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In 2021, used car prices blasted upward by a terrifying 36%, according to data from Black Book.
Fortunately, those days are behind us. In the years since, the bubble has burst — but may still have further to fall.As you explore your options to buy or hold this year, keep the following factors in mind. It also never hurts to speak with a financial advisor before making any big decisions.
1. High Interest Rates
Interest rates remain stubbornly high, and that poses a particular problem for used cars.
At the end of last month, Edmunds reported the average used car loan cost 11.4%. The Federal Reserve last pegged the average interest rate for used cars at 16.95%.
Melanie Musson, a car expert with CarInsurance.org, compares these rates to credit cards. “Most people would agree that it’s a bad idea to purchase a car with your credit card. With interest rates as high as they are, you could put your car purchase on a low APR credit card with a similar rate. Used car prices are high, and the high interest rates can more than double what you pay when your loan is paid off.”
Indeed, the cost of new car loans averaged 7.1% at the end of last month according to Edmunds. You’ll still pay more on a monthly basis for a new car of course, but lower interest rates reduce the relative cost.
Car loans in general remain 68% higher from five years ago. “We haven’t seen average interest rates for used car loans so high in over 20 years,” notes Andrew Latham, Certified Financial Planner and Content Director with SuperMoney.
But luckily, that isn’t likely to last.
2. Expectation of Falling Rates
Latham continues: “With inflation on a promising decline, the Federal Reserve is expected to start lowering rates by September 2024. Waiting until 2025 could offer you much cheaper financing options.
“While not everyone can afford to wait, it might make sense to hold off buying a used car right now if you can.”
If you can squeeze some more life out of your car, aim to keep it on the road until at least next year for cheaper financing — and perhaps cheaper prices too.
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3. High but Declining Prices
Yes, used car prices shot to the moon in 2020 and 2021. But they’ve gradually floated back down to earth since, especially over the last year.
In fact, used car and truck prices have fallen by 10.9% over the last 12 months, according to the Bureau of Labor Statistics. That marks the greatest deflation rate of any other major spending category.
The average used car cost $25,571 as of the end of July, according to CarEdge.com. That figure may well continue to fall as prices continue to correct to more normal fundamentals.
4. Skyrocketing New Car Incentives and Inventory
Why have used car prices fallen so fast, beyond correcting bubble pricing?
Because the inventory of new cars has shot upward over the last year, and dealers are offering huge incentives to move it.
In July, new car inventory hit 2.91 million in the US according to Cox Automotive. That marks a 52% jump from one year earlier.
Car dealers hate lowering MSRP prices, and indeed new car prices have dipped a modest 1% over the last year. Instead, dealers prefer to offer incentives such as “cash back” in order to move inventory. Kelley Blue Book reports that the average dealer incentive rose to $3,383 in July, worth 7% of the average new car price. That incentive rate has leapt 59.1% compared to a year ago.
In other words, dealers are desperate to sell new cars. That leaves plenty of room for you to negotiate deep discounts on the new car you want, rather than settle for a used car that doesn’t exactly rev your engine.
5. Cars Are Always Bad Investments
Scott Sturgeon, financial planner and senior wealth advisor at Oread Wealth, makes a broader argument about keeping your financial priorities straight. “Buying cars in general is just not a great use of money.
“It’s a depreciating asset that most people use for 30 minutes to an hour per day. When you add up the cost to purchase, the value it loses, insurance, gas, maintenance and the opportunity cost of spending all that money when you could be investing it or spending it on cool experiences, owning a car is actually a lot more expensive on a mile per driven basis than people think.”
Sure, you might be able to technically afford to buy a replacement car. Or you could take that money and travel Europe, or invest it to retire young, or move into your dream home. Every dollar you spend on car costs takes money away from the rest of your lifestyle.
Final Thoughts
“Unless your current car is literally falling apart — as in unsafe to drive — consider driving it longer,” urges Sturgeon.
“Even if you can hold out for just a year or two, the rate you’d get on a car loan will likely be lower which will in turn lower your monthly payment and the total interest you pay over the life of the loan.”
Musson echoes that thought, highlighting the uncertainty that’s hung like a fog over 2024. “Economic times are uncertain, so you should use this time to build your savings and prepare for the possibility of an economic downturn. Making a big purchase is a bad idea unless you absolutely must buy a car.”
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