Recent events, like a global computer chip shortage, high gas prices, and the recovery from the COVID-19 pandemic have created a shortage of reliable automobiles as demand for personal transportation has risen.
Consumers everywhere are wondering: when will car prices go down? Will used car prices drop in 2022, or will it take a few more years for the market to correct itself?
Car buying is an important category in anyone’s budget, and something we deal with often as we help people manage their personal finances. We have some tips for people thinking about car buying in our tough national economy.
New cars are always a tough investment to justify. They depreciate in value faster than any other asset, and a good used car offers the same benefits for a much lower price. This year presents some especially tricky considerations. Because auto manufacturing plants were largely closed during the height of the pandemic, new car inventory is down, driving up prices for all cars, new and used alike.
Many people balk at used cars because they don’t know the full history and want to be sure the car was treated well by its previous owner and will be as reliable as a new car would have been.
Edmunds.com reports that this year, used cars are going to remain higher-priced than usual, but the blue-book services seem to be taking those fluctuations into account, so the values you find for particular models should be reasonably accurate.
In their “Return to Normal Index,” CoPilot finds that used cars are 43% more expensive than their expected price from before the pandemic.
Will Car Prices Drop in 2022?
As for the current state of the used car market, Cars.com reports that prices did drop $1,500 on the median used car price in the first half of 2022. That’s welcome news, but prices are still much higher than the pre-pandemic baseline, and new car production doesn’t look to recover until the end of 2022.
Used car prices seem to be dropping slowly, and experts agree it will take still more time to see any significant car price drops. It’s predicted that we’ll have another 6-12 months of higher-than-normal prices before the production of new cars gets back up to speed.
Ultimately, that means used car prices in 2022 will remain high and we shouldn’t expect a big change until the end of the year or early 2023.
Consider buying an older model. A car that is a few years old will be more affordable, but don’t go back too far. More recent cars are more reliable in general, and have better features for safety and efficiency, saving you money on gas and auto insurance over time.
Major car rental companies are moving old inventory onto the used car market, and it’s safe to say you don’t want a former rental car unless you get a very good deal on it. Better to have a car you know the provenance of and are sure wasn’t put through heavy use as a commercial vehicle.
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Generally speaking, leasing a car is typically not as good a deal for you as buying a used car. While the month-to-month costs of leasing are lower, in the long term, you don’t own your car, and will be stuck in some kind of monthly payment forever.
Leases are also rife with traps that can be hard to avoid. Limits on mileage, condition, and customization of the car underscore that you don’t own the vehicle you’re driving, and the true owner will expect it back in a good condition so they can sell it to someone else. If they decide your leased vehicle has “excessive wear and tear,” you’ll have to pay at the end of the lease. There’s simply no way you can have a firm idea of what your dealer will consider normal wear-and-tear in a few years.
That’s not to say it’s never a good idea to lease. For some very specific customers, a lease might make more sense. But this is one of those things where if you have to ask, a lease isn’t right for you. If you’re a good candidate for a lease (you use a car to drive a consistently low number of miles; you get an auto allowance from your employer; you always need a brand-new car for chauffeuring clients, etc.) then you’re probably not reading this article. If you have any doubts in your mind about leasing, you shouldn’t be considering it.
These days, more car-buying options are presented online, with virtual tours to help people avoid needing to visit a dealership and take any health risks. It’s still important to test drive your car purchase and make sure there’s nothing obviously wrong with it.
Online auto retailers have built-in policies to let car buyers back out of a purchase if they have a problem. One major online car dealer gives a 400-mile, 7-day guarantee—that’s much better than the typical dealership test drive, so used car buyers who shop online shouldn’t worry too much about the lack of a test drive.
Is buying a car really the right move? Consider the full costs.
The average American drives 16 miles each way to and from work. To hire a car for that drive would vary widely from one city to another, but the national average is around $2 per mile. So, you’re looking at $32 each way to get to work and home again, times 5 days = $320 per week! Even if you’re in a relatively inexpensive city and your ride to work is only $.90 per mile, you’re still paying $288 per week. That means a car payment would be justified and still save you money vs. hiring a car every day. (Of course, remember in addition to your car payment, you’re spending $40 per week on gas and $30 per week on auto insurance). The average used car payment is $500 per month, plus $160 for gas and $120 for insurance = $780. That’s still cheaper than hiring a car.
Buying a car is a major investment, so it’s worth spending some time and learning about the process. The more you know going in, the more you’ll save, so every minute you spend doing research will pay off.
We don’t know for sure when used car prices will drop, so your safest bet is to save money and wait as long as you can to see what happens to prices in the next year. In the meantime, do some research so you’re ready when prices come down.
The internet is so full of information, some of it contradictory, most of it subject to change, so it’s hard to know where to go for reliable info. Start with our Deals For Wheels material, available as a free resource from our downloads page. From there, expand your search online and learn about the cars you are interested in, how to buy them, and how you plan to pay for your purchase.
If you’re going to be borrowing for a car, a credit report review is a good idea to make sure you get the best loan rates and your first application is approved.
If you want to learn more about budgeting or how to reach your financial goals, get started with our free, confidential counseling and education right here at Credit.org.
