Splurging for that shiny new car could put the brakes on your family’s budget.
The average price of a new car or truck sold in the U.S. last year was $32,086, according to Kelley Blue Book. That suggests that the average American family may be spending too much, according to a new analysis by Interest.com.
The site, a service of Bankrate.com, looked at whether families earning the median income in 25 of the country’s largest metro areas could afford to pay that much.
It found that the expense of car payments and insurance would strain the median family’s budget in 24 of 25 cities. Only median-income households in Washington, D.C., can afford to purchase a new car at that average sale price.
To calculate affordability, the website used the 20/4/10 rule, which assumes 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. (Washington fared the best because at $88,200, its median household income is the highest.)
Of course, car buyers routinely make smaller down payments, take a longer-term loans, and agree to payments that take a bigger chunk out of the household budget.
“Too many families are spending way too much on new cars and trucks,” Interest.com managing editor Mike Sante 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.”
There are also many well-reviewed new cars that cost less than the $32,000 average. Consumer Reports’ list of the best new cars for less than $25,000 includes cars by Honda, Kia, Mazda, Subaru, and Toyota, among others.
Using Interest.com’s affordability calculations, a $25,000 car would be affordable in Boston, San Francisco, and Washington, D.C., but still out of reach for median-income families in most large cities. In Tampa, where the household income is $44,200, cars become unaffordable at $14,200.
New car prices are up nearly 2 percent year-over-year, while used car prices are down by about the same amount. Whether you’re purchasing new or used, be sure to shop around for a loan; car manufacturers charge 42 percent lower interest rates on average than banks, but 10 percent higher than credit unions, found a report by WalletHub.com.
Top Reads from The Fiscal Times: