Twenty years ago, being able to afford a car and a mortgage didn’t seem so remarkable. Many Baby Boomers still brag about putting themselves through college and buying their own car with just a part-time job. However, a median-income household today can only afford an average-priced new car in one of the 25 largest U.S. metropolitan areas according to a Bankrate.com report.
“Americans are having to overextend themselves to pay for a new car at today’s prices,” said Bankrate.com Analyst Claes Bell in a statement.
Because many cities don’t have widespread public transportation, American households are put in a tough position where a new car is unaffordable but a vehicle is needed to get to work every day. Based on the “20/4/10” rule where financial planners recommend a household spend 20% of income on a down payment, take a 4 year loan and use 10% of income on interest and insurance payments, those making median income in the Miami area can afford to buy a $13,577 car. The average new car costs $35,368 including local sales taxes.
While the price of new cars don’t fluctuate much from region to region because of national car dealerships, median income, taxes and insurance premiums certainly vary based on geography. This often puts those living in lower income areas at a disadvantage, according to Bell.
The worst metropolitan areas for car affordability are Miami/Fort Lauderdale/West Palm Beach, Detroit, Tampa, Orlando and San Antonio. In comparison the top five metropolitan areas for car affordability are Washington D.C., San Francisco, Boston and Minneapolis.
Bell recommended consumers look for used cars rather than new cars if they struggle with car affordability.
“Cars are lasting longer and longer now, routinely going over 150,000 miles without needing major repairs,” he said.
Those still set on buying a new car need to do all their research before stepping into a dealership, Bell advised.
“Really focus on the price,” he said. “It’s not a coincidence that they’re not telling you the price of the car in the car ad. They’re telling you the monthly payment.”
It’s easy for consumers to get caught up in thinking about the maximum they can afford to pay each month, when they need to be worried about how much they’ll be paying overall according to Bell. Being able to afford the monthly payment shouldn’t be the focus because the amount of money spent on interest during those years add up quickly, he said.