How much can you afford for a car loan
11.4 Taking out a Car Loan (installment loan)
How much can you afford for a car loan? You should know before you go to the bank.
3 c’s______________________,_________________________, ______________________
Will an excellent/very good credit score guarantee that you will be approved?______
Total debts (Car payment +mortgage or rent, student loans, credit card payments, other installment loans, etc.) must be less than or equal to 40% of gross monthly income.
• Banks also typically want to see _______ of steady employment in same line of work.
• References, may need a ______________ if no/poor credit history. Never, never, never cosign for a boyfriend of girlfriend.
• Banks will want you to have some “Skin in the Game” =______________________ recommended ______% of car price. Ex:
Ex: Gross annual income $30,000 divide by 12 = $ 2500 Gross monthly income x 40%
$2500 x .40 = amount of monthly debt payments $1000.00
Rent - $450.00
Student loan - 250.00
Credit cards - 125.00
Total available for car payment $ 175.00
If your loan payment is too high for your capacity, what can you do to make payments more affordable?
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Name:____________________
1) Jared makes $45,000 a year as a sales rep and wants to buy a truck. He has an 800 credit score. His estimated truck payments are $598/ month.
He currently has no credit card debt but his rent is $700 a month and student loan payments are $250/month. How much can he afford as a monthly payment? $________ Can he get approved for the loan? _________
Show math:
2) Maddie makes $42,000 a year and wants to buy a 2014 Jeep. Her estimated payments would be $525/mo. She has credit score of 760.
She has rent @ $625/mo. and a student loan payment of $225/mo. She also bought a new sofa with 12 months of payments @ $75/mo. Monthly credit card payments $115. How much can she afford each month for a payment? $_____
Can she get the loan?________
show math:
3) Mason makes $65,000 a year and wants to buy a pre-owned BMW. His estimated payments would be $716/mo. Credit score of 768.
He has $750 mortgage, $259 student loan payments, $40 (minimum payment) credit card/mo. And $375/mo. payments on an engagement ring from Shane Co. for the next 12 months.
How much can he afford each month? $________Can he get approved for the loan? _____
Show math:
4) Mary makes $ 32,000 a year and wants to buy a used car. The estimated payments are $286/mo.
She currently lives at home and has $140/mo student loan payments and $150/mo. on credit card bills. She also would like to move out and get an apartment soon.
How much can she afford a month? $____ Would she get approved? _____
5) YOUR TURN:
How much do you expect to make your first year of Full Time Work? $_______________
Calculate 40% of your monthly Gross income? $__________
Assume you have Rent: $_________
Student Loan: $_________
Credit card payment: $_________
How much would be left for a car payment? $___________
Go to click on calculators- find auto calculators.
Compare the following borrowing scenarios:
Car price is $20,000 ( - 20% down payment $___________ ) borrow $16,000.
Click on the amortization schedule to find total interest and schedule of payments.
|Principal: |$16,000 |16,000 |16,000 |16,000 |16,000 |
|Months of loan |36 |48 |60 |72 |60 |
|Interest rate |4% |4% |4% |4% |12% (poor credit) |
|Monthly payment | | | | | |
|Total interest paid | | | | | |
|Total cost principal + | | | | | |
|interest | | | | | |
Car dealers will want to know how much you can afford for a monthly payment. Why should you also be concerned about other loan terms?
Why would it not be a smart financial decision to sell the vehicle after just 1 year of making payments?
Assume they have a special with $0 down and 4% financing. How much would your monthly payment be? $______________ How much interest would you pay? $______________.
If you were unable to pay your loan payments and the bank repossessed your car, how much money do you think you would get back?
What other consequences would happen?
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