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 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.

Raphael is 38 years old, and his current gross monthly income is $2,600. Given an average personal tax rate of 30% for his federal, state, and local taxes, Raphaels 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: Round your answers to the nearest whole dollar.)

$364

$1,456

$1,092

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:

Raphaels Car-Buying Decisions

Raphael, 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

Hes currently accumulated a down payment of $5,000 and he has determined that he can afford maximum payments of $375 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 6% for four years.

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

The Chevrolet Camaro

The Ford F-150 Pickup

The Jeep Patriot

The Kia Rio

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.

Purchase the more expensive car now and then ask his boss for a raise next week

Purchase an upgraded vehicle with fewer and less expensive options

Take a better-paying job or another, or part-time, job that would give him the additional income to support a larger monthly payment

Postpone his purchase until he can save more money for a larger down payment