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Bankrate's 2007 New Car Guide
Dollar$ & $en$e
Status and styling aside, many car-buying decisions boil down to bucks and budgets.
Dollar$ & $en$e
Cars cost half of family's annual income

One step forward and two steps back.

That's what it seems like when you review the affordability of new cars in the U.S.

While affordability improved dramatically in the late 1990s, it has leveled off since then and the number of weeks a family needs to work to buy an average-priced new car has lingered around 25 -- which adds up to almost 50 percent of a family's annual income.

A step forward came in the first quarter of 2007 when the average cost of a new car was $28,200, says Dana Johnson, chief economist for Comerica Bank -- which puts out a quarterly auto affordability index.

How many weeks?
Chart courtesy of Comerica Bank

That average price was about 1.6 percent higher than the average car price in the first quarter 2006, but the median family income increased 3.7 percent to $59,200 -- meaning it would take 24.7 weeks of a family's income to buy that $28,200 car. And that small improvement came only after a sharp increase in the fourth quarter of 2006, when the number of weeks of income needed to buy a car rose from 24 to 26.2 -- the biggest jump in the index's history.

So far this year, Johnson says, cars became more affordable because consumers reacted to the sluggish economy, a rebound in gasoline prices and troubles in the real estate market by spending about $550 less per car than they did in the last three months of 2006. "That, along with the availability of more attractive financing rates reversed somewhat more than half of the last quarter's deterioration in affordability," explains Johnson. "With demand soft and the car companies fighting for market share, buyers were able to find pretty attractive deals on new cars in the first quarter." You can compare up-to-date auto loan rates in your area at Bankrate's auto loan home page.

A downward trend in inflation and a strong dollar helped cars get a lot more affordable starting in 1995, Johnson says, but since 2002, even though incomes have risen, the amount spent on cars has gone up and loan rates have increased. "It's sort of like the cost of acquiring a car has gone up in parallel with incomes in the last five years," he says.

You would never know any of this from the aggressive marketing tactics of car companies, who use creative financing methods to make cars feel more affordable, says Philip Reed, consumer advice editor with Edmunds.com.

"People waste all kinds of money when purchasing and owning cars. It's a depreciating asset. There's no way to get around that," Reed says. "So right from the get-go you will lose money, but the question is: How much? You want to control the bleeding."

Reed is fairly strict about how much money people should spend on a car. He says a good rule of thumb is 20 percent of income. This means someone who buys a $20,000 car should be making $100,000.

However, Bryan Lee, a financial planner in Plano, Texas, rejects such a hard and fast rule. He says it's more important to look at your overall financial picture, as well as your priorities.

"If someone says 'I always wanted a BMW and I'm 42 and I never had the chance to get one,' we're not going to try and talk them out of it," Lee says. "But we'll take them through the process and help them decide."

-- Posted: August 1, 2007
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