Question

Answer the journal prompts according to the scenario below:

Joe-Bob wants to buy a car and will need to take out a loan in order to make the purchase. His current monthly income is $3,500 per month. His mortgage payment is $900 per month, and his student loan payment is $350 per month.

Note: You do not need to take taxes into consideration for this journal.

According to the affordability formulas given, can he afford to take out another loan?
When should he follow the affordability formulas? In what cases should he not?
How could taking out the car loan impact his other priorities?

Answer 1

1. According to the affordability formulas given, Joe-Bob cannot afford to take out another loan.

2. Joe-Bob should follow the affordability formulas if he wants to live without financial stress caused by debts.

3. Joe-Bob may decide not to follow the affordability formula, if he can reduce his fixed monthly payments or increase his income.

4. Taking out the car loan will force Joe-Bob to increase his DTI and reduce his savings, investments, and discretionary spending.

What is affordability?

Affordability refers to a person's financial ability to afford some fixed expenses without impacting negatively the variable expenses.

Affordability can be measured as a Debt To Income (DTI) ratio.

Data and Calculations:

Current monthly income = $3,500

Monthly mortgage payment = $900

Monthly student loan payment = $350

Total monthly debt payment = $1,250

Debt To Income (DTI) = 35.7% ($1,250/$3,500 x 100)

Thus, with a DTI of 36%, Job Bob should not take out an additional car loan.

Learn more about Debt To Income (DTI) ratio at https://brainly.com/question/26258146

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