How to Buy a New Car in One of the Toughest Markets Ever
Fall is traditionally a terrific time to buy a new car at a good price. But buyers have been facing an incredibly challenging market for new cars, and no one should expect great deals this year. That means it’s even more important for buyers to be smart about how they make their car purchase.
The average transaction price for new vehicle purchases was at nearly an all-time high in October, according to a Kelley Blue Book (KBB) report Wednesday. The average price increased by $187 from September to October, rising to $48,281. That's just below the record of $48,301 set in August, and it's $1,775 higher than October 2021.
During normal times, buyers are often able to purchase new cars for hundreds or even thousands less than the MSRP (manufacturer suggested retail price, aka the sticker price). For 17 months in a row, however, the average new car has sold for above MSRP, KBB reported.
Some experts think car prices will decline in the months ahead as supply improves and as we see the effects of the Federal Reserve's rate hikes, which have increased auto loan interest rates and made financing a new vehicle purchase much more expensive. Rate hikes typically reduce buyer demand for purchases that require financing, and that could car cause prices to come down.
The Fed’s likely not done raising rates, and inflation isn’t under control yet. Car prices are still very high, and the extra financing costs from high interest rates are making it difficult for Americans to afford a new car. But there are some strategies to use to make a new car purchase less painful.
Tips to buy a new car now
Whether you’re looking for the best possible deal during this period of high prices, or if you’re just trying to make sure you find the model with the specs you’re looking for amid tight inventory, experts say there are several strategies that can help.
Forget about year-end discounts on new cars
New model year cars come out in the fall, and dealerships often offer the best discounts on the current year models around this time of year as they try to clear out excess inventory.
However, new vehicle inventory is very tight right now due to supply chain and production challenges, meaning that buyers aren’t going to find the blowout discounts, says Ivan Drury, senior manager of insights at Edmunds.
“If you're looking for really big deep discounts, you're not looking at anything soon. You're looking at least a year out, maybe even longer, because we've been in a state of reduced auto sales for nearly two years now,” Drury says.
The exception could be cars that got big makeovers from 2022 to 2023, says Aaron Bragman, Detroit Bureau Chief at Cars.com, because most people in the market for a new car will want the latest version. For example, the 2023 Honda Accord is completely redesigned. So if a 2022 model is available at a nearby dealership, you may be able to haggle with the sale staff and buy it a lower price.
“An automaker might have a number of the older models in stock — nobody has a lot of models in stock, but they still may want to clear out a couple and as you approach the very end of the year, maybe there might be a deal or two that you can get off of a dealer's lot,” Bragman says.
Your trade-in is ‘worth more than you think’
Used car prices have been declining in the past few months, and government inflation data released Thursday shows that used prices dropped another 2.4% from September to October.
But the recent declines have only wiped away a fraction of the used car price growth since 2020.
For people who have a car to sell or trade in when they're making a new purchase, the elevated value of used cars is the best thing they have going for them.
“If you're lucky enough to have a trade-in, I don’t care how old it is, I don’t care how many miles you have on it, it is worth more than you think," Drury says. "We've seen some cooling off in used values, but it is nowhere near normal and it's not anticipated to be normal for years from now.”
Drury says dealerships are “hungry” for used cars, so he recommends trying to negotiate for a higher value for your trade-in. It may also be worth exploring other options, like selling the car yourself or seeing what you could get from a car-buying company.
Be ready to pounce
The car market is extremely competitive now, and turnover on dealership lots is fast and furious. So if you find a car you love at a good price at a dealership, it's probably best to buy it right away. Don’t count on it still being there if you wait even just a few days.
“The good thing for buyers in the market for new vehicles is that inventories are starting to be replenished to some degree, but by no means is it anything close to what you would expect for normal,” Drury says.
Low inventory means cars are expensive, and it also means buyers will struggle if they have their heart set on something particular. It's key that these buyers act fast when they do find something they like.
If you’re having trouble tracking down the vehicle and features you want, get online and see what’s out there in your broader region, Bragman recommends. Expanding your search will also help you compare prices and (hopefully) avoid paying a big markup over the MSRP.
“The days of actually going to a dealership and just finding a huge lot full of cars that you can just pick and choose one to take home that day are really not currently happening. A lot of that is behind us,” Bragman says.
Buyers will also have a less stressful experience finding sought-after cars if they can be flexible, which could mean being open to different trims or being willing to travel.
If you can wait a couple months, you might also consider placing an order for exactly what you want. In the past, ordering cars was mostly just for luxury cars, but Drury says it’s become common practice for people to order more affordable vehicles like Toyota’s RAV4.
Shop around for the best interest rates
The average interest rate for new vehicle financing increased to 5.7% in the third quarter of 2022, so it's become critical for buyers to make sure they get the lowest rate they can.
Experts encourage buyers to pre-arrange financing before they begin negotiating with dealerships. It gives buyers a benchmark, and dealerships will often try to offer something better because they make money when buyers finance through their partners.
While 0% financing promotions have become rare, there are still some of these opportunities if buyers are able to go with a short-term loan, like 36 months, instead of a more typical 72-month loan, Drury says.
Most buyers are looking at longer-term financing plans to keep monthly payments down with prices so high. That might be necessary in this environment, but Bragman says it's important to avoid extending the loan period too long. The last thing you want is to still be paying for a car past the time when you're driving it.
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