Buying a car, whether new or used, is a big decision. In some ways, now might not be the best time to buy a new car because prices have been soaring for the past six months. However, the prices aren’t likely to slow down, particularly with the ongoing chip shortage affecting car companies.
With that in mind, it might actually be the best opportunity to get a car that you’re going to have for some time.
You can also find a better deal on a used car than a new car, but even used vehicles are experiencing some inflation too.
If you’re going to buy a car, you may want to sell your old one. To get the most money for that and simplify the experience, you can go through a car buying company. You can also sell your vehicle to a dealership, but you’re only going to get wholesale price for it. Another option is to sell your existing car privately, but that can be time-consuming.
Beyond selling your current car, the following are what you should know about buying a car right now and how to prepare.
Why Are Cars So Expensive?
One of the reasons new cars are especially expensive right now is because of a global microchip shortage. Dealers don’t have many new cars to sell, which is why a used car may be the best or perhaps the only option.
Carmakers are using the microchips they can source on more expensive models, so affordable cars are especially tough to find.
While it’s been mostly bad news if you’re in the market for a new car, it seems like car shoppers are thinking about sitting it out for a while. If that starts to happen, you might actually see discounts being offered, so it’s something to keep an eye on.
At the end of August of this year, the average new car sold for more than $43,000, almost 10% higher than a year before.
During the same time, the average list price for a used car was around $26,000, which was nearly ¼ higher than a year before and 34% higher than August 2019.
When buyers can’t buy a new car, they’re holding off on trading in their existing vehicle, which is straining the used car availability.
It can be especially hard to find less-expensive older model vehicles right now, even compared to the challenges of getting a new one. There are a few reasons for this.
New car sales fell dramatically from 2009 to 2013, following the Great Recession. Since there were fewer new cars, then there are fewer old cars now.
The Cash For Clunkers program also played a role in limiting the older-model vehicles that were available.
While it all sounds like bad news, you do have to remember if you have a car to sell or you’re going to trade it in, the environment we’re in can work in your favor. For example, you can get a higher price for your current car and then put that toward getting a new one.
The microchip shortage is expected to last at least into 2022, so new and even used car prices will probably stay high for a while.
If you can’t wait it out and you have to get a new car, broaden your search to a larger geographic area. Stay patient and give yourself plenty of time to shop. You should plan to shop at least for several weeks, if not more. You should also be aggressive in selling your old car, as far as pricing.
General Things to Know Before You Buy a Car
While the above are things exclusive to the situation we’re currently in, the following are general things to know before you buy a car at any time.
- Consider financing. Before you visit a dealership or take any other steps to buy a car, you need to know how much you can put down and the monthly payment you can afford. Research the car loans you qualify for and what’s available. You can use an online tool to compare terms and options as well. Don’t wait until you go to the dealership or talk to a seller before you figure out your budget because this is likely going to lead to you spending more than you should or you want to.
- Check your credit score and report. This will give you leverage to negotiate or help you figure out if you need to make some changes before you get a car loan.
- Do your research to figure out the type of car you want.
- Get detailed pricing information ahead of time, especially now when prices are so high. You can use tools like Kelley Blue Book to figure out what the price of the car you’re considering typically is.
- You should research the value of your trade-in as well. You can also go through a car-buying company that will offer you an instant or fast quote, making the process easier for you.
- Look at car histories before you buy anything.
- If you’re going to buy a used car privately or even from a dealer, it’s a good idea to pay for an inspection. It can save you thousands in repairs, even if it’s something you have to pay for upfront.
One thing worth emphasizing here is that you should at least know what the alternatives to dealer financing are. You might see ads where dealerships say they’ll give you zero percent financing, but that’s often not the case; plus, if it is, you need a top credit score and money down. It can be better to get a pre-approval from a third-party lender before you go to a dealership.
Then, when you have that ready, a dealer might make you a better offer.
When you’re in the process of deciding on a car, you need to factor in insurance to your costs. You might think you’re scoring a great deal, only to realize that the true total costs of your new car are going to strain your budget.
Remember, if you’re financing a car, often your loan terms will require that you have full collision coverage as protection for the lender.
Should You Buy New or Slightly Used?
We’ve touched a bit already on some of the things to consider when comparing whether or not you should buy a new or slightly used vehicle.
You’re going to pay a premium for any car right now, but especially a new one. A new car, in technical terms, is one that’s never been titled and is the current model year. A new car will have very few miles on it.
Nearly new might be a used car that’s pre-owned but is only from the previous model year. Then, some cars are older and are simply called used rather than nearly new.
Something you have to think about as you make a decision is depreciation. The value of a vehicle, as you likely know, goes down significantly after you drive it off the lot. Depreciation is a significant consideration, and it’s your most considerable expense typically during your initial years of ownership.
The most significant chunks of depreciation occur in the first and second years of ownership.
If you can go down even one model year from a car you have your eye on, you’re going to see the depreciation and subsequent loss of value baked into the price you pay.
How Much of a Down Payment Do You Need?
When you buy a car, the recommended down payment is often 20%. With that being said, cars are very expensive compared to when that likely became the conventional wisdom. You can probably offer a down payment of around 10%, but you may need new-car replacement or gap insurance coverage.
You can keep more cash without having to worry that you’re going to be underwater on your car loan.
If you’re buying a used car, aim for a down payment of at least 10%, but at the same time, with cars, put down as little as you can. You only want to end up paying just your drive-off fees at the time if you can.
What to Bring to a Dealership
If you’re going to buy a car from a dealership, you’ll need to bring a few things with you.
You should bring your driver’s license and makes sure it’s not expired. You’ll need proof of insurance in most states, and you can make the process go faster if you have it.
Bring a form of payment such as cash or check or the loan you’re going to use.
If you want to get financing through the dealership, you’ll need to bring proof of your recent employment, usually in the form of your most recent few pay stubs. You should bring utility bills as proof of address.
Finally, if you don’t have perfect credit and you’re applying through a dealership, you might also want to bring a list of references they can check.