Most American families can't afford a new car, study finds(Read article summary)
A study by Bankrate concludes that for most American families, the cost of a new car exceeds the amount families are able to spend on their mode of transportation.
Buying a car is serious business, especially when you're buying one fresh off the assembly line. In fact, a study from Bankrate reveals that most U.S. families can't truly afford to buy brand-new vehicles.
To reach that conclusion, Bankrate used three important figures: the average price of a new car, which was $33,865 according to KBB at the time the survey was conducted; the average rate for a 48-month new-car loan, which was 4.24 percent; and average insurance rates for America's 50 largest cities.
Bankrate also assumed that consumers should follow the 20/4/10 rule when buying a vehicle. That rule states that shoppers should make a downpayment of at least 20 percent; finance a vehicle for no more than four years; and ensure that the loan principal, interest, and auto insurance total no more than 10 percent of gross household income.
For example, if you were buying a vehicle for $20,000, following the 20/4/10 rule, you'd want to make a $4,000 downpayment, leaving $16,000 to finance. If you landed an interest rate of 4 percent, using a handy-dandy loan calculator, we see that you'd pay a total of $17,340.71 over the life of the loan. If your insurance premiums ran $900 per year for four years, that would be $3,600, making for a total, four-year cost of $20,940.71, or roughly $5,235 per year. If you gross $52,350 or more annually, you'd be following the 20/4/10 rule.
Unfortunately, based on all those averages--new-car prices, interest rates, and insurance--most U.S. families can't afford the average $33,865 car. Some cities did come closer than others, though.
In San Jose, California, which boasts household incomes averaging $87,210, the survey showed that most families could afford a car costing up to $32,855.81. San Francisco, Seattle, Washington, D.C., and San Diego rounded out the top five--though by the time the study reached the #5 slot, the maximum affordable price for a new car had dropped to $25,033.41.
At the other end of the scale, we find--ironically--Detroit. Yes, in the home of America's domestic auto industry, where average household incomes hover just below $26,000, families can afford cars costing up to $6,174.03. Rochester, Cleveland, Hartford, and Buffalo followed close behind.
As you can see, studies like these rely heavily on averages. If you earn more than the average family, if you score a better insurance rate than most, or if you're able to pay more than 20 percent down, you're better equipped to handle the cost of a new car.
That said, the 20/4/10 rule is a fairly good one to follow. The fact that U.S. new-car sales are booming these days--despite Bankrate's findings--suggests that many families are taking on more debt than perhaps they should.
For a full ranking of U.S. cities according to the amount they can comfortably pay for a new car, click here.
This article first appeared at The Car Connection.