When Is a Good Time to Buy a Car?

January 5, 2023
When Is a Good Time to Buy a Car?

Is now a good time to buy a car? At the time of this writing, inventory shortages, rising interest rates, a lack of dealer incentives, and a stressful shopping experience are still making the car-buying process unusually difficult for buyers of both new and used cars.

Being able to find a bargain isn’t the only consideration when thinking about buying a car. Car shoppers who need a vehicle now (or who want to take advantage of high trade-in values or new electric car tax credits) may choose to move forward regardless of the car market. And since the market is constantly changing, when is the best time to buy a car changes, too.

Here’s what to consider if you’re trying to decide whether to buy now or wait.

What Makes a Good Time vs. Bad Time to Buy a Car?

When the objective is getting the car you want at the lowest possible price, there are four key factors that come into play:

Auto market

When cars are plentiful, it’s relatively easy to find the make, model, and features you want. When inventory is in short supply, as it is now, the car with the features you want may not be readily available. When dealers have excess inventory, buyers have a bit of bargaining power. But in today’s tight automobile market, buyers are routinely paying above the manufacturer’s suggested retail price (MSRP).

New and used car prices don’t always move in lockstep, but the two markets affect each other since many new car buyers are also looking to trade in a used car. Used car prices have soared in the past few years. If current trends continue, we may begin to see auto prices stabilizing somewhat.

Cost of financing

The interest rate you pay on a car loan has a significant effect on your overall costs, both in monthly payments and in total. Rising interest rates in 2022 have caused some buyers to choose less expensive cars or extend their loans to six years or more to keep monthly payments affordable.

Available incentives

In a favorable car market, car manufacturers and dealers offer discounts, cash back, or 0% financing to entice you to buy. In a tight market, these incentives are harder to come by, increasing the net cost of buying a car.

Your flexibility

If you’ve got the financial flexibility to wait out a difficult car market, it can provide you with some leverage. Though no one knows when pricing will return to normal, market conditions may be more favorable in a year or two, giving you a chance to save up and wait for the right time to buy. If your car was recently totaled, however, or your monthly repair bills are through the roof, you may need to act anyway.

What Can New Car Shoppers Expect?

Supply chain issues with car parts, including the tiny microprocessors that go into most of the new cars being built today, have created a global shortage of new car inventory. As a result, new automobile prices are up across the board. Kelley Blue Book® (KBB) reports the average price of a new vehicle was $48,681 in November 2022, up 28% from pre-pandemic levels.

Tight inventories have not only driven up the price of new cars but have also changed the car-buying experience. On top of not being able to find the make and model you want, contacting multiple dealers, agreeing to extra features or dealer fees you don’t want or need, and paying more than the sticker price, are all commonplace. It’s a seller’s market.

What Can Used Car Shoppers Expect?

According to KBB, at the end of 2021, the average used car in America sold for $28,205, 42% higher than in December of 2019, just before the COVID-19 pandemic began. People held onto their cars during the pandemic, first because they weren’t driving much, then because buying a new car became challenging. With inventory short, used car prices have soared.

A high trade-in value can help offset the high price of a new car, provided you can find a new car to buy. But high prices don’t help used car shoppers, many of whom are looking for affordable alternatives. Late last year, used car prices began stabilizing as dealers paid lower wholesale prices for used vehicles and passed the savings along to customers. However, used cars priced at $10,000 or less are still in short supply.

How Long Will Supply Chain Issues Last?

Despite some easing in the global chip market, vehicle manufacturers continue to have difficulty securing inventory. Coronavirus shutdowns and conflicts overseas are still causing further supply chain issues for carmakers both in the U.S. and abroad. Although no one can pinpoint exactly when supply chain issues will resolve, many industry insiders expect issues to continue well into 2023.

How Do Fed Interest Rate Hikes Affect Financing?

While automakers last year were unable to make enough vehicles to keep up with consumer’s eagerness to buy, this year sales could remain soft—due to weakening demand. After average automobile prices had already risen to record highs, multiple interest rates increases by the Federal Reserve have made vehicle purchases even less affordable for those who need financing.

Financing the purchase of a new car is a growing challenge for consumers. Borrowing costs can add thousands to the cost of a vehicle purchase, which can also affect how much and the type of car you can afford. Since the beginning of last year, the Fed has raised its benchmark interest rates numerous times, causing interest rates on consumer loans and credit to also rise. In turn, higher interest rates have made financing a car more expensive.

