Recent data compiled by Requisite Press indicate that a median income family can afford less than fifty three percent of an average priced new car
Knowing Your Financial Limitations
Here at Auto Credit Express we understand the importance of correctly budgeting for an auto loan. Just as the fictional Inspector Harry Callihan noted in the movie Magnum Force that "A man's got to know his limitations", borrowers, especially those with problem credit, also need to be aware of their financial limitations.
"Car buyers are often encouraged to focus solely on monthly payments," said Phil Kelton, president of Requisite Press. "But long-term loans, with seemingly affordable payments, inflate the amount that buyers spend and can erode household financial security. Buyers that aren't fully informed can easily become financially struggling owners and poor long-term customers."
20-4-10 Auto Financing Rule
We've always supported the idea that car buyers with bad credit should have a down payment of at least ten percent, while keeping the finance term to a maximum of 48 to 60 months. Most subprime lenders also limit payments to a maximum 20 percent of monthly gross household income.
The folks at the Requisite Press, however, tighten these parameters even further with their 20-4-10 rule that "consists of a minimum 20 percent down payment, a maximum 4-year loan term, and monthly payments of no more than 10 percent of gross household income."
June Auto Buyer's Affordability Index
In their most recent June Auto Buyer's Affordability Index (ABAI) Requisite Press found that:
A prudent, median-income family can only afford 52.7 percent of an average-priced new car. In fact, only one-third of American households can afford the $30,342 average price while preserving financial security*. This shrinks to fewer than one in four when insurance for a second car is included. However, consumers can take steps to save 20 percent or more—results that could preserve the financial security of a million additional families.
*Analysis based on the U.S. Census Income Report (September 2013)
Problem Credit Car Loans
The biggest issue for consumers with low credit scores is that the higher-than-normal interest rates of the majority of high-risk car loans often means exceeding both a 48-month loan term ceiling as well as the 10 percent gross income cap.
To help consumers, Requisite Press has even created AffordCheck(SM), a free, online financial assessment tool, based on the 20-4-10 rule that can be accessed here.
The Bottom Line
The fact is that borrowers, especially those who are credit-challenged, should always maximize the down payment amount while keeping both the loan term and payment-to-income ratio to a minimum. By following these guidelines, buyers can avoid financing an unaffordable car.
One more tip: Auto Credit Express helps applicants that have experienced car credit problems find those dealers that can give them their best chances for bad or poor credit auto loan approval.
So if you're ready to take that first step in reestablishing your auto credit, you can begin now by filling out our online car loan application.