Personal Finance (MindTap Course List)
13th Edition
ISBN: 9781337099752
Author: E. Thomas Garman, Raymond Forgue
Publisher: Cengage Learning
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Question
Chapter 6, Problem 1DTM
a
Summary Introduction
To determine: The debt payments-to-disposable income ratio.
Introduction:
Establishment of debit limit:A debit limit is the overall maximum credit one should get based on his ability to meet the repayment obligations. The recommended safe debt limit is considered to be 11 to 14 percent debt payment limits as percentage of disposable personal income, the length of time that high debt payment is also important to consider.
They are three recommended methods for you to determine the debt limit.
- Continuous-debt method:under this method, it is evaluated if it is difficult to get out of debt completely every four years, if yes it shows you are heavily dependent on debt.
- Debt payments-to-disposable income method: it uses the debt payment to disposable income ratio excluding mortgage loan, it focuses on the amount of monthly debt repayment.
- Debt-to-income method: it is based on the ratio of debt to income a ratio of 36 percent or less is desirable.
a
Expert Solution
Answer to Problem 1DTM
KJ’s debt payment to disposable income ratio is 21%. It is way above the desired ratio of 14%
Explanation of Solution
Debt payment to disposable income can be calculated by following formula
K has an outstanding student loan for which he pays $900 per month and auto loan repayment $300 hence total non-mortgage loan payment debt is $1,200 and his disposable income
| Amount $ | |
| Salary | 9,000 |
| Less: Federal tax | (1,800) |
| State tax | (500) |
| Medicare | (700) |
| Social security tax | (230) |
| Disposable income | 5,770 |
b
Summary Introduction
To determine: Whether K’s plan to go for an automobile loan to buy a motorcycle is feasible.
Introduction:
Establishment of debit limit:A debit limit is the overall maximum credit one should get based on his ability to meet the repayment obligations. The recommended safe debt limit is considered to be 11 to 14 percent debt payment limits as percentage of disposable personal income, the length of time that high debt payment is also important to consider.
They are three recommended methods for you to determine the debt limit.
- Continuous-debt method: under this method, it is evaluated if it is difficult to get out of debt completely every four years, if yes it shows you are heavily dependent on debt.
- Debt payments-to-disposable income method: it uses the debt payment to disposable income ratio excluding mortgage loan, it focuses on the amount of monthly debt repayment.
- Debt-to-income method: it is based on the ratio of debt to income a ratio of 36 percent or less is desirable.
b
Expert Solution
Answer to Problem 1DTM
KJ should not go for another loan, as his debt payment to disposable income is not good.
Explanation of Solution
Estimated funds available for debt repayment is expected to less than 14%. Because K’s ratio is 21%, he may face difficulty in repayment of additional debt as he has too low disposable income. It will also affect spending capacity and may affect liquidity position of an individual that is he may face difficulty in managing day to day expenses, thus.It is not advisable for him to go for one more debt, as he may face difficulty in repayment of one more loan.
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Students have asked these similar questions
Kevin Jones, of Elon, North Carolina, is single and recently graduated from law school. He is employed and earns $9,100 per month, an awesome salary for someone only 26 years old. He also has $1,700 withheld for federal income tax, $520 for state income taxes, $680 for Medicare and Social Security taxes, and $240 for health insurance every month. Kevin has outstanding student loans of almost $80,000 on which he pays about $950 per month and a 0% loan on an auto loan payment of $300 on a Ford Fusion Hybrid he purchased new during law school. He is considering taking out a loan to buy a Kawasaki motorcycle.
1. What is Kevin's debt payments-to-disposable income ratio? Round your answer to two decimal places.
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Debt Payments-to-Income Ratio
Ratio with college loan
Ratio without college loan
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Chapter 6 Solutions
Personal Finance (MindTap Course List)
Ch. 6.1 - Prob. 1CCCh. 6.1 - Prob. 2CCCh. 6.1 - Prob. 3CCCh. 6.1 - Prob. 4CCCh. 6.2 - Distinguish among the continuous debt method,...Ch. 6.2 - Prob. 2CCCh. 6.2 - Prob. 3CCCh. 6.2 - Prob. 4CCCh. 6.3 - Prob. 1CCCh. 6.3 - Prob. 2CC
Ch. 6.3 - Prob. 3CCCh. 6.3 - Prob. 4CCCh. 6.3 - Prob. 5CCCh. 6.4 - Prob. 1CCCh. 6.4 - Prob. 2CCCh. 6.4 - Prob. 3CCCh. 6.4 - Distinguish between Chapter 7 and Chapter 13...Ch. 6 - Prob. 1DTMCh. 6 - Buying a Vacation Home. Barrie and Inga Adlington,...Ch. 6 - Prob. 3DTMCh. 6 - The Johnsons Attempt to Resolve Their Credit and...Ch. 6 - Victor and Maria Advise Their Niece Victor and...Ch. 6 - Julia Price Thinks About a Loan to Buy an Inboard...Ch. 6 - Prob. 4FPCCh. 6 - Cousins Discuss Their Debt Situations Melinda...Ch. 6 - Prob. 6FPC
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