Sample Solution

Assuming a monthly gross income of $4,000, 9% can be devoted to the car payment. Approximately $360 could be spent per month on the loan. To determine the highest price car that can be paid for with this amount each month using an Excel spreadsheet formula, one must use the PMT() function.

The PMT() function requires six inputs: rate (6.75%), nper (5 years in months), pv (0), fv (-car price), type (0) and guess(not required). For example, if one wanted to purchase a car for $30,000 then pv would equal -$30,000 and all other variables remain unchanged from 6.75%, 5 years/60months, 0 at end of period (no additional fees necessary after paying off loan). The resulting value is approximately -$530 meaning that by devoting 9% of income ($360) towards the car payment they are able to afford a vehicle priced at around $30,000.

This amount may not get a car that you like as it depends on personal preference when shopping for cars. There are strategies you can use to make sure you do not exceed your budget when purchasing a vehicle such as assessing what features or amenities are important and disregarding those which add little value; finding out what similar vehicles cost in your area; comparing different types of financing options; researching fuel costs over time; negotiating with dealerships or private sellers; and avoiding “extras” such as extended warranties or rustproofing services (Fernandez-Serrano et al., 2017). It is also important to remember that spending more than 20% of monthly net income on debt payments including mortgages and auto loans risks becoming too heavily indebted according to financial advisors (Ramsay & Beardsley 2016).