Can I Afford That Payment?

Cassy J. H. Budd, CPA

Associate Teaching Professor, School of Accountancy

Brigham Young University

Frequently, when someone applies for a loan, the seller or lending institution will “qualify” the buyer for a surprisingly large monthly payment. Before you agree to assume the debt by signing your name, you should be certain that the payment for which you qualify is one that you can actually afford. If the payment is one that will be new to your budget, set up a new bank account and “make the payment” to that account for a period of six months. If the payment will be replacing another amount, like rent or another car payment, continue to pay the original amount and then send the difference between the old and new payment to the bank account for six months.

Six months is a great time frame to use for this exercise because many of the “unexpected” expenditures we tend to forget about will show up during that time period, such as the semiannual car insurance payment, the periodic trip to the dentist, or the occasional need for a visit to the urgent-care office. At the end of six months, if you can comfortably meet the obligation to yourself, you know you can continue to do so with a lender. Not only that, but you will have a nice little stash of cash to increase your down payment on that car or home.