Cost to Finance a New Car Hits a Record $656 Per Month
It has been two years since the pandemic, and the car market is still recovering. With significant hikes to new car prices and the limited production further adding to the issue, the used car market has seen a surge in demand. Compared to a year ago, new car prices have risen by 12.6%, while used car prices have hiked even more by 16.1%. To learn about the latest cars and pricing details, head to CarHP- an online car selling portal that will help you plan your next purchase.
If you’re planning on financing a new car, you need to know that the interest rate has been hiked by 0.75 percent. As of May 2022, the average new car price stood at $44,832, the highest it has ever been. This leads to an average monthly payment of $656 for 70 months. In the case of used cars, the average price is high at $31,450 and the average monthly payment stands at $546 for the same term.
Let’s briefly go through the events that led to the current car market. As the pandemic started in early 2020, the world went into lockdown. Because of this, manufacturing facilities were shut down for a brief period. Owing to uncertainty and unavailability of the workforce, companies also predicted a slow year and thus canceled most of their supply orders including chips and semiconductors. On the contrary, as more and more people preferred to use personal transport to avoid the virus, the demand for cars started rising exponentially.
Even as the factories started again with covid safety regulations to meet this new demand, car manufacturers couldn’t keep up with the demand owing to supply chain issues, specifically chip shortage.
This is because chip suppliers turned to the highly profitable consumer electronics sector which saw a surge in demand as most people were forced to stay indoors.
This sector makes up a significantly higher chip market share than cars. Since cars require hundreds of chips and sensors from ECUs to driver assistance features, manufacturers were forced to reduce production, thus limiting the supply of new cars.
As the new car market dried up, customers moved to the used car market to get their hands on cars, causing price inflation. However, all these issues will be resolved soon as chip shortage issues are addressed. When the new car market has recovered, it is predicted that used-car prices could collapse by around 30%.
Even after the chip shortage is addressed, it is still unclear how the market will recover as it mainly depends on inflation. The current prices could remain for quite a while longer depending on how the demand is met, especially if the demand keeps increasing.
By the end of 2022, dealers could start to bring back offers and incentives as usual. Since demand is already high, the price drop is only expected to happen when the cumulative shortage of around 1.5 million units is addressed.
The car market has more or less adapted to the new normal, implementing different strategies like virtual showrooms and even home delivery of new cars. But, there are no new cars, to begin with.
The usual dealership with rows and rows of new cars to choose from is now left with empty lots. Customers also pay up-front before the cars even arrive at dealerships regardless of the higher prices.
An estimated 4.5 million customers are waiting for cars, and this pent-up demand will take quite a while before it returns to normal. Because of this, 2022 will be similar to 2021 as prices will keep climbing and new cars will still be harder to attain.
Before the pandemic, negotiating with the dealer for lower prices was the norm. But today, almost 89% of car buyers are paying over the sticker price to get their hands on a new car.
Since demand has outpaced supply considerably, dealers no longer have to offer discounts or incentives to sell cars quickly. According to J.D.Power, almost 57% of cars arriving at dealerships are sold within 10 days, and the average time for a car to be sold now stands at just 17 days, compared to 49 days just a year ago.
The situation has gotten so bad that even the President, Joe Biden, has acknowledged it. His administration is working on removing the bottlenecks to normalize the car market with better infrastructure and domestic production.
However, the whole saga has a silver lining, especially if you have a car you’re planning to trade in. The pent-up demand has spilled over to the used car market, leading to the highest prices the market has ever seen. Cars that used to be valued at $10,000 just a few years ago are now sold for 15 or even 20 grand depending on the make and model.
So, trading in your current car for a new one will reduce the initial sticker shock by a considerable margin. Even if you’re not, now is the perfect time to sell it and make a profit.
Even old and beat-up cars are fetching higher prices than usual, which could last longer. So, unless you need a new car as soon as possible, it’s a good idea to wait out the market till it goes back to normal.