Driving a car is a vital but expensive aspect of getting around town for many Americans. Despite the high cost of vehicles, people still want to take on the financial responsibility of owning one.
Some people even spend as much on cars as they do on homes. According to LendingTree, vehicle debt is third in size, behind mortgages and student loans, making up 9.4% of all consumer debt in the country.
Rising Cost of Automobiles
Automobile prices have escalated to the point where new buyers are paying four figures in monthly payments. According to an Edmunds industry study, about 13% of new car purchasers in June had monthly payments of $1,000 or more. A significant increase from the 7% who paid this much in June.
Borrowing by new automobile buyers increased to 40,602 in the second quarter, breaking the 40,000 mark set in 2005. In the same span, Cox Automotive reported in June that the average price of a new car touched a record high of $48,043.
Typically, dealerships now sell cars at a higher price than the sticker price or the manufacturer suggested retail price (MSRP) without incentives. Due to their diminished negotiating ability, buyers must accept the dealership's offer to pay thousands more than the sticker price. Markups on luxury vehicles go as high as $50,000 because dealers are looking to sell to the highest bidder.
Problems with the supply chain are the root cause of the extremely high prices. The natural disaster in Japan, COVID shut down in China, and the conflict between Russia and Ukraine have all contributed to a shortage of essential vehicle components. In addition, the increased target range that the Fed adopted has contributed to the rise in interest rates.
Tips for Purchasing a Car Now
With everything going on, purchasing a car can be difficult, especially if you are on a tight budget. Many experts advise waiting it out if you intend to acquire one; presumably, the market will shift in your favor. Prices will improve after the economy recovers from the effects of inflation, and you should be able to get a much better deal.
A one-year wait could mean the difference between getting your choice of car at a reasonable price and settling for less. However, waiting is not an option if you live in an area where getting anywhere without a car is impossible. We share tips that may help you get a good deal.
Sell Your Vehicle
The current high pricing may be bad news for people trying to buy a car, but it's a perfect time to be a seller, according to Carrie Hoagenson, VP of Consumer Lending/Sales & Service at Credit Union of Texas. In the ideal situation, selling your car allows you to take advantage of better financing arrangements or even pay for a vehicle with your own money.
Lease Your Car
Hoagenson suggests leasing your vehicle, which, according to her, will lower monthly payments. The monthly payments on a lease are usually lower than the monthly finance payments if you bought the same car. When you lease, you are paying to use it—not to purchase it. The risk of a huge, unanticipated expense is greatly reduced when you lease a car.
“The internet has altered the way we shop for automobiles. You can now compare listings and find cars near you without leaving your house,” says Julie Bausch, managing editor, Car Talk Digital. In addition, being flexible with your choice of cars can give you more options to help you make a decision.
For instance, according to Bausch, you may want a 2022 Mazda CX-5. But you might find yourself waiting months for this model and paying 6%-8% over MSRP for it. Instead of waiting, she advises making a list of comparable models that will meet your needs. She notes that a late-model vehicle with low mileage might be a better choice than the newest model that won't be available until 2023.
Shopping around also means looking for the best financing option that suits your budget and credit score. According to Hoagenson, buyers may consider taking out a Flex Auto Loan. Hoagenson says these sorts of loans allow you to finance any make or model five years or newer for a lower monthly payment in exchange for a larger one-time payment at the end of your loan term.
Debt is appealing because it allows you to acquire something new without needing to cope with the discomfort of giving up money later. But all that spending will eventually catch up with you.
In the words of Dave McCurdy, marketing manager at Eco Driving USA, “Never pay more than you can afford – no matter how tempting it is to buy that luxury model with all the bells and whistles.”
In one of his articles for CNBC, Sam Dogen, a personal finance writer, developed the 1/10th rule for buying a car. According to him, the purchase price of a vehicle should not exceed 10% of your gross annual income to help reduce your base price budget and save money. Applying this formula, if you earn $68,000 per year, you should budget not more than $6,800 for a car.
If you're looking for a loan, Bausch suggests checking with your local bank or credit union. According to her, knowing exactly how much you can spend on a car before you start looking is a huge benefit. Being pre-approved can also help if you have less than ideal credit. Car dealerships will always look to charge higher interest rates for certain buyers. It's not necessary to agree to the financing terms offered by the dealership if you're pre-approved.
The ideal timing, according to Bausch, may entail taking advantage of available bargains and promotions. She also offers advice on favorable periods you can use to your advantage. She advises, “Generally, the ideal periods to buy a car are long weekends, holidays, the end of the month, and October to January 1st, when the model year changes.”
And she explains that dealers will be eager to get rid of the current model year as fast as possible during the end of the year when new models take center stage.
Getting exactly what you want is possible by placing an order directly with the manufacturer. The dealer doesn't have any finance charges, which may reduce costs. You may skip paying a bonus fee or a markup above the MSRP.
Buy a Used Car
Used automobiles are a possibility, but they're still not inexpensive. According to Cudd, “even used cars from the past five years are comparatively expensive.” The shortage of brand-new automobiles is placing pressure on the market for used cars. Your best bet is to get an older model at a relatively high cost.
How Long Is Too Long for a Car Loan?
“The typical auto loan duration, Bausch says, used to be about five years or 60 months. This was before the automotive world went insane with shortages and post-pandemic spikes in car values. Now, we are seeing average auto loan lengths of 6–8 years and 72–84 month terms.”
While extended loan terms can have lower monthly payments, She notes that extended loans are not good because the longer the car loan, the more the consumer will pay in interest and finance charges over the loan.
According to her, buyers fall into this loop of extended loans because of necessity and slick sales tactics. But therein lies the risk, where car depreciation becomes an issue for the consumer.
Consequently, she notes that people find themselves upside down on their loans, owing more on the vehicle than it is actually worth. She warns that in these unstable times, committing to something for 6–8 years can be hard if your finances change.
Consumer advocate Geoff Cudd is the proprietor of FindTheBestCarPrice.com. He argues that, in theory, getting a 36-month auto loan gives you the best bargain and the lowest interest rate. However, Cudd acknowledges that the majority of people can not afford that noticeably increased monthly payment. If you have no choice but to take out a long-term loan, he suggests keeping it to a maximum of 60 months.
If at all feasible, he advises avoiding a loan with a 72-month term. Cudd recommends getting an extended auto loan if you're very short on cash or have an unplanned setback. This makes it less likely that you'll miss a payment.
Purchasing a vehicle is a major financial and emotional commitment. Making wise judgments can ensure that your financial situation does not spiral out of control or leave you stuck with a car you don't enjoy. Ask questions and be sure you understand everything before you sign anything.
Don't sign anything you might later regret because you were hurried into it.
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This article was produced and syndicated by Wealth of Geeks.
Featured Image Courtesy of Shutterstock.
Amaka Chukwuma is a freelance content writer with a BA in linguistics. As a result of her insatiable curiosity, she writes in various B2C and B2B niches. Her favorite subject matter, however, is in the financial, health, and technological niches. She has contributed to publications like ButtonwoodTree and FinanceBuzz in the past. In addition to ghostwriting for brands like Welovenocode, Noah and Zoey, and Ohcleo, amongst others. You can connect with her on Linkedin and Twitter.