Question

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. Latasha is 38 years old, and her current gross monthly income is $4,200. Given an average personal tax rate of 30% for her federal, state, and local taxes, Latasha'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.) $588 $2,352 $840 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: Latasha's Car-Buying Decisions Latasha, who lives in Houston, is trying to decide between the following car models: Brand and Model Cost

Answer 1

Part 1 :

Option A - $588

Workings : 20% of ($4,200 x 70%) = 588

Part 2 :

Blank 1 : $21,000 ($16,000 loan + $5,000 Savings)

Answer is Option A : Hyundai Accent

For next question, the answer is both Option A and Option B

A. Postpone her purchase until she save for higher down payment

B. She can go for upgraded vehicle with fewer expensive options

Workings :

The loan amount of $16,000 can be arrived at by using formula

EMI = [ P x R x (1+R)^n ]/[(1+R)^(n-1)]

Where we substitute

EMI = $375

R = Rate of interest per month

n = Number of instalments

This way we can solve for P, which will come to $16,000