Numbers Can be True Liars
For those of us who love our numbers and get excited by the idea of an equation that may take many steps to solve it would be hard to imagine that numbers can actually lie to us, but they certainly can. Even though each and every mathematical equation has but one true answer, which is one of the most loved parts about math for the pocket protector crowd, the simple fact is just about anyone can manipulate numbers to show and mean whatever they want them to. Let me show you an example of just how numbers have been manipulated with regards to the affordability of a new car.
In a recent report, Bankrate.com released information that would lead us to believe that there is no metro area that has a median income high enough to purchase an average new vehicle and drive it. If that were the case we wouldn’t see as many cars on the road in major metro areas and public transportation would be used even more than it already is. While there are plenty of people who do use public transportation in metro areas, there are many who live in areas not directly inside these metro areas that drive new vehicles and are able to afford them without any difficulty.
According the Bankrate.com report the average consumer in San Jose, CA could afford a new vehicle at a price of $32,856 with a maximum monthly payment of $662 a month while someone living in Detroit, MI would only be able to a vehicle that cost 6,174 at a monthly payment of $120 per month. These numbers are based upon the average household incomes in these areas and these two locations represent the most affordable area and the least affordable area on this list.
This report was prepared using a “20/4/10” rule meaning a down payment on the vehicle was 20 percent; the financing is only for four years and the interest and insurance were not to exceed 10 percent of the gross monthly income for the house. While the math is correct and calculated perfectly based upon this rule, the logic behind this report is completely inaccurate. If this report were completely accurate residents of the Detroit area wouldn’t be able to afford any of the vehicles they make as a new model at all, which certainly isn’t the case.
First of all, most vehicles aren’t financed for only four years. In some cases we see loans that are extended to 72 or 84 months, making the payments smaller and more affordable for the car shoppers of today. The four years of financing is much closer to a lease term than to a financing term. Secondly, many households spend more than ten percent on their vehicles. While this may not be the soundest financial logic there are some who will live in a place that’s much more affordable in order to have the vehicle they want to drive.
Even if these numbers were somewhat sound, new vehicles tend to come with a great deal of incentives and discounts, especially when they near the end if a model years and dealers want to make room for the new models that are about to arrive. While the math is accurate from this report, the logic behind it is completely off base. Considering the automotive industry just had its best-selling year for new vehicles in history it appears more of us can afford the new vehicles we want than this report would have us to believe, making it truly a liar.