The latest report from Requisite Press shows a median income family can afford slightly less than fifty five percent of an average new car price
Checking Your Budget
At Auto Credit Express we believe that people with bad credit need to understand the importance of creating a budget for success prior to actually signing on the dotted line – especially if the vehicle in question is a new car.
We were reminded of this need earlier today with the latest press release from Requisite press that noted for the average family, a new car was only slightly more affordable this past August than during the previous month of July.
According to Requisite Press:
An August median-income buyer could only afford 22 of the 262 new car models priced less than $35,000 (Based on 2014 MSRP) – about 1 in 12. This is up from 18 models in April 2014. The increase is due to rising household incomes, flat new-car prices, and low interest rates. However, while analysts expect incomes to continue increasing in the months ahead, it is also likely that prices and interest rates will increase.
That information compares to their July report that reported that a “median-income family can only afford 53.5 percent of an average new-car price.”
Requisite Press came up with this analysis based on the following information:
The August ABAI (Auto Buyers Affordability Index) of 54.8 is based on a median household income of $54,045, an average light-vehicle transaction price of $29,670, and adherence to the 20-4-10 auto financing rule (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). This equates to an affordable monthly payment of $320 and price of $16,255.
Subprime Auto Loans
The biggest issue facing consumers with credit issues has to do with the higher interest rates charged by subprime lenders that often requires extending the loan term while exceeding the gross income cap recommended by many financial experts.
So, how can credit-challenged consumers avoid this pitfall?
Subprime Car Finance Tips
To begin with, we encourage borrowers with poor credit to go beyond a ten percent down payment – the percentage that a majority of high-risk lenders require. That’s because larger down payments reduce the overall interest charges.
In addition, these consumers should also try to limit the finance term to anywhere from 48 to 60 months – the shorter the better. Since most subprime lenders also limit monthly payments by way of Debt to Income ratio (including a budget of $100 for full-coverage auto insurance) to a maximum 20 percent of monthly gross household income. In order to at least meet and hopefully exceed these guidelines, most borrowers should limit their considerations to a new or used subcompact, compact or affordable midsize car.
The Bottom Line
Although the average price of a new car is a bit more affordable, borrowers should choose a reasonable vehicle if they’re financing one with a subprime loan. Doing that as well as maximizing the down payment while keeping both the loan term and payment-to-income ratio to a minimum will go a long way towards ensuring the successful completion of a high-risk car loan.
One more tip: Auto Credit Express helps applicants with problem credit find new car dealers that can offer them their best opportunities 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.
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