New car down payments nearing record high

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Consumers paying more upfront to achieve 'affordable' monthly payment

As the price of new cars keeps going up, consumers are finding it harder to finance one, in large part because they are struggling to come up with an affordable monthly payment.

Many obviously feel they need to pay more upfront so they can have a monthly payment that fits within their budget. A new report from automotive publisher shows the average down payment on a new car in May was $3,850, an increase of 6.5% over May 2016.

And it's not just because cars are getting more expensive. Consumers are buying more expensive cars.

More bells and whistles

"Buyers want pricier cars with more bells and whistles, leading to the troubling trend of trading longer loan terms for lower monthly payments," said Edmunds Executive Director of Industry Analysis Jessica Caldwell. "But now that interest rates are also on the rise, something has to give."

But compromising on the vehicle selection and options package apparently isn't on the table. Caldwell says if consumers can find a way to finance what they want, that's what they'll do. So they scrape up some extra cash to keep the monthly payment from putting them in the hole each month.

The Edmunds analysis found that the average loan term, monthly payment and amount financed on new vehicles have grown steadily over the past five years. That's one reason leases have grown in popularity -- consumers can drive a more expensive, option-laden model for a lower monthly payment.

But those attractive lease deals might soon start to dry up as manufacturers confront a growing glut of late-model used cars coming off lease that are driving down prices.

20-4-10 rule of auto financing

Consumers who follow the "20-4-10 rule" will buy less expensive cars and make smaller down payments. Under that rule -- advocated by personal finance experts but rarely followed -- a car purchase is only really affordable if you can put down 20% of the purchase price, finance it for no more than four years, and have a monthly payment that doesn't exceed 10% of your gross monthly pay.

Under that rule, if you purchased a car for $33,754, you would need to make a down payment of $6,750. Financing the balance for four years at 4% would create a monthly payment of $609.

To afford the average new car or truck, you would need a monthly gross income of $6090, or $73,080 a year. The average American household income is significantly less than that.

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