According to usatoday.com the average price of a new vehicle sold in America was $33,560 in April of 2015, yet according to the Census ACS survey, the median household income in the United States was only $55,775 in 2015. As you might imagine, households often own more than one vehicle, and depending upon the location of the residence, city, quantity of license drivers, amongst many other factors, governing.com estimated that in 2013 the average household had 1.8 vehicles. On the surface, this would seem to indicate that average Americans probably spend way too much money on new vehicle purchases.
First off, as in any major purchase, the consumer should take into account their income, their current budget, the length of such a commitment, insurance, and other pertinent factors. For instance, as written on the fool.com, it is recommended that a good rule of thumb for vehicle purchases should consist of: "A down payment of at least 20%, financing lasting no more than four years, and total cost -- principal, interest, and insurance -- adding up to no more than 10% of a household's gross income." These above principals often abbreviated to "20/4/10 rule" are basically ignored by a substantial portion of the vehicle buying segment of Americans. Instead, the consumer has been roped into his purchase by two very important things, of which, the first is the consumer is properly taking advantage of historically low loan rates, to which, consumers can get auto loans at under 2%, depending upon credit score, length of loan, amount of loan, income, and so forth. In any event, consumers with stellar credit are receiving auto loan rates at historic lows and those low rates translate into lower monthly payments. On the other hand, and by far the biggest elephant in the room, is the fact that auto loans that use to be no longer than five years for a new vehicle, about a decade or so ago, have instead morphed into loans of 72 months (6 years) and even 84 months (7 years), so that now 62 percent of auto loans as estimated by Edmunds in 2014 were for terms greater than 60 months.
What consumers don't seem to comprehend, is that they are often way too focused on trying to get their auto loan monthly payment down to a reasonable level that they believe that they will be able to budget for, so that consequently they often lose focus of the bigger picture, which is the amount of time that they are committing to a vehicle, that they then will have to keep paying on and keep paying on, for a substantially greater length of time. There is not a valid reason why any consumer should want to sign their name to a vehicle contract that is greater than 60 months, to begin with, because if the numbers aren't right for 60 months, the correct analysis should be therefore to find a vehicle that is cheaper.
Instead of consumers actually doing their homework, before they walk into the auto dealership by realistically adhering to a sensible budget, or adhering to the "20/4/10 rule", they seem to decide way too often, that such and such a price on a monthly basis, seems to be about right, then they way too frequently give up that price to the dealer, who manipulates it up "just a couple dollars" further, extends the loan out another 24 months, and the consumer subsequently ends up signing the deal, in which, they have made a financial commitment for seven long years, making them often upside-down on their loan, and basically playing catch-up on trying to get their equity positive on their new purchase, from day one.
Unfortunately, way too many Americans purchase way more vehicle than they can rightly afford, sacrificing their hard-earn money for something that truth be told, pleasures them little, and pains their financial rear-ends a lot.