Vehicle Finance Part #1Purchasing a New Vehicle

Warm UpEvaluate each percentage:

7% of $120 =

12% of $5,858 =

105% of $25.99 =

30% of $473.15 =

Evaluate each expression:

12 + 8 x 3 - 10 =

400 - (26 + 1.05 x 20 - 11) =

(15)(8) - 22 + 45 =

(1.12)(54 + 88 - 37) - 10 =

Choosing a Vehicle

Buying a vehicle is a major purchase:

There is an initial cost, the registration, the insurance, the fuel, and the maintenance costs.

These are just a few things to consider when deciding what type of vehicle you can afford to buy and how much money you are able to spend.

Choosing a Vehicle

Since a lot of money is spent on a vehicle, it is important to make an informed choice

Choosing the right vehicle demands considerable research

What are some factors that need to be considered when choosing a vehicle?

Before you ShopDetermine why you want to buy a vehicle

convenience - you can go anywhere you want whenever you want

commuting to work or school

feeling of independence - you do not need to ask other people for a ride

trying to avoid expensive repair costs on your present vehicle

replacing your present vehicle because it is getting old

Before you ShopTips to save money when buying a vehicle

choose a smaller vehicle

negotiate for options ex) air conditioning vs lower price

avoid buying brand new instead, wait a couple months

wait for end of year clear out prices

rebates and incentives from either manufacturers or the government

AffordabilityIf you borrow money to purchase a car, financial planners generally advise that your total monthly debt should be no more than 40% of your net income

Maximum Monthly Debt Repayment = 40% x Net Income

Net Income = Debt or Loan ÷ 40%

ExampleIf your monthly net income is $1,200, what is the maximum monthly debt repayment you can afford?

ExampleWhat is the minimum monthly net income that is needed if you wish to take a loan with monthly repayments of $600?

Total Debt Service Ratio

used to determine how much you can afford to pay for a vehicle

very similar to gross debt service ratio (GDSR) except it also includes any other debt repayments - like a vehicle loan or credit card debt

the TDS should never exceed 40%

Formula

TDS =

Monthly Housing Costs + All Other Monthly Debts

———————————————-Gross Monthly Income

x 100

The TDS should never exceed 40%

ExampleChelsea and Jason are trying to decide if they can afford a new car. The car they wish to purchase will cost them $149 biweekly. They are currently living in a home with a monthly mortgage of $1,200. Heating costs are $89 a month, and property taxes are $1,300 a year. Chelsea also has a credit card debt that she is paying off with monthly payments of $120. Chelsea and Jason’s combined gross monthly income is $4,600. Calculate the TDS ratio and decide whether or not they should purchase this car. Justify your answer.

Example

Trystyn wants to purchase a vehicle with a monthly payment of $500. They have a mortgage that costs $895 per month, heating is an additional $79 a month. The annual property taxes are $1,250. Trystyn is also working to pay off their line of credit and contributes $120 a month to paying down that balance. Trystyn makes a gross monthly income of $7,215. Can they afford this vehicle, justify your answer.

ExampleKenzie wants to determine how much money they can spend on a vehicle. They are currently living in an apartment with rental fees of $900 per month. Kenzie’s rent doesn’t include heating which costs an additional $75 per month. Kenzie has student loans that costs $150 per month and their monthly income is $3,000.

Based on the TDS, what is the maximum amount of money they can spend on a vehicle.

Kenzie sees an advertisement in the paper for a new car for $130 a month. Can they afford this vehicle?

Example

Lincoln has a gross monthly income of $5,000. His mortgage is $670 per month with an additional $50 heating charge. The property taxes are $1,050 annually. He is currently paying $125 per month to pay down his credit card debt. Determine the maximum payments Lincoln can make on a vehicle based on his TDS.