NEW YORK (MainStreet) A median-income household can only afford the average-priced new car in one of the 25 largest U.S. metro areas, according to a new Interest.com report.
All of those metro areas except for Washington, D.C. fell short of the $32,086 that it takes to buy the average new car. In many cases, the cities fell well short of the average price of a new car. Interest.com found that Tampa residents can only afford to spend $14,209 on a car. Sixteen cities fell short by $10,000 or more.
Washington, D.C. leads the list for a second straight year, followed by San Francisco and Boston. Two Florida cities (Tampa and Miami) bring up the rear and are the only two cities where car affordability declined over the past year. San Antonio experienced the biggest jump in affordability over the past year at 7%, followed by Phoenix at 6% and San Francisco and Atlanta, both at 5%.
Interest.com recommends that median-income households spend no more than the following amounts on vehicle payments, which include interest. For comparative purposes, the average price of a new car or light truck in 2013 was $32,086, according to Kelley Blue Book. That equates to a monthly payment of approximately $633. Residents in Washington, D.C. can afford to spend $32,531 on a new car or pay a maximum of $641 each month while people in San Francisco can buy a car for $28,009 and spend $563 each month.
Residents in Miami and Tampa were at the bottom of the list of 25 largest U.S. metro areas and consumers there can only afford to spend $299 and $280 respectively each month. More information is available here.
"Too many families are spending way too much on new cars and trucks," said Mike Sante, managing editor of Interest.com. "Just because you can manage the monthly payment doesn't mean you should let a $30,000 or $40,000 ride gobble up such a huge share of your paycheck. You can get a great car for much less and use the savings to invest in yourself. Here's where the money for your retirement or kids' college can come from."
When calculating how much a household can afford to spend on a car or light truck, Interest.com considered three key factors that are commonly referred to as the "20/4/10" rule: a down payment of at least 20%, financing lasting no longer than four years and principal, interest and insurance not exceeding 10% of a household's gross income. The calculator is available here.
Many consumers walk into a dealership without knowing how much they can afford to spend each month, he said.
"You wind up going to the car dealer who determines a lot of that thinking for you and they are good at grabbing every bit of discretionary income you have," Sante said. "You need to have a really firm price point in mind and stick with it."
Car companies have been adept at making the car buying experience to be an emotional one to reflect consumers' success and personality, he said.
"When consumers get to the end of the month and write big car payment check, then they don't have money left over to save or invest in a 401(k)," Sante said.
Purchasing a car needs to be only a financial decision since cars are the second most expensive item consumers buy after a house, he said. Unlike homes, cars are a depreciating asset and will never appreciate unlike housing.
"You have to be smart about it," Sante said. "You have to look for every possible way to save and this is one of the key ways to do it.
One way to avoid overextending yourself on a car purchase is to consider a used car or a Certified Pre-Owned (CPO) car, said Christopher Basso, public relations manager for Carfax, a provider of vehicle history information for used cars based in Centreville, Va. CPO cars may be the better option for those would-be new car buyers looking to save money for retirement.
Nearly all CPO cars are late-model cars, so they will have many of the features available on a similar new car. These cars also tend to have lower mileage, which means they will likely have less wear and tear than the typical used car and are still covered by the original manufacturer's warranty.
These cars also go through a rigorous inspection as part of the certification process and more than 90% of CPO cars for sale come with a free Carfax report.
"If you're buying a car, think with your head and not with your heart," Basso said. Chances are you can get a model year or two older cars with the same options as the new model for less money per month. The key is to be practical and fall in love with the car after you drive it off the lot, not the moment you see it on the lot."
Consumers can also look for deals online. Based in Santa Monica, Calif., TrueCar is a platform which shows consumers what others have paid for the same vehicle during the past 30 days and list dealers affiliated with them so you can buy a car at the same price without negotiating.
"Extreme weather conditions have caused dealer inventories to rise to their highest levels since 2009," said Scott Painter, TrueCar's CEO. "With incentives on the rise, if you're willing to brave the elements, the next 30-45 days will be an epic time to buy."
Another option is to keep your car and upgrade it with anti-collision technology. Safe Drive Systems has radar technology and cameras which can monitor the driver's distance from other vehicles. The driver receives alerts when approaching another vehicle too closely or if the vehicle begins to stray from its lane without signaling, helping to prevent collisions.
"Everyone wants a safer vehicle," said Rona Aharonson, CEO of New York-based Safe Drive Systems. "Now consumers can have the same advanced technology installed in their car."
--Written by Ellen Chang for MainStreet