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April 2014 Auto Buyer’s Affordability Index

May 13, 2014

Discussion

The April 2014 ABAI is 52.1 on a scale of 0 to 100. A score of 52.1 indicates that a U.S. median-income buyer following the 20-4-10 auto financing rule can only afford 52.1 percent of the April 2014 new-car average transaction price (ATP). This equates to a maximum affordable price of $15,795, assuming a median income of $53,043 and an ATP of $30,339.

The need for timely, relevant consumer affordability information has become increasingly important in light of trends to higher loan amounts and longer loan durations. According to Experian Automotive, the average amount financed for a new vehicle in the fourth quarter of 2013 was $27,430–the highest since 2008. J.D Power reported that 33 percent of auto loans in February 2014 were long-term loans–72 months or longer–setting a new record. In addition, FICO has indicated growing pessimism on the part of bank risk professionals regarding auto loan delinquencies, according to a survey released on April 8, 2014.

The monthly ABAI was developed to enable buyers to easily view current new-car prices in the context of sound financial advice. The 20-4-10 auto financing rule consists of a minimum 20 percent down payment, a maximum four-year loan term, and monthly payments of no more than 10 percent of gross household income. The rule is widely recommended by personal finance experts to maintain financial security, avoid excessive interest costs, and preserve future investment opportunities.

Methodology:

An affordable price monthly payment (including principal and interest) was calculated by taking 10 percent of the U.S. monthly median household income, and subtracting a U.S. average monthly insurance premium. For an income of $53,043 and a monthly insurance premium of $130, the affordable monthly payment is $312.

An affordable price was 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 was assumed. For a payment of $312, an interest rate of 4.14 percent, and a sales tax rate of 7.24 percent, the affordable price is $15,795.

The April 2014 ABAI was calculated by dividing the affordable price of $15,795 by the average transaction price of $30,339, and then multiplying by 100.

The affordable price result can easily be validated using any number of online calculators. Two examples, along with associated inputs, are shown below:

Interest.com–Calculate for: Purchase Price, Monthly payment: $312, Term in months: 48, Interest Rate: 4.14%, Rebates and Cash Down: $3,159, Trade allowance: $0.00, Amount owed on trade: $0.00, Fees (non-taxable): $0.00, Fees (taxable): $0.00, Sales tax rate: 7.24%.

Returns a Total Purchase Price (before tax) of $15,795.41

Cars.com–Monthly Payment: $312, Down Payment: $3159, Trade-in Value: $0, Sales Tax: 7.24%, Interest Rate (APR): 4.14%, Term (Months): 48

Returns a Vehicle Price of $15795

Sources:

New Car Average Transaction Price

The Average Transaction Price reference used in the April 2014 index is $30,339. The price reference for April 2014 is an average of estimates by Cars.com and Truecar.

April 2014 ATP Table

Press Release links: Cars.com, Truecar

U. S. Median Household Income

The median household income used for the April 2014 index is $53,043. The median household income is published by Sentier Research, LLC on a monthly basis based on the Current Population Survey data. There is a one-month lag in publishing the data, so the latest available data for the April index is from the March 2014 Current Population Survey and was derived and published by Sentier Research, LLC on April 24, 2014.

U.S. Average 48-Month Auto Loan Interest Rate

The interest rate used in the April 2014 index is 4.14 percent. The interest rate is the national average 48-month interest rate for April 17, 2014 published by Bankrate.com based on a weekly survey of large banks and thrifts. Bankrate.com does not keep an archive of past 2014 rates. However, the Bankrate.com rates for April 17th can be found at Yahoo.com.

U. S. Average Insurance Premium

The insurance premium used in the calculation of the April 2014 index is $130 per month.  The premium is based on state average insurance premiums published by Insure.com for 2014, and then weighted by state population to develop a national average. The state population estimates are from the Census Bureau’s Population Estimates Program, Annual Estimates of the Resident Population: April 1, 2010 to July 1, 2013, 2013 Population Estimates (ID PEPANNRES).

U. S Average Sales Tax Rate

The sales tax rate used in the calculation of the April 2014 index is 7.24 percent. This rate is based on state average combined sales tax rates published by the Tax Foundation for 2014, and then weighted by state population to develop a national average. Population numbers used were identical to those used for the insurance premium calculation.