Why the Average American Can No Longer Afford a New Car

A new report explains why many Americans can't afford the average new car.

Mar 16, 2014 at 3:30PM

Ford's F-150 is America's best-selling new vehicle. But at an average transaction price of close to $40,000, it's out of reach of many American households -- or should be, says a new report. Photo credit: Ford Motor Co.

Here's a surprising statistic: The average price of a new vehicle in the U.S. is $32,086.

Here's another one: The average U.S. household can't afford it.

Say what? 

That's the conclusion of a new report from Interest.com, a consumer-finance site owned by Bankrate. The report looked at median household incomes across the U.S. and concluded that new cars are out of reach for many Americans -- or should be.

It sounds a little crazy, but for those of us concerned about the economy -- which should be all of us -- it's worth a closer look.

The median household can't afford the average new car
Here's what the report actually says.

The analysts at Interest.com took a look at the median household income in the 25 largest U.S. metropolitan areas. They then applied a common rule of thumb for determining how much someone can comfortably afford to spend on a car.

Their conclusion? Only in Washington, D.C., can median-income households afford to buy a new car. 

Washington had the highest median household income of the 25 areas they reviewed. (San Francisco and Boston were next, if you're keeping track.) According to their calculations, that income is just enough to support a $641 monthly payment, which they translate to a purchase price of $32,531 -- just above the average cost of a new vehicle.

But clearly, lots of people in the U.S. buy new cars regularly -- or at least occasionally. 

So how did these folks determine what we can "afford"?

A rule of thumb that says too many people are spending too much on their cars
Interest.com's analysts applied what they call the "20/4/10" rule to determine how much a household can afford to spend on a new vehicle.

That rule works like this: A down payment of at least 20%, financing lasting no more than four years, and total cost -- principal, interest, and insurance -- adding up to no more than 10% of a household's gross income.

Follow that rule, and it's hard to disagree with Interest.com managing editor Mike Sante, who says that most Americans are spending far more than they can truly afford on new cars and trucks.

Are people really overspending on their cars?
It's easy to get carried away when you're buying a new car or truck. A fun test drive, that new-car smell, and the sales folks are so good at getting you to spend just a little more.

People are spending more, too. Auto loans with terms running for six or even seven years are becoming more and more common. A longer-term loan can get the monthly payment on a big-ticket vehicle down to something you can "afford", but... do you really want to be making payments on a six-year-old car?

What do you think? Are people spending too much money on new cars nowadays? Or is this report making overly conservative assumptions? Scroll down to leave a comment and let me know.

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John Rosevear owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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