New-Car Affordability Down In April as Average Price Jumps
May 17, 2017
The April 2017 Auto Buyer’s Affordability Index (ABAI) is 60.4—down from the 61.0 March record. The decrease was driven by a $256 jump in the light-vehicle average transaction price (ATP). Additionally, the U.S. median household income (MHI) slumped $41, leading to a $26 decrease in the affordable price. As a result, median income shoppers lost $282 of buying power. An ABAI of 60.4 indicates that a prudent, median-income household can only afford 60.4 percent of the new-car average price.
The ATP rose in April (+$256) after three consecutive monthly decreases (-$808, cumulative). As a result, the index pulled back 0.6 points from an all-time high, but remains up 1.5 points since January of this year. Affordability gains have been driven by ATP decreases and amplified by a rising MHI—up $846 so far this year.
Buying power (affordable price change minus the ATP change) decreased $282 in April, dropping the cumulative buying power to $661 relative to January 2016. Buying power has increased $707 since the low point of this period ($-46, December 2016). (See figure below.)
Preserving Personal Affordability
Regardless of the state of overall affordability, each new-car buyer can preserve her own financial health by first ensuring that the purchase is affordable. Requisite Press recommends that consumers apply the 20-4-10 auto financing rule (see below) to more easily assess the affordability of a new-car purchase. Shoppers can verify affordability throughout the car-buying process with AffordCheck℠, a free online tool based on the 20-4-10 rule. AffordCheck℠ can be used to determine an affordable price range, and it can also be used to assess specific offers as they are received.
20-4-10 Auto Financing Rule
The ABAI is based on the 20-4-10 auto financing rule. The rule consists of 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 (including insurance). The rule is widely recommended by personal finance experts to maintain financial security, avoid excessive interest costs, and preserve future investment opportunities.
The affordable monthly payment (including principal and interest) is calculated 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. A 20 percent down payment is assumed. The ABAI is calculated by dividing the affordable price by the average transaction price and then multiplying by 100.