Have you looked into buying a new vehicle and thought "were they always so expensive!?" It's not just you. The average new car prices have been climbing due to the popularity of SUVs and pickup trucks. The most recent estimate puts an average new car at roughly $36,000. According to the latest census data, the median US household income is also climbing yearly, but is it enough to make the average new car affordable for the average Joe?
We were curious if a new vehicle is truly attainable for someone making the median income or if most car shoppers are stretching themselves thin. We take a look at the average new car price compared to the average income and calculate the payments on a popular truck. Here's what we found.
Median U.S. Income and the Average Car Price
Median Household Income
According to US census data, the US median household income rose 3.2% between 2015 and 2016. While 2017 data has not yet been released, the 2016 median income was $59,039.
Of course, income largely depends on factors such as your age and geographic location. Annual earnings increase with each age bracket until 65 years and then fall significantly due to retirement. Peak earning age ranges from 49 for men to 40 for women.
Average New Car Price
The average car price was over $36,000 at the end of 2017, which is an increase of almost $3,000 from 5 years ago. The average monthly car payment is up to $525/month. These stats don't necessarily mean automakers are jacking up the prices of their vehicles at unprecedented levels every year. Instead, it's a sign of the changing landscape of the industry. Car shoppers are much more interested in SUVs and pickup trucks than sedans, and these larger vehicles come with a higher price tag.
Will the Median Income Be Enough?
Now that we know the average new car price and the median income, we can look at the recommended loan terms to determine if this salary is enough to cover a $36,000 car. For our example, we'll use a 2018 Chevy Silverado 1500 in the Crew Cab WT 5.3L V8 Short Box configuration which lands us right around the $36,000 price point.
Recommended Car Loan Terms
While more and more car shoppers are stretching out their loans over 5 years and borrowing more than ever, it's not necessarily the right route to take. Most financial experts recommend going with these best practices when financing a new vehicle:
- At least a 20% down payment
- The shortest possible loan term not surpassing 60 months
- No more than 10%-15% of your pretax income for your monthly payments
It's important to note that it's a lot easier to follow the recommended terms if you can plan for a car purchase, but there could be an unexpected reason for a needing a new car which doesn't allow you to plan ahead. This can make it difficult to come up with the full down payment or any at all, which will increase your interest rates and monthly payments.
Get a Great Rate on a Car Loan
Purchasing a Chevrolet Silverado on the Median Income
The monthly income of someone making the median $59,039 annually, comes out to $4919.91. Taking 10% of this monthly income gives us $492 to spend on the Silverado while 15% gives us $738. Is it enough?
Chevrolet Silverado 1500 Crew Cab Price: $36,000
20% Down Payment: $7,200
Finance Terms: 60 months
Interest Rate: 4.75%
Monthly payment: $540
The 10% guideline doesn't even cover the truck payment itself, much less the insurance. Putting 15% of your income towards the Silverado will cover the payment but it's likely you'll have to cut back on other expenses. This example explains why the average car shopper is stretching the budget and taking out a longer loan to cover the cost of a new vehicle.
There are several ways you can avoid straining your finances when buying a new car. Because new trucks and SUVs are driving up the average costs, you'll be able to save money by going with one of the most affordable sedans or SUVs. You can also choose to forgo buying new and get a used car with low mileage to save on the purchase price and avoid high depreciation.
