To calculate how much a household can spend on a new vehicle, Bankrate applied the "20-4-10 rule": a down payment of 20 percent; a four-year loan; and principal, interest and insurance payments accounting for 10 percent of the household's gross income.
"This is a rule of thumb that a lot of financial advisers use," Bankrate.com analyst Claes Bell told Automotive News. "You want to keep the auto payment contained so it doesn't crowd out the rest of the financial picture."
With an average new-vehicle loan term of 68.5 months, or 5.7 years, in the first quarter,according to Experian, it's evident that many consumers don't follow that rule.
"The main point of this research is to illustrate how Americans are having to overextend themselves to pay for a new car at today's prices," Bell said in a statement. "Low- and middle-income households are having to stretch loan terms to six or more years and/or spend huge percentages of their paychecks to afford reliable transportation, and it's very difficult to get off that hamster wheel of debt once you're on it."
Consumers are extending their loan terms to buy the vehicle they need with a monthly payment they can afford, he added.
The low-interest rate environment may have made payments more manageable, but as loan terms extend and interest rates rise, consumers could be stuck with negative equity on their vehicles, he said.
The affordability figure applies to the entire household. In Washington, where median income is the highest, a household conceivably can afford a total purchase price of $37,223 for a new vehicle (see list, below), with payments of $697 a month. But it would be spending its entire auto budget on one vehicle. If the household needs two vehicles, it could afford to pay only about $350 a month on each. It couldn't afford two brand-new luxury cars, Bell said.