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Most American families can't afford a new car, study finds

A study by Bankrate concludes that for most American families, the cost of a new car exceeds the amount families are able to spend on their mode of transportation.

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Buying a car is serious business, especially when you're buying one fresh off the assembly line. In fact, a study from Bankrate reveals that most U.S. families can't truly afford to buy brand-new vehicles.

To reach that conclusion, Bankrate used three important figures: the average price of a new car, which was $33,865 according to KBB at the time the survey was conducted; the average rate for a 48-month new-car loan, which was 4.24 percent; and average insurance rates for America's 50 largest cities.

Bankrate also assumed that consumers should follow the 20/4/10 rule when buying a vehicle. That rule states that shoppers should make a downpayment of at least 20 percent; finance a vehicle for no more than four years; and ensure that the loan principal, interest, and auto insurance total no more than 10 percent of gross household income.

For example, if you were buying a vehicle for $20,000, following the 20/4/10 rule, you'd want to make a $4,000 downpayment, leaving $16,000 to finance. If you landed an interest rate of 4 percent, using a handy-dandy loan calculator, we see that you'd pay a total of $17,340.71 over the life of the loan. If your insurance premiums ran $900 per year for four years, that would be $3,600, making for a total, four-year cost of $20,940.71, or roughly $5,235 per year. If you gross $52,350 or more annually, you'd be following the 20/4/10 rule.

Unfortunately, based on all those averages--new-car prices, interest rates, and insurance--most U.S. families can't afford the average $33,865 car. Some cities did come closer than others, though.

In San Jose, California, which boasts household incomes averaging $87,210, the survey showed that most families could afford a car costing up to $32,855.81. San Francisco, Seattle, Washington, D.C., and San Diego rounded out the top five--though by the time the study reached the #5 slot, the maximum affordable price for a new car had dropped to $25,033.41.

At the other end of the scale, we find--ironically--Detroit. Yes, in the home of America's domestic auto industry, where average household incomes hover just below $26,000, families can afford cars costing up to $6,174.03. Rochester, Cleveland, Hartford, and Buffalo followed close behind.

Our take

As you can see, studies like these rely heavily on averages. If you earn more than the average family, if you score a better insurance rate than most, or if you're able to pay more than 20 percent down, you're better equipped to handle the cost of a new car.

That said, the 20/4/10 rule is a fairly good one to follow. The fact that U.S. new-car sales are booming these days--despite Bankrate's findings--suggests that many families are taking on more debt than perhaps they should. 

For a full ranking of U.S. cities according to the amount they can comfortably pay for a new car, click here.

This article first appeared at The Car Connection.

The Christian Science Monitor has assembled a diverse group of the best auto bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

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