The rule states that a buyer should be able to offer a down payment of at least 20 percent, incur financing for no more than four years and endure a principal, interest and insurance totaling up to no more than 10 percent of household income. That works out to a monthly payment of $601. Households with an average income in Washington, D.C. can afford a payment of up to $628, while the next closest city, San Francisco, can only afford $537 per month. You can pick through the cryptic press release below for more information.
CHICAGO, Feb. 26, 2013 /PRNewswire/ -- A median-income household can only afford the average-priced new car or light truck in one of the 25 largest metropolitan areas in the U.S. (Washington, D.C.), according to research released today by Interest.com, a Bankrate (NYSE: RATE) company. Interest.com published a related list of how much a median-income household in each metro area can afford to spend on a vehicle.
"What this research indicates, more than anything, is that a lot of Americans are spending too much money on their cars," said Mike Sante, managing editor of Interest.com. "Car costs are one of the most controllable parts of a household's budget. For example, if you live in New York City or San Francisco, you're probably going to have to pay a lot for housing, but you don't have to pay a lot for a car. You're better off driving something more affordable and saving or investing the difference."
When calculating how much a household can afford to spend on a car or light truck, Interest.com considered three key factors that are commonly referred to as the "20/4/10" rule. That is: a down payment of at least 20%; financing lasting no longer than four years; and principal, interest and insurance not exceeding 10% of a household's gross income.
Interest.com recommends that median-income households spend no more than the following amounts on vehicle payments (principal and interest) in total and each month. For comparative purposes, the average price of a new car or light truck in 2012 was $30,550, according to TrueCar. That equates to a monthly payment of approximately $601.
Affordable Purchase Price
Maximum Monthly Payment
1. Washington, D.C.
2. San Francisco
7. Portland, Ore.
9. San Diego
10. New York City
13. Los Angeles
19. St. Louis
22. San Antonio
More information is available at:
For each metro area, Interest.com calculated 10% of the monthly median gross household income in that area and subtracted the average monthly insurance premium in that area to determine the maximum amount that the median-income household should spend on monthly car payments (principal and interest).
Interest.com used its Auto Loan Calculator to calculate how much the median-income household can afford to borrow. Assumptions: 20% down payment, 48-month loan, national average interest rate, roll the sales tax into the amount being financed. The calculator is available at:
Median incomes for each metro area were pulled from the U.S. Census Bureau's 2011 "American Community Survey" (the latest year for which data is available).
Insurance costs are 2010 statewide averages from the National Association of Insurance Commissioners (the latest year for which data is available).
TrueCar provided the average national cost for new cars or light trucks in 2012.
The average rate for a 48-month new car loan came from Bankrate.com (January 23, 2013).
Sales tax rates were obtained from local governments and car dealers.
Since it was created in 1994, Interest.com has been helping consumers make smart financial decisions. Interest.com's stories, calculators and interest rate tables also appear on the websites of more than 100 newspapers in 31 states, including the Los Angeles Times, the Chicago Tribune and the Dallas Morning News.
Interest.com is owned by Bankrate, Inc., which is among the largest and most trusted providers of personal finance advice and information on the Web.