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Americans may be spending too much on new cars

Research finds median-income households can afford the average-priced new car in only one in 25 U.S. metropolitan areas.

By Douglas Newcomb Mar 12, 2014 2:21PM

New car dealer. Photo by Flikr user Emilio Labrador.See all those people driving around in new vehicles? It may compel you to splurge on a new car. Or perhaps your neighbor just bought a cool new ride and now you want to keep up with the Joneses.


But before you sign on the dotted line and enjoy that new-car smell -- and get stuck with a payment that sucks up a big chunk of your monthly income -- you should consider whether you’re buying more car than you can afford, advises Interest.com. Its 2014 Car Affordability Study, in fact, found that median-income families in only one major city -- Washington, D.C. -- can afford the average-priced new car or light truck.


“Too many families are spending way too much on new cars and trucks,” Mike Sante, managing editor of Interest.com, said in a statement. “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.”


Interest.com considered three factors in calculating how much a household can afford to spend on a new vehicle. Referred to as the “20/4/10” rule, it includes a down payment of at least 20 percent; financing lasting no longer than four years; and principal, interest and insurance not exceeding 10 percent of a household's gross income.


To come up with its affordability ratings, Interest.com calculated 10 percent of the monthly median gross household income for each U.S. major metropolitan area using information from the U.S. Census Bureau. It then subtracted the average monthly insurance premium to determine the maximum amount that the median-income household should spend on monthly car payments, including principal and interest.


Insurance costs are 2011 statewide averages from the National Association of Insurance Commissioners, while average 48-month new car loan rates are according to Bankrate.com. Sales tax rates were obtained from local governments and car dealers.


For comparison purposes, Interest.com used the Kelley Blue Book average price of a new car or light truck in 2013, which was $32,086. This equates to a monthly payment of approximately $633. Interest.com used its auto loan calculator to determine how much the median-income household can afford to borrow using the 20/4/10 rule.

Washington, D.C., led the list of metropolitan areas with the highest degree of affordability for the second year in a row, followed by San Francisco and Boston. The Florida cities of Tampa and Miami ranked at the bottom of the list and were also the only two cities where car affordability declined over the past year.


According to Interest.com, San Antonio saw the biggest jump in affordability over the past year (7 percent), followed by Phoenix (6 percent) and San Francisco and Atlanta (both 5 percent). The full list is below, and it also shows the maximum amounts that Interest.com recommends that median-income households spend on vehicle payments, including principal and interest.


“You can get a great car for much less and use the savings to invest in yourself,” said Interest.com’s Sante. “Here's where the money for your retirement or kids' college can come from."


Metro area         

Affordable

purchase price  

Maximum monthly payment

1.   Washington, D.C.          

$32,531

$641

2.   San Francisco                  

$28,009

$563

3.   Boston                             

$26,669

$520

4.   Minneapolis                      

$24,846

$494

5.   Baltimore                         

$24,591

$479

6.   Seattle                              

$23,600

$480

7.   Portland, Ore.                     

$22,905

$415

8.   Denver                               

$22,775

$452

9.   San Diego                          

$22,175

$442

10. New York City                   

$21,907

$441

11. Philadelphia          

$21,775

$434

12. Chicago                 

$21,409

$434

13. Dallas                     

$20,731

$405

14. Los Angeles             

$20,637

$416

15. Sacramento              

$20,554

$412

16. Houston                    

$20,271

$396

17. Milwaukee                  

$20,013

$388

18. Atlanta                        

$20,000

$393

19. St. Louis                      

$19,016

$379

20. San Antonio                  

$18,376

$359

21. Phoenix                         

$18,199

$364

22. Pittsburgh                       

$17,965

$354

23. Detroit                    

$17,352

$338

24. Miami                      

$15,174

$299

25. Tampa                   

$14,209

$280

 

[Source: Interest.com]

198Comments
Mar 12, 2014 3:01PM
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As long as people are stupid enough to keep paying outrageous prices, the car companies will keep raising them. IF people suddenly get an attack of common sense, and just stop buying new cars, it would only take a month or so and prices would suddenly drop like a rock.
Mar 12, 2014 3:07PM
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So only the people who work near the federal government can afford a new car, while the rest of the average people, even in some of the wealthiest U.S. cities,  must do without.  There's a lesson here and it's not a good one.
Mar 12, 2014 3:04PM
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What? You mean my income isn't keeping up with the price of new cars? A brand new Yukon XL with leather is over $60,000. That would be more than my house payment.

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Still driving 03 superduty owes me nothing with 239K 7.3l Diesel


and 04 Suburban with 210K on 5.3L gas


I put the car payment amount into a savings account so repairs are not an issue and when they do crap out I just go buy another truck with cash.  I always tell them I am financing and get a better price because they think they are making money off the financing.  Then I just pay it off before the first payment..  My sons do the same.

Mar 12, 2014 2:49PM
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Another thing people should consider when purchasing a vehicle is can they afford to pay for repairs after the warrenty period.  I made that very mistake when I purchased a new 2006 Ford Super Duty truck with the then touted 6.0 diesel. Months after it was paid off, the engine started to give issues and the last quote for repairs was 9600 bucks, on a vehicle that was worth 13 grand.  Needless to say, I do not own the truck anymore.
Mar 12, 2014 3:21PM
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A new car,truck might be thee most biggest waste of money.

got me a 2006 Lincoln truck 4x4 for $13,000 very nice

had for 1 year so far so good. cost new over $42,000.

PS this truck is nice but not worth $42,000 + new !!

(all-that) let someone else waste the $30.000)

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My niece got hit with $5K to replace out of warranty ac on a VW Jetta
Mar 12, 2014 5:43PM
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Not A Proportional Expense, 

   Apparently there are still some auto industry writers insinuating that cars are somehow as proportionately affordable as they were thirty or more years ago, which borders on delusional. Today's average $30,000 auto, though admittedly packed with safety features and electronics unknown in the 1970's, costs on average 75% to 80% of the average American's full year's wages or salary. Also, this does not take into account the sharp increases in gasoline, insurance, registrations and maintenance costs.

   In 1974 after college I was making about $320.00 per week, or 16,640k / yr. working for a realty division of one of the Big 3 car makers. That year I bought a brand new Plymouth Barracuda for the 'astounding price' of $3,540.00 out the showroom door. The car's cost was only about 21% of my starting salary that year...and gasoline was about 65c a gallon. The average working person today is certainly not making 5 times the cost of the average $28,000 to $32,000 car out there on the lot. Factor in today's $3.50 per gallon gas, higher insurance rates and $70.00 per hour mechanics and new car ownership becomes a veritable minefield of delusion and reality checks to even think of comfortably affording the vehicle. Just sayin' ... Peace to all.

Mar 12, 2014 4:20PM
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Car dealerships will keep on shoving cars down peoples throats. Pressuring the sales people to work from open to close. Encouraging them to get into debt so they will have no choice but to keep working for the dealerships. I worked for one of the major 3 companies for almost 10 years. I honestly had the customers best interest in mind. Which really irritated the big boys. I did well, but worked very hard and put up with a lot of abuse. Both from customers and my bosses. If I made a difference in just one persons life, that is all that matters. I looked around one day and it just made me sick. It was all about money and showing off your expensive things. I saw a lot of divorces, a lot of alcoholism, a lot of extramarital affairs. The whole thing makes me sick. I am glad I no longer am in the business.
Mar 12, 2014 4:14PM
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I stopped buying new cars when their cost exceeded that of my first house.
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