We here at Instamotor are working hard to make buying a used car easier and more affordable. We’ve taken more of the guess work out of the entire process by putting together a brand new tool for our users. We recently put our brain trust and number crunchers to work and cooked up a brand new calculator to help you figure out just how much car you can afford. While we were working on putting that piece of awesome technology together we crunched some numbers for you to discover where it’s the most affordable to buy a used car.
Here’s how we did it. We wanted to figure out where you could find the most affordable cars around. So we took the top 75 most densely populated areas in the U.S., and grabbed all the For Sale By Owner listings we could find in each area. On average we found that each area had 4,147 listings. From there we determined what the average price of a used car was for each area and we ranked them from least affordable to most affordable.
How Affordable is it to Buy a Car in the U.S. Based On Income
We wanted to get a more complete idea of used car prices beyond this. Affordability is based on income and as we have written about in the past, one of the best things you can do is get a good handle on just how much car you can afford based on a number of factors. If you need a refresher on what you should take into consideration before plopping down massive amounts of money for a car, check out our recent post, here.
In addition to this, back at the beginning of 2016, Bankrate did a study that essentially showed that Americans could no longer realistically afford to buy a new car. In 2016 KBB reported that the average new car price increased by 2% to $34,938 and Edmunds third quarter analysis reports that the average price of a used car is now $19,232. All these factors point to one main takeaway—cars are expensive and getting pricier, especially if you are looking at buying a new car. That being said though, there are ways you can save. One of those ways is by shopping for a used car from a private seller—or take the uncertainty out of the transaction by using a service like Instamotor to help you find the right car for you and make a savvy financial decision.
To help you figure out the best plan for buying a used car, we wanted to get a better idea of what “affordable” actually looked like based on median income. To that end, we took the median income for each major U.S. city and metro area and calculated an affordable price based on a 48-month loan term and a 5% interest rate. In that cost we also included the monthly average cost of gas and insurance based on each location, assuming that you should not use more than 15% of your gross monthly income to pay for a car. From there we ranked each city’s used car affordability from 1 to 100, with 1 being the most affordable based on the median income and 100 being the least affordable based on income.
How to Determine Affordability in Car Buying
When you are looking for a new or a used car, financial advisors and gurus agree: Try to spend less than 20% of your income on your car. Why 20%? Well, if you want to maintain and grow your wealth as you get older, you need to invest and save in a measured way. Most financial advisors say that you shouldn’t spend more than you earn or take on more debt than you can handle. Getting that formula right depends on choosing the right priced house, car, and college and keeping all those debts as low as humanly possible. These are the biggest things you will spend on in your life. Making frugal choices and keeping their costs low is of the utmost importance.
When we dove into the numbers, what we found out was surprising. The most expensive place to buy a used car (based on median income) is McAllen, TX. According to Census.gov the median income in McAllen, TX, was just $44,254 in 2015 dollars. That puts it more than $12,000 below the national median income of $56,615.
The 20% Rule
If you assume that you should never spend more than 20% of your income on a car, the average new car is well out of reach for someone living in McAllen. If the average cost of a new car is hovering around $34,938 that’s more than 61% of the median income for someone living in McAllen. If those in McAllen are looking for a better way to manage their finances, they should check out a used car. According to our analysis the average price in McAllen is $6,497. That is just 14% of the median income there.
On the other end of the scale, people living and working in New York have an easier time affording a new car but it is still well outside the recommended 20% rule. This is because the median income in the New York area, according to the Census report is $72,871. When people in New York, NY are looking at buying a new car they are looking at spending 48% of their income on it. The used car picture is a bit better. New Yorkers can spend just 11% of their income on a used car bought on the private market or through Instamotor, a significant savings.
That doesn’t mean that you should head to New York to buy a used car though. According to our analysis, the average price of used cars in New York is right around $8,179. That puts that area at number six in our average used car price list. You also should be aware that it doesn’t always make sense either financially or physically to buy a car from out of state and you could end up losing money in the transaction if you do go over state lines to purchase a car. If you want to learn more about why you should really think twice about buying a used car out of state, check out our post.
Want to take a deeper dive into our study? We first established an affordable price with our calculation, using median income and other base assumptions on loan term and interest rate. We then created an affordability score, which we then visualized on the map, where we compared the differences between our established affordable price, against both the new car transaction price, and the retail used car transaction price, with both weighted equally. The new car price was from KBB, and the retail used car price was from Edmunds. You can check out our map breakdown and the study, here.