November's New-Car Buyers Spent an Extra $1.4 Billion with Long-Term Loans, According to Requisite Press Study

LOS ANGELES, Dec. 10, 2014 /PRNewswire/ -- Requisite Press, LLC reported today a November 2014 Auto Buyer's Affordability Index (ABAI) of 53.0, indicating that a prudent, median-income household can only afford 53.0 percent of the new-car average price. In a survey of new-car buyers that have used long-term financing, Requisite Press found that nearly half of the buyers used the longer terms to purchase more expensive cars. At November prices, buyers that financed with a 6-year loan instead of 5-year loan could spend an additional $6,016 while keeping payments the same. Given the November sales volume, long-term loans enabled extra spending of more than $1.4 billion, according to the study. Consumers with a lifetime of long-term loans could see a reduction in retirement savings of more than $140,000.

In a survey of new-car buyers*, Requisite Press found that nearly half (46.3 percent) of those that had taken out a long-term loan (61 months or longer), would have selected a less expensive car if limited to a 60-month loan.

Based on the November average transaction price of $30,445, buyers choosing a 6-year loan versus a 5-year loan were able to commit to an additional $6,016 (total cost) while keeping payments the same. Assuming current auto financing trends for loan term and the survey results, along with the November sales volume, the study concluded that the total increase in spending due to long-term loans was more than $1.4 billion.

"The numbers are big when taken in aggregate, but the damage is done at a personal level," said Phil Kelton (@Phil_Kelton), President of Requisite Press. "A lifetime of using long-term loans to boost spending, results in a lot less retirement savings—clearly a hit to family financial security."

Based on a lifetime of buying 8 cars with 6-year loans (each with $6,016 of extra spending), a conservative 5 percent rate of return, and a retirement age of 67, the reduction in retirement savings would be more than $140,000. That grows to more than $250,000 when 7-year loans are considered.

Requisite Press recommends that consumers avoid the need for long-term loans by maximizing their buying power with nonnegotiable competition at every step in the car buying process—sales price, trade-in, financing, and add-ons. In addition, following the 20-4-10 auto financing rule will preserve family financial security.

The November ABAI of 53.0 is based on a median household income of $53,713, a light-vehicle average transaction price of $30,445, and adherence to the 20-4-10 auto financing rule. This equates to an affordable monthly payment of $318 and price of $16,143.

The monthly ABAI was developed to enable buyers to easily view current new-car prices in the context of sound financial advice. The 20-4-10 auto financing rule consists of a minimum 20 percent down payment, a maximum 4-year loan term, and monthly payments of no more than 10 percent of gross household income. The rule is widely recommended by personal finance experts to maintain financial security, avoid excessive interest costs, and preserve future investment opportunities.

For additional information:

http://www.requisitepress.com/ABAI

*The survey was written by Requisite Press, LLC and conducted using Google Consumer Surveys, November 2014.

Requisite Press, LLC was founded in 2012 to publish select expert information with great potential for consumer quality-of-life improvement. In addition to the monthly Auto Buyer's Affordability Index, Requisite Press, LLC also provides AffordCheck (SM), an online 20-4-10 rule calculator, and produces the Auto Buyer's Edge YouTube channel.

Contact:

Phil Kelton
@Phil_Kelton
Email
310-896-2302

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SOURCE Requisite Press