Cars Are Unaffordable, But Will That Stop Buyers?
New cars are unaffordable in all major U.S. cities, according to a new report from Bankrate. However, we continue to see strong sales of new vehicles. What gives?
First, let’s define what “unaffordable” means. Experts look at the median household income in various cities, then apply the “20/4/10” rule.
Use This Rule to Determine How Much Car You Can Afford:
This rule stipulates that a car is affordable when a buyer can make a down payment of at least 20%, use financing lasting no longer than four years — with principal, interest and insurance not exceeding 10% of a household’s gross income.
If a median-income household cannot buy a median-priced new vehicle using the “20/4/10” rule, then we have a problem with affordability.
So, why are new vehicle sales so strong? The answer to this is simple: people aren’t following the “20/4/10” rule, and automakers keep coming up with ingenious new financing strategies that ensure they won’t.
Think about the number of “O Down” financing schemes on offer; think of all of the factory leasing deals.
Leasing used to represent a tiny portion of new vehicle transactions. Today, more than 50% of all new vehicles are leased in certain vehicle categories.
In short, car companies are making it easier than ever to help Americans drive away in vehicles that they cannot really afford (according to the “20/4/10” rule).
Before You Shop for a Vehicle, Go See Your Credit Union
It the “20/4/10” rule therefore obsolete? No way – in fact, following this rule is still an excellent way to buy a new vehicle without threatening your long-term financial health.
If you’re considering a new vehicle purchase, do yourself a favor and go see your credit union before you drive to a dealer lot.
Your credit union will help you to see how different car buying scenarios fit in with your other financial goals – such as saving for emergencies and retirement. It’s the best way to ensure that you don’t buy yourself a shiny new mistake.
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