The average transaction price of a new vehicle is $32,086. For the last few years Americans have been buying higher-contented vehicles, which are cars and trucks packed with features and accessories.
The one problem here is that the average U.S. household can’t afford that price.
Interest.com, a consumer finance site owned by Bankrate looked at median household incomes across the US and concluded that new cars are out of reach for most Americans. They looked at the median household income in the 25 largest U.S. metropolitan areas and Washington DC was the only area that could actually afford to buy a new car.
Washington had the highest median household and based on their calculations a car buyer would be able to support a $641 monthly payment, which they translate to a purchase price of $32,531 - slightly higher than the average.
Americans are spending too much on their cars according to the data, if you want to buy a new car the analysts at Interest.com recommend the “20/4/10” rule. This equals a down payment of at least 20%, financing lasting no more than four years, and total cost — principal, interest, and insurance — adding up to no more than 10% of a household’s gross income.
Auto loans with monthly terms running for six or seven years are becoming more common. The longer the term the more you can “afford,” but the problem with that is it means more in interest and finance charges.
According to Edmunds, ten years ago the average loan length for new vehicles was 63.3 months; in November of 2015, it was 68.3 months. Experian, a credit-tracking firm, says loans with terms lasting 73 to 84 months accounted for nearly 28% of all new vehicles financed in the third quarter of last year, up 17% from the same quarter a year ago. Earlier in 2015 it hit 30%, the highest ever.
Another main reason to keep the loan length down is negative equity, keep in mind that a new car on average depreciates 22 percent in its first year. A buyer is generally “upside down” meaning that she owes more than the car is worth. Car buyers aren’t putting down enough of a down payment, so it takes them longer to build equity in the car.
The flipside to paying an astronomically high price and losing money immediately on the resale value is to buy in the private party. Buying a newer used car that had one previous owner is a great way to save money - let the first owner eat a bulk of the depreciation and get a great feature rich vehicle at the best price. You can also secure a auto loan on a used vehicle just as you would at the dealer through your bank or credit union.