Shoppers are usually advised not to upgrade their vehicles too often due to the wear of new cars. Historically, the most financially responsible course of action has been to stick with the car as long as possible and buy a used car rather than a new one – but does this advice still apply amid the ongoing inventory shortage? The scarcity of new cars has caused a huge rise in used car prices and trade values over the past year. This means that your used car can be worth nearly as much as its new counterpart today, which may help offset the higher prices for new cars.
Related: Inventory Shortage Update: Should You Wait to Buy a Car?
Whether it’s in your best interest to take advantage of higher trade values or wait until the inventory shortage improves, it comes down to several factors: the car you’re trading, the car you’re looking to buy, and how long we’re willing (and able) to wait to buy that new car .
Why buy now?
Even with new car prices hitting record levels and inventory remaining tight, some shoppers will benefit from buying a new car sooner rather than later — particularly those who have the means to trade it in. This is because a generous barter value can help offset new car price hikes. At the same time, car loan rates are poised to rise in the near future along with the monthly car payments.
Your consumption trends to trade in dollars
New car depreciation rates vary widely, but under normal circumstances, a new car loses an average of 20% of its value after the first year and continues to decline by about 10% until it reaches the five-year mark, According to Experian. This means that a 5-year-old used car will typically retain about half its initial value.
But this is not so Normal Conditions: Inflated used car values mean your car swap can be far more valuable now than the depreciation equation suggests. according to JD Power’s latest sales reportEquity traded averaged nearly $10,000 in May, up 59% from the previous year, and higher trade values could help offset some of the premiums for new auto insurance.
Average used-car prices among Cars.com dealers show a similar trend: The median used-car price in May was $25,095 — a 47% jump from May 2019, which preceded production challenges related to the pandemic. Although high used car prices herald bad news for budget-conscious shoppers, the bright side is that dealers are likely to offer generous swap offers in an effort to fill their quotas.
Another consideration is how quickly the value of your used car will rise. According to a Cars.com survey, nearly two-thirds of car owners who traded in their cars received a higher-than-expected bid: about half received $1,000 more than expected, and 20% received $3,000 or more. According to Cars.com data, the top five cars with the fastest-rising resale value are the 2018-21 model year variants of the Tesla Model 3, Kia Optima, Toyota RAV4 Prime, Tesla Model Y and Toyota Corolla.
New cars may become more expensive
New-vehicle inventory challenges were initially caused by a global shortage of microchips, but cascading supply chain problems continued to drive prices up. According to Tyson Jominy, JD Power’s vice president of data and analytics, parts and components like tires, paint resin, wire harness and seats are lagging behind in manufacturing plants.
“Many components are from one source, so problems with one supplier can hinder production at many automakers,” Jominy wrote in an email to Cars.com.
Because of these ongoing challenges, production is not expected to return to normal until 2023 and inventory levels may not recover until the second half of 2023. It is likely that significant monetary stimulus will not appear until inventory levels are restored and new car prices may continue to climb in the meantime.
“There are still many incentives, but perhaps automakers use them differently,” Jomini wrote. “Some incentives will encourage consumers to use the automaker’s captive lender, [however,] It does not represent any of these significant leverage. Such incentives are not likely to return en masse until the second half of 2023, when inventory levels are expected to increase above the 2 million threshold. [But] Until then, we don’t expect a return of very large amounts of cash.”
Expect higher interest rates
On top of the rising prices of new and used cars, interest rates on auto loans are also on the rise and are expected to rise after the latest Federal Reserve report. high rate – The largest since 1994. According to JD Power, the average interest rate for May was estimated at 4.92%, an increase of 0.62% over the previous year. Additional price increases will contribute to higher monthly car premiums:
As a rule, every [1%] “Increasing interest rates either lowers purchasing power by about $1,250 or increases monthly payments by $20,” Jomini wrote. “Many lending institutions may see the Fed [0.75%] Raising the interest rate as a negative sign and increasing lending rates even then.” Securing a lower interest rate now can save shoppers hundreds or even thousands of dollars during the life of a car loan.
More from Cars.com:
Why should you wait
While some shoppers can reap the financial benefits of buying a car now, others are better served by waiting until the inventory shortage improves. If you currently own a reliable vehicle that does not require onerous repair costs, waiting for the storm may be the best option.
Want to buy a used car
As mentioned earlier, used car shoppers are paying more than ever, but experts predict that used car prices will eventually fall after improvements in new car production — likely by late 2022 or early 2023.
Buying a used car once prices are stable can provide a significant financial advantage over buying a new car. Prior to the May 2019 inventory shortage, the average price for a new vehicle among Cars.com dealers was $35605; By comparison, the median used The price of the car was 17,101 dollars.
New cars sell above label price
Waiting to buy a new car until the inventory shortage improves is likely to result in better incentives, a lower bargain price, and better vehicle selection. The average price for a new car for May was estimated at $44,832, according to JD Power — a 16% increase from the previous year. One reason for the sudden rise is a lack of incentives: The average new car incentive for May was just $965 — that’s 65% Drops from a previous year.
Not only do shoppers find fewer discounts on new cars, they pay more more What the label price suggests: JD Power data shows that new-vehicle transaction prices in May were $1,001 above their MSRP on average, and 64% of consumers drove above their MSRP, according to Gemini.
These brands come at a time when demand for new vehicles is outpacing supply, reducing available inventory. For example, inventory of new cars among Cars.com dealers fell from about 3.4 million vehicles in May 2019 to about 996,000 in May. Cars that arrive at a lot of dealerships don’t stay there for long, either: In May, 56% of new cars were sold within just 10 days of arriving at a dealership, and the average vehicle sits on a dealer’s lot only for 19 days (less than 45 days a year ago), JD Power reports. This means that shoppers will likely have a hard time finding the exact car they want, and those who find a suitable match are more likely to pay a higher price than the sticker.
How to save money when stock is short
If waiting until inventory shortages improve isn’t a viable option, there are several strategies shoppers can use to find the right vehicle while also saving money.
- Shop several dealerships to get the best price (even if it means a premium off the sticker price).
- Get pre-approved for a car loan and see if you can negotiate a financing rate.
- Be prepared to buy as soon as you find the right vehicle.
- Make sure to get the best possible offer for your deal.
In some cases, ordering a car from a factory will be the best way to get the car you want and reduce profit margins. Be warned, though: Ordering a car can be a long process in itself. Shoppers should be prepared to wait several months for the vehicle to arrive.
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