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August New-Car Shoppers Gained Additional Buying Power as Affordability Improved

September 16, 2015

The August Auto Buyer’s Affordability Index (ABAI) is 57.4, an increase from the July value of 57.0. The improvement was driven by a $217 increase in the average incentive and corresponding average transaction price (ATP) drop of $127. The ABAI increase was also supported by an $86 increase in the U.S. median household income (MHI).

Data Items August 2015

ABAI Plot August 2015 600 r1

Median income new-car buyers gained $160 of buying power in August, month-over-month (the affordable price change minus the ATP change). Buying power has increased $2,374 since the December 2014 price spike. Since December, both the affordable price (a function of income, insurance, interest rate, and sales tax rate) and the ATP have moved in supportive directions.Buying Power Plot final 600

Pressure on new car prices is anticipated to continue as competition (versus used cars and between automakers) increases and as interest rates rise. New-car affordability should continue to improve into 2016 as long as U.S. economic growth continues. However, regardless of the state of overall affordability, new-car buyers can preserve their own financial health by making sure the purchase is affordable. Requisite Press recommends that consumers use a rule of thumb, such as the 20-4-10 auto financing rule (see below), to more easily assess the affordability of a new-car purchase.

Consumers 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 20-4-10 auto financing 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.

ABAI Methodology

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.

ABAI SourcesData Sources August 2015 r1