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Outside of buying a home, purchasing a vehicle can be one of your most costly expenses. Early this year, as the cost of new cars reached new heights, many drivers held off on signing on the dotted line.
But the industry is finally shifting as vehicle inventory stabilizes and manufacturers offer more incentives. Brian Moody, executive editor at Autotrader, says it’s good news for those looking to buy. Consider how the industry’s current state might make this fall season a fine time to finance a new set of wheels.
New vehicle prices are holding steady
The average price Americans paid for a new vehicle in August was almost flat compared to one year ago, according to data from Kelley Blue Book (KBB). It now stands at $48,451, an increase of less than $50 from last year. Growing vehicle inventory and incentives helped make prices more accessible.
Even more remarkably, new vehicle transaction costs are down 2.4 percent compared to January, which KBB called “the most significant decrease in the past decade.” But despite prices’ downward trend, high interest rates have made many hesitant to set out to the dealership. These rates offset any wins that a lower price tag carries.
“The other costs associated with buying a new car specifically are higher,” Moody says.
According to recent Bankrate data, new car buyers getting a 60-month car loan received an average interest rate of 7.51 percent in late September. Without a down payment, a rate like this can mean a monthly payment of up to $970 for the average new car.
Interestingly, though, higher interest rates have positively impacted the bottom line for car buyers, Moody explains.
“In a way, they’re playing to the consumer’s benefit because ultimately you have to pay what you have to pay, but it is helping the prices stay steady because the dealers and the people who are pricing these know they can’t just keep raising the price,” he proposes.
Dealerships know the challenges shoppers face and aim to avoid pricing out entire populations before arriving at the dealership. With this in mind, many dealers have adjusted by upping dealer incentives.
Increase in dealer incentives
A dealer incentive is a perk offered to buyers by the dealership. These can be cash rebates, lower rates or vehicle upgrades. Last year, incentives were low due to supply chain issues. With demand high and supply low, dealers had little reason to offer generous incentives.
But these buyer perks jumped for the eleventh consecutive month in August, KBB found. The average incentive package was 4.9 percent of the entire price, up 2.3 percent at the same time last year. But still, these incentives remain historically low.
For context, incentives back in August 2020 averaged 10.8 percent of the average transaction price (ATP). However, some vehicle sectors offer incentive rates close to pre-pandemic levels. Of the sectors with the highest incentives, the high-end luxury segment provided the most for its buyers, reaching 10.1 percent of ATP.
Vans, small and midsize pickup trucks and high-performance cars held the lowest available incentives in August.
Another way to save money on your monthly payment is to put down a large down payment — ideally, at least 20 percent. Calculate how much more money down can save you.
Available vehicle inventory has grown
The pandemic resulted in supply chain issues across industries, including the automotive sector.
That meant fewer new vehicles were produced, resulting in higher prices. Even those who could afford higher-priced vehicles could not find their desired car.
But there has finally been a shift in the market. Data from Cox Automotive in early September, ahead of the ongoing United Auto Workers strike, reported 2.06 million in total inventory, which has not happened since April 2021.
“There’s tons of supply versus, say, a year or so ago, when we were talking about not much inventory in terms of new cars, especially,” explains Moody. But now, he says, “There’s an abundant supply.”
On top of overall inventory growth, a larger variety of vehicle types has also positively shifted the market. The EV sector, for example, had vehicle availability above the industry average in early September, according to KBB. The sector boasted incentives averaging 8.1 percent of ATP.
Moody explains that an increase in electric car models leads to increased competition, which is favorable even for those not looking to drive green.
“That’s the story that I think people miss about electric cars. Everyone gets all hung up on, ‘Well, I don’t want to drive an electric car, and why are they forcing us,’” Moody quips.
But more choices mean more competition across automakers and thus more consumer benefits, Moody concludes.
For example, purchasing a compact car will save you additional money over a larger truck. Check out Bankrate’s best-value cars before shopping for the best deals.
How to save for future vehicle purchases
Although vehicle prices have remained steady, and the increase in inventory bodes well, prices are still very high. And growing inflation and moves made by the Federal Reserve will make financing your vehicle more expensive.
Consider the following tips to get the best deal on your next auto loan purchase.
- Buy electric. While EVs tend to carry a higher initial cost, they can cost less throughout ownership. On top of this, August data showed a continued decline in electric vehicle prices, driven by Tesla’s price cuts.
- Consider shopping with a credit union. With high interest rates, it is wise to compare multiple lender options. Check out credit unions, as they often offer lower rates than dealerships and online lenders.
- Improve your credit. The stronger your credit score is, the more competitive your rates will be. Before applying for a loan, try improving your credit to secure the best rate.
- Apply for loan preapproval. While not all lenders offer this perk, loan preapproval will give you a firm idea of the expected cost and leverage for negotiation.
Outside of these tips, Moody has straightforward advice for those who might purchase a car this year: “Just don’t overextend yourself.”
While purchasing a flashy luxury vehicle can be tempting, it is not worth the risk if it pushes your budget over the edge. Take the time to calculate the true cost of ownership, including any additional costs, and consider how your terms will impact your monthly payments.
Moody says a successful purchase requires three things. Buyers should be realistic about the price, look for the most attractive incentives and have a strong credit score.
With those in mind, Moody thinks drivers “can find a good deal and can potentially be paying less from here on out going forward.”