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. Dane is a 38-year-old man whose current gross monthly income is $3,400. Given an average personal tax rate of 32% for his federal, state, and local taxes, Dane's net monthly income is If he follows the advice of financial experts, what is the maximum amount that he should spend to purchase a new vehicle? (Note: Rour pwers to the nearest whole dollar.) $3,400 $925 $4,489 $462 $2.312 $1,850 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: Dane's Car-Buying Decisions Dane, who lives in Houston, is trying to decide between the following car models: Brand and Model cost Ford Fiesta $13.50 Toyota Prius 19,95 wa Sorento 21.150 Porsche Boxster 48,100 Brand and Model Cost Ford Fiesta $13,580 Toyota Prius 19,895 Kia Sorento 23,150 Porsche Boxster 48,100 He's currently accumulated a down payment of $1,000 and he has determined that he can afford maximum payments of $575 per month. His initial research on the current cost of auto loans has found that his lowest cost loan would be made by a bank and would require an interest rate of 12% for four years. and the most expensive car that he can Given this information, the maximum amount that Dane can afford to pay for his new car is afford to purchase, without stretching his budget, is: $22,835 The Ford Fiesta $26,260 The Kia Sorento $17,126 The Toyota Prius Dane shouldn't buy a car at this time due to his limited budget The Porsche Boxster However, he could upgrade to a more expensive model by undertaking several activities. Which of the following activities would allow this upgrade? Check all that apply. Postpone his purchase until he can save more money for a larger down payment Take a better-paying job or another, or part-time job that would give him the additional income to support a larger monthly payment Purchase an upgraded vehicle with fewer and less expensive options Go ahead and purchase the more expensive car; he deserves to be happy