U.S auto sales are on track to reach an all-time record this year of 17.7 million. But there’s a dark side to that story. A lot of Americans can’t afford the $34,000 it takes to buy an average-price vehicle. Yet many of them are doing it anyway by taking out longer, more expensive loans.
A recent study from the personal finance site, Bankrate.com, found that median-income households in each of the country’s 50 largest cities can’t afford a vehicle at Kelley Blue Book’s current national average price of $33,865.
That’s even in a place that’s oozing with money, like San Jose, Calif., where the median household income is $84,000. In San Jose, an affordable car, according to Bankrate.com, costs about $33,000.
In L.A., where the median income is $50,544, that type of income would only support buying a car that costs $17,630, according to the Bankrate.com survey.
Bankrate determined affordability by applying the 20/4/10 rule: 20% down on the purchase price, no longer than four years of financing, and no more than 10% of a household’s gross income going toward principal, interest and insurance combined.
Applying that formula to a passenger vehicle that’s the average price people are paying — about $34,000 — would require a $6,800 down payment. The amount that would need to be financed, then, is $27,200.
To pay that off in Bankrate’s recommended four years would cost buyers about $620 per month, presuming a 4 percent annual percentage rate.
And that’s just the car. It doesn’t include fuel and insurance.
“People are spending far too much money on their cars,” Steve Pounds, personal finance analyst at Bankrate.com, said in a statement. “There are many safe, affordable and stylish options on the market for people to choose from that won’t cut into more important budget items such as college funds and retirement savings.”
The credit reporting agency Experian is reporting the trend of unaffordabiilty is accompanied by an increase in the percentage of new car buyers who are financing the purchase, as well as the amount people are financing and the length of time for their loans.
The average new vehicle loan term is 68 months, according to Experian, or about six years. Almost a third of new vehicle loans are now between six and seven years — a 12 percent increase from the fourth quarter of 2014 to the same period in 2015.
Cars’ unaffordability is also pushing more consumers into new car leases to help keep payments low. Leases were 27% of the new car market in the first quarter of 2015. A year later, they had jumped to 31 percent. The average monthly lease, as of early 2016, was $503.