If you’re wondering, “Can I afford a new car,” statistically speaking probably not. According to the latest Car Affordability Study performed by Bankrate, most Americans can’t afford a new car.
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.
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.
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.
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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.
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.
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.
Obviously, most people will continue to purchase cars. A couple tips will help keep your vehicle affordable.
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