Car Buyers In Many U.S. Cities May Be Extended Too Far

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Car buyers in many cities may be extended too far
Rich Pedroncelli/AP
By Philip LeBeau

A new study shows the average household in 24 of America's 25 largest metropolitan areas cannot afford to pay for the average priced new car or truck.

"Just because you can manage the monthly payment doesn't mean you should let a $30,000 or $40,000 ride gobble up such a huge share of your paycheck," said Mike Sante, managing editor of Interest.com. "Many people are spending money on a car payment that they could be saving."

For the second straight year, Interest.com calculated how much the median household in America's largest metro areas could afford to spend every month on car payments and auto insurance.

Once again, Washington D.C., topped the list with the median household being able to afford a maximum monthly payment of $641.

The study showed that Tampa and Miami are the only two cities where car affordability declined over the past year.

The biggest jump was in San Antonio where affordability increased 7 percent compared with last year.

Interest.com makes its calculations assuming buyer's put down 20 percent and take out a 48-month auto loan.

Top 5 metro areas for auto affordability:

1. Washington, D.C. - ($32,531 affordable purchase price/$641 maximum monthly payment)

2. San Francisco - ($28,009 affordable purchase price/$563 maximum monthly payment)

3. Boston - ($26,669 affordable purchase price/$520 maximum monthly payment)

4. Minneapolis - ($24,846 affordable purchase price/$494 maximum monthly payment)

5. Baltimore - ($24,591 affordable purchase price/$479 maximum monthly payment)

Buyers overextended

With the average price paid at dealerships for a new car now topping $32,000,
Interest.com says many households in America's largest metropolitan areas cannot afford to spend as much as they do on new cars and trucks.

"I'm concerned the average transaction price is so much higher than the median income for families," said Sante. "Clearly, many people don't have a plan for how much they can spend and afford."

The truth is few car buyers put down 20 percent when they buy a new vehicle, and according to Experian Automotive just 4.7 percent of all new car auto loans in the fourth quarter of last year were 37-48 months long. By comparison, a record 20.1 percent of auto loans were between six and seven years long according to Experian.

The rising popularity of longer auto loans is due to new car buyers looking to keep their monthly payments as low as possible.

"You shouldn't borrow for over 48 months or you'll wind up paying for a new car forever," said Sante.

Cities with the lowest affordability:

21. Phoenix - ($18,199 affordable purchase price/$364 maximum monthly payment)

22. Pittsburgh - ($17,965 affordable purchase price/$354 maximum monthly payment)

23. Detroit - ($17,352 affordable purchase price/$338 maximum monthly payment)

24. Miami - ($15,174 affordable purchase price/$299 maximum monthly payment)

25. Tampa - ($14,209 affordable purchase price/$280 maximum monthly payment)

The 20/4/10 rule

Sante believes more American households would have more money to save or spend on something else if they followed the "20/4/10 Rule":
  • Put down 20 percent.
  • Take out an auto loan for no longer than 4 years.
  • Make sure you spend no more than 10 percent of your monthly gross pay on a car payment and auto insurance.
"You really should have a game plan when you start looking to buy a new car or truck," said Sante. "If you don't you could find yourself spending more than you can really afford."

http://www.interest.com/auto/calculators/auto-loan-calculator/


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6 Comments

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Cherry Chen

Solutions:
1) Get gas using gas saving apps. Check out GasBuddy. I never pay more than $15 for gas with it.
2) Buy a cheap car used that doesn't break down a lot. I love my 2006 Honda Accord.
3) Get insurance online. Try Insurance Panda. I pay $30/month full coverage.
4) Use the Waze app to avoid unnecessary driving and traffic jams.
5) Try your best to pay for the car in full. Don't get a loan for it.

March 12 2014 at 2:29 PM Report abuse rate up rate down Reply
laura.meads

we would love to have a new car, but will have to stick to the 17 year old Toyota with over 300k miles. just don't have that kind of $

March 12 2014 at 2:08 PM Report abuse +1 rate up rate down Reply
pllove49

What a shocker ..people can't afford much of anything that's new...heck even the junk and clunkers are almost out of range for most people...

March 12 2014 at 1:27 PM Report abuse +3 rate up rate down Reply
armstrongrainman

lets see-put 20% down,4 yr. loan, 10% of monthly income for car payment & auto insurance.
14,000 car( probably a yugo at this price)- 2800.00 down=11,200 loan divided by 4 yrs
=2800.00 yr. divided by 12 months=233.33 month payment plus 11,200.00 at 7% intrest at
bank divided by 12 months=65.33 intrest/month=298.66 car payment PLUS car insurance
107.00 month(could be higher for new vehicle)=405.66 monthly car payment not to excede 10% of monthly income means you make 4056.60 monthly=48,679.20 yr=23.40 hr. .
It's no wonder that cars sales suck. This scenario belongs to maybe30% of the population.

March 12 2014 at 1:05 PM Report abuse +3 rate up rate down Reply
1 reply to armstrongrainman's comment
vlady1000

Your point is well taken. The actual payment would be $268/mo, a little less than your $298. But you know how many think. can not afford, just make the loan period longer to reduce the monthly payment, hence the 5 year auto loan, and I believe some are now going up to 7 years. In my 40 years of owning a cars, I always paid cash and never carried collision or theft. Never made sense to pay interest (especially no tax deductible) and much higher insurance prems on a depreciating asset.

March 13 2014 at 8:58 PM Report abuse +1 rate up rate down Reply
komivesdd

This financial hucksterism has been going on since the first car was sold. The upsidedowncar owner whose car will be worn out before it is paid for.... if ever it is paid for, will go broke over his , as the salesman put it "wise purchase" and "rock bottom deal". Champagne taste and beer pocketbook will get them everytime. Folks, didn't even touch on insurance cost and cost of maintenance, what were you thinking when you signed the sales contract??????? People have not gotten smarter, 30 years ago I sold quite a few new Chevys at STICKER and sometimes more, all because the buyer wanted to keep the same payment, just stretched out over a longer time period. They demanded all those add-on dealer installed "extras" too, we would just roll them into the deal. They were blinded by the thought of showing off a new car to their friends and family and would not bother to negotiate the price or finance terms. They left the dealership happy, my job was done.

March 12 2014 at 11:45 AM Report abuse +1 rate up rate down Reply