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Record-setting car sales, but not because of affordability

MoneyWatch headlines for June 30, 2016
Mortgage rates drop toward new lows, and other MoneyWatch headlines 01:06

Owning a car is an American way of life, yet it's becoming less affordable.

Blame the rising cost of cars and the stagnant wages of American workers. According to a new study from Bankrate.com, the median-income household in the 50 largest U.S. cities can't afford the average-priced new car or light truck. The cities with residents that are most capable of affording for a new car include San Jose, California, and San Francisco, but the median household in those cities would still find it a slight stretch, the report noted.

The rule of thumb for car affordability is sometimes called the "20/4/10" rule, which means a household should make a down payment of 20 percent on a car, secure financing that lasts four years or less, and make sure that principal, interest and insurance is less than 10 percent of their gross income. Despite the financial burden a new car can represent, Americans are buying more of them than ever: Auto sales reached a new peak in 2015.

How to find deals on new cars despite rising prices 01:36

"This may be a no-brainer, but don't buy or lease a car that's more than you can afford," said Steve Pounds, personal finance analyst at Bankrate.com. "The reality is that cars are more expensive, they're more complex and they last longer. That makes consumers make tough decisions about financing."

About seven out of 10 new cars purchased with a loan in 2015 had term of more than five years, or longer than financial experts recommend. Consumers are increasingly turning to longer-loan terms -- 72 months, 84 months or even longer -- to make new car monthly payments more affordable.

While a longer loan term can reduce monthly payments, lenders often charge a higher interest rate in exchange, and the longer the term, the longer you're paying interest. Over time, that will end up costing a borrower more.

Despite the rising cost of a new car -- the average now stands at $33,865 -- interest rates have remained low, which has spurred consumer demand. Before buying a car, you should compare the total costs of the cars you're interested in, including such overlooked items as taxes and registration fees, to make sure you can handle the cost, Pounds said.

He also recommends asking car dealers about any rebates or incentives that might be available, such as discounts for members of the military.

Below are the five cities where cars are the most and least affordable for median households. The price of an affordable car for residents of those cities is in parenthesis.

Most affordable:

1. San Jose, California ($32,856)

2. San Francisco ($31,970)

3. Seattle ($25,660)

4. Washington, D.C. ($25,237)

5. San Diego ($25,033)

Least affordable:

1. Detroit ($6,174)

2. Rochester, New York ($7,392)

3. Cleveland ($7,558)

4. Hartford, Connecticut ($7,960)

5. Buffalo, New York ($8,319)

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