For example, let’s say you needed to finance $40,000 to buy a car. A five-year loan at 3.5% APY would cost you $728 monthly and $43,660 over the life of the loan. At 6.5% APY, the same loan five-year loan would cost you $783 monthly and $46,959 over its life–an increase of $3,299.

A rising interest rate environment isn’t the only factor that can affect your APR on a car loan. Your credit score also plays a significant role. According to a recent report from Experian, car buyers with excellent credit can expect to qualify for lower interest rates than buyers with fair or poor credit, varying by nearly 10 percentage points on new car loans, and by nearly 17 percentage points on used car loans.

Should You Keep Your Current Car?

If you’re just flirting with the idea of a new car, you might decide to wait until the market softens–or at least give yourself time to shop around for a good deal. However, if you need a new (or new-to-you used) car urgently, you may not be able to put off your purchase. Similarly, if your current car is in need of continual repairs, it may be more costly to keep it than to replace it with a more reliable vehicle.

While there are some signs of supply chain issues easing, if inventory problems persist into this year, new car prices may remain high. Used car pricing may soften a bit, which would be good news for used car shoppers, but lost leverage for new car buyers hoping to get top dollar for their trade-in. Meanwhile, interest rates on car loans may also continue to rise if the Federal Reserve hikes interest rates again in the months to come.

Refinance Your Existing Car Loan

If you decide to keep your current car and your credit has improved since you took out your original loan, you might want to look into refinancing your existing car loan to see if you can lower your payment.

LendingClub Bank requires at least two years’ worth of payments left on your existing auto loan to do a refinance. If you find that you do qualify for a lower rate on a new loan, you may be able to lower your monthly payments. Extending your loan term length (e.g., from your two remaining years to three) could also lower your monthly payments, though that may also increase the total amount of interest you pay.

5 Tips for Finding a Better Deal on a New Car

No matter the timing of your new car purchase, you can increase your chances of getting a good deal using these tactics:

1. Contact multiple dealers.

To find the car you want and to get the best possible price it always pays to shop multiple dealers first. Cars that are in high demand may require searching many dealers over weeks or months to locate the make and model you want.

2. Pre-order your new vehicle.

If you find a dealer you can work with, ask about pre-ordering your new car so you’re not stuck with a trim level you don’t like or unwanted extra features that add to your costs. Keep in mind, due to the computer chip shortage, you may be waiting up to six months (or more on some new cars) for your new vehicle to arrive.

3. Get federal and state tax credits and incentives on EVs or hybrids.

Under the passage of the $369 billion Inflation Reduction Act, buyers of qualifying electric and plug-in hybrid vehicles in 2022 may still receive up to $7,500 as a nonrefundable federal tax credit on their tax returns. But rules are changing. While the Act promises to accelerate electric car affordability for millions of Americans, the availability of federal tax credits will decrease dramatically before ramping up over the long term. Over the next couple of years, and until automakers meet strict new guidelines for battery manufacturing, fewer electric cars will qualify for EV tax credits. One bright spot is that many states will continue to offer generous rebates and tax credits of their own.

4. Shop around for the best loan.

Dealer financing may come with markups that can add to your overall cost of financing. It’s always a good idea to compare APRs with your bank, credit union, or online lenders. You may be able to get approved for a lower-rate loan so you don’t have to negotiate dealer financing. (But if you do wind up with a higher APR than you had hoped for, you may be able to refinance your car loan to a lower rate later on with a different lender.)

But what if after securing preapproval you’re not able to actually take delivery of a car you ordered until weeks or months later? Many bank or credit union preapprovals expire in 30 or 60 days. So, if you need more time to complete your purchase, you may have to get re-approved for your loan. Alternatively, you can try to get a preliminary estimate on financing from the dealer when you place your order, then comparison shop for loans when you’re 20 to 30 days out from delivery.

5. Keep your options open.

Whether the market favors buying or not, walking away from a car (or loan) you can’t afford helps you stay on track. Don’t be afraid to scale down or look for alternatives if the deal you’re offered doesn’t meet your expectations.

The Bottom Line

The best time to buy a new car, used car, or do a trade-in depends on several factors: auto market supply, loan rates, dealer incentives, and how long you’re willing to wait for a good deal to appear.

Most importantly, know your options: figure out how much you would pay for a new car versus used, how much you could get for your old car, and what your new monthly payment might be should you need to finance your purchase. Then weigh the value of getting a newer, more reliable car against the cost of maintaining your current vehicle. After all this, if you find a car that fits your needs at a price you can live with, it could be the right time to buy a car.

If you choose to keep your existing vehicle for now, see if you could save money on your original dealer loan by looking into an auto refinance loan.

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