Car shoppers may find that bargains are scarce this year. But better prices on trade-ins may help ease the pain.
Last year’s pandemic-induced production delays, combined with a continued shortage of computer chips and other automotive components, have tightened the supply of new models — especially popular sport utility vehicles and pickup trucks.
The inventory of new vehicles at dealerships in March was down more than a third from a year earlier, according to an estimate from the automotive website Edmunds.
That means it may be challenging to find a new ride with the colors and features you want at a price you can afford. “It’s harder to get exactly what you want,” said Ivan Drury, senior manager of insights at Edmunds. “Don’t expect heavy discounts.”
Consumers have started buying cars again, as pent-up demand from the pandemic and the receipt of stimulus checks send shoppers to dealer lots. Car sales in the first three months of the year were “extremely strong,” according to the National Automobile Dealers Association, an organization representing franchised dealers.
“Sales demand has been far stronger than anyone expected,” said Michelle Krebs, senior director of automotive relations at Cox Automotive.
She attributed the high demand to well-heeled consumers who continued working during the shutdowns in 2020 but didn’t take vacations or dine out and now have cash to spend on high-end vehicles. Plus, she noted, “people are taking more road trips, so they are investing in vehicles to do so.”
Whether the demand continues as the economy gains steam remains to be seen, said Keith Barry, who writes about cars for Consumer Reports. Competing pressures are at play: Some people will probably return to commuting to work as offices reopen and may prefer to drive instead of taking public transportation, raising demand for cars. But others may continue working at home, which would tend to reduce the need for cars.
“It’s a really big, open question,” Barry said.
For some popular new models in tight supply — like the Kia Telluride, a highly rated, midsize SUV — consumers can expect to pay the full “sticker” price suggested by the car’s manufacturer, at least until production catches up with demand.
“It’s been a weird year,” Drury said.
That has driven up the average purchase price of a new vehicle to about $40,000.
Inventories of luxury cars are the lowest as buyers have pounced, while run-of-the mill sedans are relatively plentiful, said Krebs at Cox.
So if new cars are too expensive, you can just buy a used car, right?
Yes, but deals may be elusive there as well. Fewer people bought new cars last year, so fewer used cars were traded in. And the short supply of new cars is pushing more buyers to consider used cars, raising those prices, analysts say. The average price paid for a used car is well above $20,000, Edmunds says.
On the plus side, if you have a car to trade in, its value is probably higher, especially if it is a popular model. The average value for trade-ins, including leased cars turned in early, was about $17,000 in March, up from about $14,000 a year earlier, according to Edmunds. The average age of trade-ins was 5 1/2 years.
Various online services, like Kelly Blue Book, TrueCar and Carvana, will supply a trade-in estimate based on your location and your car’s age, mileage and general condition, and offer more tailored appraisals if you provide details like the vehicle identification number. Some even offer to buy your car outright.
If you trade in your car at a dealership, be sure to negotiate the price of your new purchase before you discuss the value of your trade, Consumer Reports advises.
And when you buy a used car, it’s important to have it inspected by an independent mechanic, to spot any potential problems. If a dealer balks at letting you do that, it may be best to shop elsewhere, Barry said.
The Federal Trade Commission offers additional advice on used-car shopping on its website, as does the Consumer Federation of America.
Here are some questions and answers about car shopping:
What are average interest rates for car loans?
The average rate for a new-car loan was 4.3% at the end of 2020, according to Experian. Average interest rates were higher for used cars, at 8.4%. The average monthly payment for a new-car loan is $575, according to Edmunds, and $432 for a used-car loan.
I want to keep my monthly car payment low. Does it make sense to get a longer-term loan?
It’s best to choose the shortest loan term you can manage, according to Experian. The average length of a new-car loan is approaching six years as buyers seek to keep their monthly payments affordable. But the longer length means you’ll pay more in interest over time. And the longer the loan term, the more risk that you could end up “underwater” — meaning as the car ages and loses value, it could be worth less than you owe on it. If you had to sell the car for some reason, you might not net enough cash from the sale to repay the loan.
Is it always cheaper to buy a used car?
Almost always. But sometimes, the price difference between a “lightly used” one-year-old car and a new version of the same vehicle isn’t very much, according to a recent analysis by the automobile search engine iSeeCars.com. In those cases, it can make sense to buy new, especially if you want to take advantage of lower interest rates available when financing new cars, said Karl Brauer, executive analyst at iSeeCars. The average asking price for a gently used Toyota Tacoma, for instance, is only about 4% less than for a new model, making it worthwhile to consider the new version. In contrast, a used Hyundai Sonata is 36% less than a new model, making the used version an attractive option.