3. How much car can I afford? How much car can I afford? Before buying a car, it is tritical 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. Ana is 38 years old, and her current gross monthly income is $3,600. Given an average personal tax rate of 30% for her federal, state, and local taxes, Ana's net monthly Income is if she follows the advice of financial experts, is the maximum amount that she should spend to purchase a new vehicle? (Note: Round your answers to the nearest whole dollar.) $1,260 $1,512 $504 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: Ana's Car-Buying Decisions Ana, who lives in Houston, is trying to decide between the following car models: Cost Brand and Model Kia Rio Jeep Patriot Chevrolet Camaro Ford F-150 Pickup $12,295 16,780 26,305 27,690 She's currently accumulated a down payment $2,000 and she has determined that she can afford maximum payments of $425 per month. Her Initial research on the current cost of auto loans has found that her lowest cost loan would be made by a bank and would require an interest rate of 6% for four years. Given this information, the maximum amount that Ana 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 Kia Rio The Chevrolet Camaro The Jeep Patriot The Ford F-150 Pickup 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. Take a better-paying job or another, or part-time job that would give her the additional income to support a larger monthly payment 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 Purchase an upgraded vehicle with fewer and less expensive options
