her boss for a raise next week Go ahead and purchase the more expensive car; she deserves to be happy Postpone her purchase until she can save more money for a larger down payment Take a better-paying job or another, or part-time job that would give her the additional income to support a larger monthly payment