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 cars 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 its acceptablealthough you shouldnt obligate yourself to eating rice cakes for the next four years.

Ana is 38 years old, and her current gross monthly income is $3,800. Given an average personal tax rate of 32% for her federal, state, and local taxes, Anas 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.)

$760

$517

$2,067

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:

Anas Car-Buying Decisions

Ana, who lives in Houston, is trying to decide between the following car models:

Brand and Model	Cost
Kia Rio	$12,295
Jeep Patriot	16,780
Chevrolet Camaro	26,305
Ford F-150 Pickup	27,690

Shes currently accumulated a down payment of $3,000 and she has determined that she can afford maximum payments of $375 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 five years.

Given this information, the maximum amount that Ana can afford to pay for her new car is , and the most expensive car that she can afford to purchase, without stretching her budget, is:

The Kia Rio

The Ford F-150 Pickup

The Jeep Patriot

The Chevrolet Camaro

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.

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

Purchase an upgraded vehicle with fewer and less expensive options

Go ahead and purchase the more expensive car; she deserves to be happy