For many of us, new cars can be so appealing! We get bitten by the “new car bug” and think how great it would be to have a new car. Then we tell ourselves that we really need a new car because our old...

For many of us, new cars can be so appealing! We get bitten by the “new car bug” and think how great it would be to have a new car. Then we tell ourselves that we really need a new car because our old one is just a piece of junk waiting to fall apart in the middle of the road. Of course, we don’t have the money to purchase a new car outright, so we’ll have to get a loan. That means car payments. The trouble is, car payments often turn out to be a lot less affordable after we actually get the loan than we thought they would be before we signed on the dotted line. And they last way beyond the time the new car aura wears off. This project will help you understand how loan payments are determined, as well as the obligation that they place on you as the borrower.

Let’s assume for this project that your parents have promised to make the down payment on a new car once you have your degree in hand. They have agreed to pay 30 percent of the cost of any car you choose, so long as you are able to obtain a loan and make the payments on the remainder. Find the price of the vehicle you would like by visiting a car dealership or pulling up a Web site such as http:// www.edmunds.com. Add another 4 percent to the price for tax, title, license, and so on (or ask a dealer to estimate these costs for you). Take 70 percent of the total to determine how much you’ll have to finance from your car loan. Then find out what the going rate is for car loans in your area by calling or visiting your bank or by consulting a Internet site such as http://www.bankrate.com. Calculate what your monthly payments would be at this rate if you financed the loan for three, five, and six years. How well do you think these car payments would fit into your budget? What kind of income would you have to make to afford such payments comfortably? If the payments are more than you thought they would be, what can you do to bring them down?