Customers want to get into their desired vehicles at monthly payments they can afford. Dealers and lenders are eager to oblige. But a study by Bankrate.com found that a median-income household can't afford what Kelley Blue Book says is the national average new-vehicle price of $33,865.
Bankrate calculated how much a household can spend on a vehicle, by applying the "20-4-10" rule: the consumer makes a down payment of at least 20 percent, finances the vehicle no longer than four years and pays principal, interest and insurance not exceeding 10 percent of the household's gross income.
San Jose, Calif., was ranked highest for vehicle affordability in the study. Residents of that Silicon Valley city, based on their median income, could afford a purchase price of $32,856, about $1,000 less than Kelley Blue Book's average vehicle price. At the opposite end of the 50 largest cities ranking, Detroit has the lowest vehicle affordability: Residents there can only afford a purchase price of $6,174, with a $120 monthly payment.
Enter longer loans. That's one way to secure a low monthly payment. (Leasing is another.)
Loans of 73 to 84 months made up 30 percent of new-vehicle loans in the fourth quarter last year, marking a 12 percent rise from the year earlier.
Every quarter we report on longer loan terms. Those reports invariably prompt hand-wringing by some commentators. But if we take a look in consumers' wallets, should we really be surprised?