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Sustained Income Growth Preserves Upward New-Car Affordability Trend

July 19, 2017

The June 2017 Auto Buyer’s Affordability Index (ABAI) is 61.7 and is down 2.7 points from last month, but up 2.5 points year-over-year. This month’s decrease was driven by a $1,066 increase in the forecasted light-vehicle average transaction price (ATP). The MHI was largely unchanged at $59,345 (-$16). An ABAI of 61.7 indicates that a prudent, median-income household can only afford 61.7 percent of the new-car average price.

The ABAI is up more than 4 percent (2.5 points) since June 2016. This increase was largely due to a 4.4 percent ($2,492) gain in the MHI. The gain due to increasing incomes was partially offset by a 1.2 percent ($356) increase in the ATP.

Buying power (affordable price change minus the ATP change) is up $617, year-over-year and up $1,136 relative to January 2016.


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.

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 Sources

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