The consumer advice Web site Interest.com offers prudent financial guidance to keep car buyers out of debt so they can spend more on other priorities -- such as a retirement nest egg or college for the kids.
Lucky for the auto industry, few people seem to be taking that advice.
"People are committing way too much discretionary income to a car," says Mike Sante, managing editor of Interest.com. Instead, he says, people should spend less, purchasing a more modest new car or even a used car.
"People are letting the salesman, they're letting the lender, define what they can afford. Just because you can write a check for a monthly payment and it doesn't bounce, that doesn't mean you can really afford it," he told me in a phone interview on Monday.
The rule of thumb for Interest.com is that people can't afford a car unless they can put at least 20 percent down, including the value of their trade-in, on a term of no more than 48 months and spend no more than 10 percent of the household's gross income on principal, interest and insurance.
Using that as the definition of "affordability," Interest.com found in a study, released today, that there's only one metro area among the nation's top 25 where the average customer can actually afford the average-priced new car -- Washington, D.C.
So the 20-48-10 rule of thumb is what people should follow, according to Interest.com. But what they actually do is stretch out the term so they can borrow more and keep monthly payments flat, according to Experian Automotive.
The average term on a new-car loan in the fourth quarter of 2013 was 65 months, unchanged from a year earlier, Experian said. The average monthly payment on a new-car loan was $471, up from $460 a year ago.
Using Interest.com's rule of thumb, the recommended "affordable" monthly payment in Washington was $641, including insurance. No wonder so many people opt for the longer term even though it costs more in the long run.