According to the August report from Requisite Press, a median-income household can afford just fifty-seven percent of the average-priced new car.
Budgeting for a new car
One reality consumers with bad credit have to realize is the importance of properly budgeting for a car loan. This becomes all too clear when the latest report from Requisite Press notes that despite the fact that new car affordability is generally increasing (it declined slightly in July), consumers with an average income still need to take a close look at their budget and be careful in order "to preserve their own financial health."
According to the latest report, "New-car affordability should continue to improve into 2016 as long as U.S. economic growth continues. However, regardless of the state of overall affordability, new-car buyers can preserve their own financial health by making sure the purchase is affordable."
Requisite Press calculates the Auto Buyers Affordability Index (ABAI) by "taking 10 percent of the U.S. monthly median household income and subtracting a U.S. average monthly insurance premium. The affordable price is then calculated using the affordable payment, along with a U.S. average 48-month auto loan interest rate and a U.S. average sales tax rate."
Car buyers with bad credit
But must new car buyers are taking on loans of 60, 72 and even 84 months. This means that in addition to many more months of negative equity, the real concern for borrowers with bad credit is the high interest rates these car loans carry and the higher interest expenses that come with extended loan terms in general.
That's why we continue to recommend that car buyers faced with credit issues should have a down payment of at least ten percent (a percentage that most high-risk lenders also require). These borrowers, in particular, should also limit the term financed to a maximum of 48 to 60 months.
Since most subprime lenders limit monthly payments (including a budget of $100 for full-coverage auto insurance) to a maximum 20 percent of a borrower's monthly gross household income, the result is that consumers who want to be smart about it should only consider a subcompact or compact car.
Requisite Press tightens those parameters considerably with their 20-4-10 rule. They strongly suggest all buyers configure a car loan with a minimum 20 percent down payment, a maximum 4-year loan term, and monthly payments of no more than 10 percent of their gross monthly household income.
The Bottom Line
While new cars are generally becoming more affordable despite the slight dip in July, borrowers with tarnished credit would be smart to maximize their down payment while keeping both the loan term and payment-to-income ratio to a minimum. Typically this entails moderating their expectations and financing a very affordable car – at least until they've reestablished their credit.
And one more tip: Auto Credit Express helps borrowers with problem credit find a car dealer that can offer them a good chance for an auto loan approval.
So, if you're ready to take that first step, you can begin the process now by filling out our online auto loan application.