According to the most recent information from Requisite Press, a median-income household can afford just over fifty-seven percent of the average-priced new car.
Looking at Car Financing with Poor Credit
One of the most important things credit-challenged consumers have to come to grips with is the importance of properly budgeting for a car loan. We were reminded of this recently when the latest press release from Requisite press noted that new car affordability through June 2015 is up almost nine percent from June of last year.
According toRequisite Press, "A prudent, median-income household can afford 57.4 percent of the new-car average price. The index is up nearly 9 percent from June 2014 (52.7) and has increased every month so far this year." That analysis is established with data from the U.S. Bureau of Economic Analysis and the Census Bureau and "based on a median household income of $55,192—an improvement of more than $1,800 from June 2014."
But while new cars are becoming more affordable due to an increase in income, borrowers are, at the same time, taking out loans on more expensive vehicles with higher levels of equipment and features, with the report noting that "The average transaction price increased only $152 over the same time period. However, auto loan duration and amount financed are at record levels."
In addition to many more months of negative equity – a real concern for borrowers with bad credit due to the high interest rates these car loans carry – financing a vehicle for a longer term means living with the same level of technology that much longer.
"The increased use of long-term loans is often rationalized by pointing to the longer operating life of today's cars," said Phil Kelton (@Phil_Kelton), President of Requisite Press. "However, with the rapid advance of automotive technology, a 2015 model may be wholly inadequate in 2021—even if it's still drivable."
Subprime Car Loans
At Auto Credit Express 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 should also limit the finance term 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, this means consumers who find themselves in this situation should only be considering either a subcompact or compact car.
The folks at the Requisite Press actually tighten those borrowing parameters even further with their 20-4-10 rule that strongly suggests 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 gross monthly household income.
The Bottom Line
Although the rise in median family income means that new cars are becoming more affordable, borrowers dealing with credit problems would do well to maximize their down payments while keeping both the loan term and payment-to-income ratio to a minimum. This means lowering expectations (at least until their credit is reestablished) and financing a more affordable car for a shorter term, rather than taking out a long-term loan on a more expensive vehicle.
We do have one more tip: Auto Credit Express helps consumers with credit problems find those new car dealers that can offer them their best chances for car loan approvals.
So, if you're ready to take that first step, you can begin the process now by filling out our online auto loan application.