To determine the maximum car payment, the following formula should be used:
- Monthly car payment = Monthly income * 10%,
Thus, the payment should be:
- Monthly car payment = $3000 * 10% = $300.
- $300 * 12 months * 4 years = $14,400.
Therefore, I would need to look for cars that do not exceed $14,400 in price. Then, the potential 10% down payment should be:
- $14,400 * 10% = $1,440.
This amount for down payment can be acquired in:
- $1,440 / $300 = 4.8 – approximately 5 – months.
The same formulas can be applied for maximum mortgage payment:
- Monthly mortgage payment = Monthly income * 28%,
Thus, the payment will be:
- Monthly mortgage payment = $3000 * 28% = $840.
- $840 * 12 months * 15 years = $151,200.
The house I would chose to buy should not be more expensive than $151,200. With this amount, the 3% down payment should be:
- $151,200 * 3% = $4,563.
This down payment can be acquired in:
- $4,563 / $840 = 5.4 – approximately 6 – months.
Car loan amortization schedule
To prepare a car loan amortization schedule, I would need to determine first the annual interest rate. Brigam and Houston (2021) facilitate that financial management focuses on establishing necessary assets, raising capital to purchase these assets, and maximizing value. Experian Automotive (2022) reports that in 2022, the annual interest rate for new cars was 4.07%, while for used cars, it amounted to 8.62%. Knueven and Wangman (2022) add that “dealers calculate your interest rate with many factors in mind, including your credit score, the type of car you’re buying, and where you live” (para. 3). In this assignment, I will assume that I have a prime credit score and will be buying a used car to save on its total price. Thus my interest rate would be 5.58% (Knueven and Wangman, 2022). I decided to choose the 2013 Hyundai Accent, as its average price is currently around $5000 and up to $20,000 (TrueCar, 2022). I will assume from my amortization schedule that the price of the car I want to buy is $9,479 (TrueCar, 2022). Thus, my amortization schedule for a car loan will be the following:
- Annual interest rate: 5.58%
- Years: 4
- Number of payments per year: 12
- Total balance: $9,479
Beginning Balance | Interest | Principal | Ending Balance | |
1 | $9,002.53 | $41.86 | $167.84 | $8,834.70 |
2 | $8,834.70 | $41.08 | $168.62 | $8,666.08 |
3 | $8,666.08 | $40.30 | $169.40 | $8,496.68 |
4 | $8,496.68 | $39.51 | $170.19 | $8,326.50 |
5 | $8,326.50 | $38.72 | $170.98 | $8,155.52 |
6 | $8,155.52 | $37.92 | $171.78 | $7,983.75 |
7 | $7,983.75 | $37.12 | $172.58 | $7,811.18 |
8 | $7,811.18 | $36.32 | $173.38 | $7,637.80 |
9 | $7,637.80 | $35.52 | $174.18 | $7,463.62 |
10 | $7,463.62 | $34.71 | $174.99 | $7,288.63 |
11 | $7,288.63 | $33.89 | $175.81 | $7,112.83 |
12 | $7,112.83 | $33.07 | $176.63 | $6,936.21 |
Year 1 end | ||||
13 | $6,936.21 | $32.25 | $177.45 | |
14 | $6,758.77 | $31.43 | $178.27 | $6,580.50 |
15 | $6,580.50 | $30.60 | $179.10 | $6,401.40 |
16 | $6,401.40 | $29.77 | $179.93 | $6,221.48 |
17 | $6,221.48 | $28.93 | $180.77 | |
18 | $6,040.71 | $28.09 | $181.61 | $5,859.10 |
19 | $5,859.10 | $27.24 | $182.46 | $5,676.65 |
20 | $5,676.65 | $26.40 | $183.30 | $5,493.35 |
21 | $5,493.35 | $25.54 | $184.16 | $5,309.20 |
22 | $5,309.20 | $24.69 | $185.01 | $5,124.20 |
23 | $5,124.20 | $23.83 | $185.87 | $4,938.33 |
24 | $4,938.33 | $22.96 | $186.74 | $4,751.59 |
Year 2 end | ||||
25 | $4,751.59 | $22.09 | $187.61 | |
26 | $4,563.99 | $21.22 | $188.48 | $4,375.52 |
27 | $4,375.52 | $20.35 | $189.35 | $4,186.17 |
28 | $4,186.17 | $19.47 | $190.23 | $3,995.94 |
29 | $3,995.94 | $18.58 | $191.12 | $3,804.83 |
30 | $3,804.83 | $17.69 | $192.01 | $3,612.82 |
31 | $3,612.82 | $16.80 | $192.90 | $3,419.93 |
32 | $3,419.93 | $15.90 | $193.80 | $3,226.14 |
33 | $3,226.14 | $15.00 | $194.70 | $3,031.44 |
34 | $3,031.44 | $14.10 | $195.60 | $2,835.84 |
35 | $2,835.84 | $13.19 | $196.51 | $2,639.33 |
36 | $2,639.33 | $12.27 | $197.43 | $2,441.91 |
Year 3 end | ||||
37 | $2,441.91 | $11.35 | $198.35 | |
38 | $2,243.57 | $10.43 | $199.27 | $2,044.31 |
39 | $2,044.31 | $9.51 | $200.19 | $1,844.12 |
40 | $1,844.12 | $8.58 | $201.12 | $1,643.00 |
41 | $1,643.00 | $7.64 | $202.06 | $1,440.94 |
42 | $1,440.94 | $6.70 | $203.00 | $1,237.95 |
43 | $1,237.95 | $5.76 | $203.94 | $1,034.01 |
44 | $1,034.01 | $4.81 | $204.89 | $829.12 |
45 | $829.12 | $3.86 | $205.84 | $623.28 |
46 | $623.28 | $2.90 | $206.80 | $416.48 |
47 | $416.48 | $1.94 | $207.76 | $208.72 |
48 | $208.72 | $0.97 | $208.73 | $0.00 |
Year 4 end |
3. Throughout the life of the loan, the amount of money paid in interest decreased steadily, beginning with about $42 in the first month, and dropping to only $0.97 in the last month. As opposed to it, the principal payments increased with each month, starting with $168 and rising to $209 at the end. Thus, the amounts of interest and principal needed to be paid each month balanced each other, allowing me to remain inside the balance determined for the loan. There were no drastic changes in the balance throughout the loan’s life; it decreased in a steady and consistent way. Overall, monthly payments did not exceed $210 during all the years of the loan, which is well within the preplanned amount of $300 I could put towards buying a car.
It can be said that the loan term of 4 years or 48 months is a rather comfortable period for a small car loan such as mine, as it does not strain the general budget. Moreover, the interest and principal were not too costly due to such long term, even with the constant increase of principal payments after each month. However, Knueven and Wangman (2022) explain that “loan terms can impact the interest rate, as in general, the longer the term, the higher the interest rate is due to higher risks of non-payment” (para. 12). The total cost of the car amounted to $11,505.38, with all taxes, fees, interest, and price included. The sales tax was assumed to be 7%, as it is an average amount in the U.S.
References
Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management: Concise Edition (11th Ed.). Cengage.
Experian Automotive. (2022). State of the Automotive Finance Webinar. Experian. Web.
Knueven, L., & Wangman, R. (2022). The average auto loan interest rate by credit score, loan term, and lender. Business Insider. Web.
TrueCar. (2022). Used 2013 Hyundai Accent For Sale Nationwide. TrueCar. Web.