Consumers in Many U.S. Cities Are Overextended on Auto Loans, Study Says | Edmunds

Consumers in Many U.S. Cities Are Overextended on Auto Loans, Study Says


Just the Facts:
  • Consumers in many U.S. cities are overextended on their auto loans, according to new data from Interest.com.
  • According to the report, of 25 U.S. cities, only consumers in Washington, D.C., can afford to buy a vehicle at the national average cost of $32,086.
  • The Interest.com conclusion assumes 20 percent down and car payments plus insurance totaling 10 percent or less of household income.

NORTH PALM BEACH, Florida — Consumers in many U.S. cities are overextended on their auto loans, according to new data from Interest.com.

The Web site, which helps consumers to make financial decisions with its analysis, interest tables, and calculators, has released its second annual Car Affordability Study and the results are not particularly rosy.

Interest.com looked at 25 major U.S. cities and found that, with an average cost of $32,086 for a new car or truck in 2013, only those living in Washington, D.C. can actually afford to buy a vehicle at that price.

The site's conclusion is based on the "20/4/10 rule" — a down payment of at least 20 percent; a finance term of four years; and principal, interest and insurance not exceeding 10 percent of a household's gross median income.

Taking all those factors into account, Washington, D.C. residents at the city's median income level of $66,583 in 2013 can afford to spend $32,531 on a car, with monthly payments up to $641. By contrast, consumers in 25th-ranked Tampa, Florida (2013 median income, $44,402), can only buy a $14,209 car, with payments around $280 per month.

"What this research indicates, more than anything is that a lot of Americans are spending too much money on their cars," said Mike Sante, managing editor of Interest.com, in a statement, "Of course, with about 15.6 million vehicles sold in 2013, it seems obvious that a good many buyers are not following the golden "20/4/10" rule.

But let's do the math.

An Edmunds analysis shows that the average down payment for a new car in 2013 was just 12 percent. So the "20" part of the rule is not being observed regularly.

A J.D. Power study found that the average length of a new-vehicle loan is now 66 months. And terms of 72 months or more — some as long as 97 months — make up fully 33.1 percent of the total. So the "4" is being widely ignored.

Meanwhile, Experian notes that the average monthly payment on a new car in the U.S. is around $460. And, according to AAA, the average cost of insuring a passenger vehicle in 2013 was $85.75 per month.

So with the median U.S. household income per month standing at $4,277, according to the U.S. Census Bureau, and payments plus insurance averaging $545.75, it's pretty clear that average American is stretched beyond the"10" component of the Interest.com recommendation.

Edmunds says: It's fun to play with averages but, as always, your results may vary.

Leave a Comment
ADVERTISEMENT
ADVERTISEMENT