Scenario: You are in the market for a new car. You do not have a trade-in, but you have saved $3,000 toward a down payment. You currently earn $3,750.00 gross monthly income, of which 28% is withheld for various deductions. You have heard of the 20% rule of thumb, but want to limit your payments to no more than 18% of your net monthly income because of other debt commitments. You currently have a credit score of 685. You expect to drive the car an average 15,000 miles per year. You're considering purchasing a used-rather than new car. This strategy offers several advantages.
1. Which of the following is not an advantage of purchasing a used car?
A. The reduced down payment required for the purchase.
B. A lack of knowledge and confidence in the mechanical condition of the car.
C. The price of the automobile.
D. Avoidance of the vehicle's significant decrease in value due to depreciation.
2. Which of the following will directly affect the final cost of a new car if you elect to purchase the vehicle?
A. The amount of the trade-in on an existing vehicle (if applicable).
B. The color of the vehicle.
C. The extent to which you dress up when you negotiate the purchase.
D. The amount of any rebate or incentives associated with the purchase of the new vehicle.
E. The period or term of any loan used to finance the purchase.
3. Alternatively, after seeing several television commercials suggesting the benefits of leasing a new automobile, you’ve started thinking about the phenomenon of leasing. Which of the following statements regarding leasing is true?
A. If you select to use a closed-end lease, then you’ll be free from any final payment. That’s why they call it a walkaway lease.
B. Leasing can result in lower monthly payments than would be incurred if you purchased the vehicle.
C. Customary end-of-term charges on a lease can include a disposition fee, an early termination charge, and an excess mileage charge.
D. If you use an open-end lease, you’ll be required to pay the difference between the vehicle’s projected residual value and its actual market value.
E. Leases work best for people who want to drive a vehicle for years and years, and drive at least 30,000 miles every year.
4. A lease payment is based on four variables. Which of the following is not one of these variables?
A. The money, or lease, factor.
B. The vehicle’s residual value.
C. The closed-end premium.
5. Being upside down in a loan is the same as having:____.
A. Negative equity.
B. A negative interest rate.
6. Complete the following table to determine your desired maximum monthly payment.
Gross income (monthly) $
Deductions (dollar amount) $
Take-home pay $
Percentage allotted for car payment %
Maximum monthly payment $
7. You have decided to purchase a new car and have negotiated the price. A four-year loan is resulting in payments of $586.00 per month. How might you get your monthly payment down to your desired monthly goal?
A. Shop for a loan with a higher interest rate.
B. Extend the term of the loan from four to five years.
C. Shorten the term of the loan from four to three years.
D. Shop for a loan with a lower interest rate.
8. A good credit score is an important factor when buying a car because it allows you to (1)____obtain financing terms, and (2)_____afford a expensive or better vehicle for the same loan amount.