According to the latest report from Requisite Press a median income family can afford just over than fifty three percent of an average priced new car
Understanding Your Finances
Here at Auto Credit Express we believe that one of the most important aspects of car loans consumers with bad credit need to understand is the need to properly budget for a subprime car loan.
We were reminded of this fact earlier today when the latest press release from Requisite press noted that, for the average family, a new car was only slightly more affordable in July than during the month of June.
According to Requisite Press:
A prudent, median-income family can only afford 53.5 percent of an average new-car price. New-car prices increased at more than twice the rate of incomes during the five years (2009 through 2013) of economic recovery since the Great Recession. The average price grew by 8.9 percent, whereas median household income increased by only 4 percent (Analysis based on data from the U.S. Bureau of Economic Analysis and the Census Bureau).
That information compares to their June report that reported that "median-income family can only afford 52.7 percent of an average-priced new car."
Requisite Press came up with this analysis based on the following information:
The July ABAI of 53.5 is based on a median household income of $53,891, an average light-vehicle transaction price of $30,210, and adherence to the 20-4-10 auto financing rule. This equates to an affordable monthly payment of $319 and price of $16,175. The July ABAI is up 1.5 percent from the June 2014 ABAI of 52.7, largely due to a 1.0 percent increase in median household income.
Subprime Car Loans
As always, the biggest issue facing borrowers with less than perfect credit is that the higher interest rates charged by subprime lenders often means extending the loan term as well as stretching the gross income cap recommended by financial experts.
What do we mean by this?
Auto Finance Rules
We've always believed that car buyers with credit issues should have a down payment of at least ten percent – a percentage, by the way, that a majority of high-risk lenders and bad credit auto dealers not only agree with, but require. Borrowers with credit problems should also limit the finance term to a maximum of 48 to 60 months. In addition, most subprime lenders also limit monthly payments (including a budget of $100 for full-coverage auto insurance) to a maximum 20 percent of monthly gross household income.
In order to meet those guidelines, consumers with poor credit, if they're approved for a new car, will probably need to consider either a subcompact or compact car.
We should also point out that the folks at the Requisite Press 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
Despite the fact that the average price of a new car is a bit more affordable, borrowers with past credit issues need to lower their sights when financing a vehicle with a subprime loan. In addition, they should always maximize the down payment while keeping both the loan term and payment-to-income ratio to a minimum.
One more tip: Auto Credit Express helps applicants 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 in reestablishing your car credit, you can begin the process by filling out our online auto loan application.