Can I Afford A New Car: Financial Study Finds Most People Can’t
You Probably Don’t Fit the Affordability Rules
The 2017 Car Affordability Study takes into account a common budgeting formula for car buyers. The criteria include three factors: down payment, loan term and the monthly costs associated with buying a car. It’s called the 20/4/10 rule.
Down Payment Matters
As a rule of thumb, it’s considered good practice to put down 20 percent of the purchase price of a new vehicle. The down payment takes care of depreciation and prevents you from immediately being “upside down.” That means staying out of a negative equity situation.
Considering the average cost of a new car is $33,300 today, following the car buying rules means having a down payment of nearly $6,700. Although trade-in could be used in lieu of money down, most Americans take advantage of zero down, low interest loans with subvented interest rates whenever possible.
The Loan Term Length
Bankrate suggests taking a maximum car loan term of 48 months. Many lenders and manufacturers offer loan terms of 84 months – even 96 months and longer.
While it reduces payments, the buyer is still paying off their car well after the warranty has expired. That often means “doubling down,” paying for repairs and payments at the same time. It’s difficult to manage for most people.
How Much Should You Spend Per Month?
The “10” in the formula is the percentage of vehicle-related expenses the monthly budget should contain. That’s not just car payments either. It includes car insurance and registration, fuel, maintenance and repairs.
Among professionals with a college education, the average annual income is $63,076, or $5,256 per month. That leaves a monthly car expense of $526. Between payments, insurance, fuel, and maintenance that $526 evaporates in no time at all.
Where Is a New Car Affordable?
Bankrate ranks the top 25 cities in terms of car affordability. According to the 20/4/10 rule, it’s only affordable to purchase a new car in one American city: Washington, DC.
What You Should Do When Buying a Car
Obviously, most people will continue to purchase cars. A couple tips will help keep your vehicle affordable.
- Stay within the 20/4/10 rule. Look for vehicles within your affordable price range and stick to your budget.
- Look at used cars. If new cars are outside your affordability, shop for used or certified pre-owned vehicles to keeps costs down.
- Understand the maintenance and insurance costs before buying. Many buyers don’t consider the extras when they sign the sales agreement and get a shock afterwards.