Anyone who has car shopped recently knows that new and used vehicle prices have increased considerably over the past two years. For example, in 2020, the average new vehicle purchase price hovered around $39,000. By 2022, that number jumped to $48,000.
The rise in prices is partly due to the COVID-19 pandemic, which caused significant supply chain disruptions. The disturbances made it more difficult for carmakers to source parts for new vehicles, especially computer chips. The supply of new vehicles was restricted at a time when vehicle demand increased, which drove car prices higher.
Whatever happens in the new vehicle market has a knock-on effect on the used market. The limited supply of new vehicles caused huge demand for used ones. Many used models have appreciated significantly over the past two years; some have increased in value by 40% in two years.
Jump in Interest Rates
In addition to rising vehicle prices, buyers have had to deal with climbing interest rates throughout 2022. Commercial banks’ average interest rate on a 72-month loan for a new vehicle purchase rose from 4.55% in November 2021 to 5.19% in May 2022.
New vehicle buyers this year face an average purchase price of $48,000 and an average interest rate of 5.19%. Imagine a buyer with excellent credit and a down payment of $8,000. They could still face a monthly payment of more than $600. Most consumers would find it difficult to make that large car payment. However, they still need a vehicle to get to work and all their other commitments. What’s a person to do?
Consider Your Options
Although the average purchase price for a new vehicle is at an all-time high, it’s possible to buy one for substantially less. Vehicle size and luxury options contribute to that high average purchase price. For many people, the bottom line is they need a vehicle that seats five and is reliable. Many desirable cars meet that description with purchase prices under $30,000. It’s important to shop for a vehicle that meets your needs while providing the few most appealing extras. Popular features option packages are usually good values that don’t increase the price too much.
If a new vehicle costs too much money, shop dealers that offer a generous selection of used vehicles. Much of the legwork can be done entirely online. Carvana.com allows consumers to browse tens of thousands of used vehicles. Today, most local dealers have their complete inventories online. These websites make it easy to shop for a specific price range, make, model, vehicle age or mileage. It doesn’t take much time to find the vehicle of your dreams.
As you look for a vehicle, shopping for financing is equally as critical. Many dealers have funding on their websites, so it’s very easy to consider what they offer. In many instances, dealer financing is in partnership with a lender. Please don’t feel you must use the funding they recommend. You might be able to do better.
Some customers come to shop ready to pay cash for a vehicle; others line up financing with their bank or credit union. Those are good options. Carvana provides financing for 70 to 80% of its buyers by offering competitive rates and making the application process easy. Customers get a financing offer in two minutes.
Some lenders have recently become willing to sell to finance buyers with less-than-perfect credit. Keep that in mind as you shop for a vehicle. It might be wise to inquire at the outset whether they are able to finance anyone. If not, be prepared to move on to the next dealership.
Making a payment affordable often comes down to the length of the vehicle loan. Interest rates on used vehicles typically can be stretched to 60-month terms. Today, many car buyers who purchase a new vehicle look at spreading the payments over the maximum repayment period, usually 72 or 80 months. Find a website that lets you play with the numbers to see how the loan term affects your monthly payment.
If vehicle prices and interest rates make purchasing the vehicle you want challenging, consider adding a co-signer to your loan. Parents or other relatives are often willing to help, and when their credit is better than yours, adding them to the loan can lower down payment requirements, lower the interest rate or extend the life of the loan. It’s an option more dealers, including Carvana, have made available to help customers.
Remember, refinancing an auto loan is always possible if interest rates come down in the next couple of years. Just be careful of the fees for originating the refinancing loan. Getting a better interest rate is smart, but not if it involves a substantial origination fee.