Individuals with higher outstanding loans are considered riskier by lenders as there is a higher probability of default relative to those with no or with fewer debts to pay. I have an outstanding long-term education loan that is considerably low relative to the current income level. My current credit score is 630, meaning that I have a healthy financial standing that would attract an interest rate of 9.288 % per annum for a loan payable monthly in 36 months FICO. (n.d.). My dream car is a Chevrolet Spark LS which costs $14,395 ( Lassa, 2020).
A $14,395 3-year loan payable monthly at 9.288% per annum interest attracts a total interest of $2,153.81. The scheduled payment per month is $459.69, which is below the disposable income of $1,000 available per month after paying for all the basic expenses, including the repayment of the outstanding education loan.
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The affordability of a car is a key factor to consider before purchase. A car is only affordable if the projected monthly repayments are below an individual’s disposable income after paying all the basic expenses, including repayment of any outstanding loans. The scheduled repayment may be reduced by increasing the repayment period, although this would increase the total interest payable. Since a car is a depreciating asset, financial prudence discourages excessive spending. More attention should focus on appreciating assets.
References
FICO. (n.d.). Estimate your loan savings using a credit score calculator . myFICO. https://www.myfico.com/credit-education/calculators/loan-savings-calculator/
Lassa, T. (2020, June 19). The ten cheapest cars on sale in the U.S. in 2020 . Automobile Magazine. https://www.automobilemag.com/news/10-cheapest-cars-on-sale-united-states-today/
