If you've bought a car recently, it's no surprise: car prices are skyrocketing. Unfortunately, this trend doesn't seem to be slowing down anytime soon.
We'll walk you through the factors that make up this sharp surge and give you some tips on how to stay within your budget when buying a car.
How the car prices change
Research from CarGurus.com has shown that used car prices have increased by more than 30% since June 2020. Prices have risen steadily since the Covid-19 pandemic, and the numbers have never been higher.
Not all brands grow at the same rate. For example, Tesla only grew 6% last year, while Ram Trucks grew 40.5%. A full list of automakers and their year-over-year increases can be found here.
Why the car prices are rising
During last year's pandemic, global supply chains were disrupted and many automakers weren't producing as many vehicles as they normally would. The influx of economic controls and the mass avoidance of public transportation caused more people to buy cars, further reducing the availability of cars.
There has been a global chip shortage since 2020, which has resulted in massive delays for automakers. The average car can have hundreds of these chips, which explains why automobile production has slowed while other industries have started ramping up again.
How to budget higher car prices
If you need to buy a car now, prepare to pay higher prices than you might have paid a year or two ago.
To plan ahead:
Look at your overall budget
Whether you are looking to buy a car for cash or take out a loan, the best thing to do is to check your budget to see how much you can afford.
As the prices of other goods are also increasing, it is important to give your budget some flexibility. Don't buy the most expensive car you can afford or raid your savings to pay for it. While the economy appears to be recovering, you should still keep a sizeable emergency fund in case of future layoffs or leave of absence.
Compare interest rates
According to Bankrate.com, auto loan interest rates are the lowest since 2015. When getting a car loan, one of the most important factors to consider is the interest rate and the APR. The interest rate affects your monthly payments and the total amount of interest paid over the life of the loan.
Start by getting quotes from your current bank, then get outside quotes from other banks, credit unions, and auto lenders. Compare the APR, not just the interest rate. The APR is the broader number that reflects both the interest rate and any fees.
Get the most out of your trade-in
As used car prices rise, your trade-in is likely to make more money than you have in the past. Check the value of your car on Kelley Blue Book and Edmunds.com to see what it's worth.
Then maximize your trade-in value by collecting multiple quotes from dealers and listing your car for sale on sites like eBay, Craigslist, and Cars.com. You earn more from a private seller but may have to deal with unreliable buyers. When selling a car to a private individual, you also need to verify that the check or cash you receive is legit.
When selling to a dealer, try to exploit the offers of several dealers against each other in order to spark a bidding war. Remember, used car inventory is low, so many companies are willing to pay more than you would expect for a used car.
Get a longer term loan
If you can't afford to pay for the car in cash, a car loan is the next best option. Auto loan terms range from 24 to 84 months, and interest rates tend to rise with the longer term. With car prices currently higher, you may need a longer repayment term to get the monthly payments that you can conveniently afford. Use a car loan calculator and play around with the numbers to find your credit limit.
The monthly payments can change depending on the term. Let's say you received two offers from a car lender for a car worth $ 20,000. The first option is a three year term with an interest rate of 5% and a monthly payment of $ 582. The second option is a six year term with an interest rate of 6% and a monthly payment of $ 331.
You review your budget and find that the maximum amount you can afford each month is $ 350. In this case, you better choose the six-year term with the higher interest rate.
It is better to have a payment that you can easily make each month than a lower interest rate and less wiggle room in your budget. You can always make extra payments on the car loan to get it paid off faster as your income increases. Most auto lenders do not charge early repayment penalties, so there are no additional fees for repaying the loan early.
Car insurance budget
When you want to buy a new car, call your car insurance company and ask about the new monthly premium. In most cases, buying a newer car will increase your premiums because replacing it becomes more expensive in the event of an accident.
However, if your new car has additional safety features that could reduce the chance of an accident, your premiums may not change as much. However, it is better to find out the amount of the premium now rather than after purchasing the car.
It is impossible to predict where prices will be in the future. Unless you need to buy a car right away, maybe you should wait a few months to see if prices cool off.
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Zina Kumok (138 posts)
Zina Kumok is a freelance writer who specializes in personal finance. As a former reporter, she has covered murder trials, the Final Four, and everything in between. It has been featured in Lifehacker, DailyWorth, and Time. Read how she paid off $ 28,000 in student loans at Conscious Coins in three years.