People are paying way too much for new vehicles these days, with average transaction way out of whack with average household incomes.
According to Kelley Blue Book, the estimated average transaction price (ATP) for light vehicles in the United States was $33,261 in May 2017. According to the government, the median household income in the U.S. was $56,000 in 2015.
This is just too much, once we apply the time-tested “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 “0 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).
Don’t Buy the Payment
Car salesmen are trained to “sell the payment” to buyers. If the monthly payment is do-able, a sale can be made. The trouble is, getting that monthly payment down to an “affordable” level often means stretching payment out to 60 months, 72 months or even more. It also means factory lease deals that may seem cheap, until you factor in that they leave you with nothing at trade-in time.
Before You Shop for a Vehicle, Go See ProMedica FCU
The simple truth is that following the “20/4/10” 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 ProMedica FCU before you drive to a dealer lot.
ProMedica FCU 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.