Smart $ Decisions
Determine Your Budget: Decide how much you can afford to spend on a car, including the purchase price, insurance, maintenance, and fuel costs. A common rule of thumb is to allocate no more than 15% of your monthly take-home pay to car expenses, including the car payment, insurance, fuel, and maintenance. This helps ensure that your car expenses don't strain your budget and leave room for other financial priorities.
For example, if your monthly take-home pay is $3,000, you should aim to spend no more than $450 per month on car-related expenses. This can help you maintain a balanced budget and avoid financial stress. Of course, everyone's financial situation is different, so it's important to consider your own circumstances and financial goals when deciding how much to spend on a car.
To calculate the total interest paid on a car loan, you can use the formula: $ Interest Paid = (Monthly payment x # of payments) - $ purchase price
To calculate the total interest paid on a $48,000 car loan for 6 years at an interest rate of 7%, we can use the amortization formula. Here's a step-by-step breakdown:
Loan Amount (Principal): $48,000
Annual Interest Rate: 7%
Loan Term: 6 years (72 months)
First, we need to calculate the monthly interest rate and the number of monthly payments:
Monthly Interest Rate =7% / 12 = 0.58%
Number of Monthly Payments = 6 × 12 = 72
Next, we use the formula for the monthly payment:
Monthly Payment = P × r × (1+r)^n / (1 + r)^n - 1}
Where:
P is the loan amount ($48,000)
r is the monthly interest rate (0.005833)
n is the number of monthly payments (72)
Plugging in the values:
Monthly Payment= 48 × 0.005833 × (1+0.005833)^72 / (1+0.005833)^72 ≈ $828.64
Now, we calculate the total amount paid over the life of the loan:
Total Amount Paid= Monthly Payment × Number of Payments
Total Amount Paid= $828.64 × 72 ≈ $59,661.12
That's $11,661 or $161.96 per month in just interest
Should the rebate be taken or should low or 0% financing be used for the best value?
Lets assume the same car above has $2500 rebate or 2.99% financing , which one provide the lowest overall cost?
Overall cost for $2500 rebate
Loan Amount: $48,000 - $2,500 = $45,500
Annual Interest Rate: 7%
Loan Term: 6 years (72 months)
Total paid is approximately $54,584.36
Overall cost for 2.99% financing
Loan Amount: $48,000
Annual Interest Rate: 2.99%
Loan Term: 6 years (72 months)
Total paid is approximately $52.341.84
The cost of owning a car
The cost of owning a car includes several factors beyond just the purchase price. Here's a breakdown of the main costs to consider:
Purchase Price: The initial cost of buying the car, whether new or used.
Financing Costs: If you finance the car, you'll need to consider the interest paid on the loan.
Depreciation: The decrease in the car's value over time. New cars depreciate faster than used cars.
Insurance: The cost of insuring the car, which can vary based on factors like the car's make and model, your driving history, and your location.
Fuel: The cost of fuel, which depends on the car's fuel efficiency and how much you drive.
Maintenance and Repairs: Regular maintenance (oil changes, tire rotations, etc.) and unexpected repairs.
Registration and Taxes: Annual registration fees and taxes, which can vary by state.
Parking: If you live in an area where you need to pay for parking, this can add to the cost.
Tolls: If you frequently drive on toll roads, these costs can add up.
Savings for 35 MPG Vs. 25 MPG
To calculate the savings, we need to determine the fuel costs for both cars and then find the difference.
Car with 35 MPG:
Miles Driven: 15,000 miles / year
Miles per Gallon (MPG): 35 MPG
Gas Cost per Gallon: $3.50
Gallons Needed= 15,000 / 35 = 428.57 gals
Fuel Cost= 428.57 × $3.50 ≈ $1,500
Car with 25 MPG:
Miles Driven: 15,000 miles / year
Miles per Gallon (MPG): 25 MPG
Gas Cost per Gallon: $3.50
Gallons Needed= 15,000 / 25 = 600 gals
Fuel Cost= 600 × 3.50 = $2,100
Savings:
Savings=2,100−1,500=$600\text{Savings} = 2,100 - 1,500 = $600 per year
So, by buying a car that gets 35 MPG instead of one that gets 25 MPG, you would save approximately $600 in fuel costs over 15,000 miles or every year.