Cars aren't affordable, study finds

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The average cost of a new vehicle is too high for median-income households in each of the 50 largest U.S. cities, a study by Bankrate.com found.

Bankrate.com ranked the 50 largest U.S. cities based on how much a median-income household could pay for a new vehicle, and calculated the corresponding maximum monthly payment.

Even in the relatively affluent city of San Jose, Calif., in the middle of Silicon Valley, the median income isn’t enough to afford the average new car — if consumers follow traditional borrowing rules of thumb.

“People are spending far too much money on their cars,” said Steve Pounds, personal finance analyst at Bankrate.com, in a statement. “There are many safe, affordable and stylish options on the market for people to choose from that won’t cut into more important budget items, such as college funds and retirement savings.”

20-4-10 rule

When calculating how much a household can spend on a new vehicle, Bankrate followed what it called the “20-4-10 rule.” This refers to 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.

In fact, consumers have continued to buy cars and light trucks, often by violating one or more of the yardsticks in that rule. Most commonly, they have been taking out longer loans.

To find the maximum monthly amount that a median-income household should spend on a vehicle payment, Bankrate calculated 10 percent of the monthly median gross household income in each city and subtracted the average monthly insurance premium in each city.

When Bankrate conducted the study this spring, the average price for a new vehicle was $33,865, the company said, citing Kelley Blue Book. Bankrate also factored in the national average rate for a 48-month new-car loan, which was 4.24 percent at the time.

San Jose, Detroit

Based on its recommendations on how much median-income households could spend on vehicle payments, including principal and interest, Bankrate.com said San Jose residents could spend the most — but still not enough to cover the cost of a new car.

With a median income of $87,210, San Jose residents can afford a $32,856 vehicle with a maximum monthly payment of $662, Bankrate said. That’s about $1,000 shy of the average new-vehicle price.

Residents of Detroit, which has a median income of $25,769, could afford to spend the least of the 50 cities studied on a new vehicle: $6,174, with a maximum monthly payment of $120.

Bankrate.com offers personal financial advice and tools online.

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Cars aren't affordable, study finds