The Typical American Family Can’t Afford The Typical New Car!
Posted: June 22nd, 2010 | Author: Joe | Filed under: Debt | Tags: Buying a car, Car Buying, Car loans, Saving Money, spending | 2 Comments »Liz Pulliam Weston has an article on MoneyCentral about how and why A car payment is not a fact of life.
Her article is basically an update on her original formula for determining how much you should spend when purchasing a new car. Her formula is not only simple, but sensible:
“…if you can’t pay cash for your next car, you should make a down payment of at least 20%, finance the balance for four years or less and make sure the resulting payment is no more than 10% of your gross income.”
The problem with that approach is that the typical American family can’t afford the typical new car!
According to the National Automobile Dealers Association, the average price of a new car in 2009 was $28,966. Using Ms. Weston’s formula, a family income of $65,000 would be needed to afford the car (at 5.57% interest) but the average median income in 2008 was only $50,000.
Of course, another problem with the formula is that it assumes no other major household debt.
All this leads to people taking longer and longer term loans, sometimes so long that the loan ends up being more than the car is worth. By the time the car is toast, you’re stuck still owing money on it while trying to figure out how to get another car.
This is a predicament near and dear to me because I fell into that new car trap when I was fresh out of college.
But just because Weston’s approach is not easy doesn’t mean it’s worth ignoring.
It’s not easy, but it is liberating. It’s my opinion that car loans are a major source of people’s financial trouble. I can’t tell you how many homes I pass by where the car in the driveway is worth more than the dwelling! And if you think about it, it’s that desire to have the newest thing that keeps us on the income-debt treadmill.
If you can break that cycle, you can free yourself from a whole world of financial trouble.
That’s why pundits like Ramsey recommend that people by “a clunker” or otherwise minimize their expenses temporarily while they save up to afford a better car.
Check out the full article here. It has much more info – and don’t be typical! 
photo by salendron
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