If you’ve done any car shopping lately, this will come as no surprise: automobile prices are going through the roof. Unfortunately, that trend doesn’t appear to be slowing down any time soon.
We’ll walk you through the factors driving this sharp increase, and give you some tips on how to avoid blowing up your budget when buying a car.
How Car Prices are Changing
Research from CarGurus.com found that used car prices are up more than 30% from June 2020. Prices have been steadily rising since the Covid-19 pandemic, and numbers have never been this high.
Not all brands are increasing at the same rate. For example, Tesla has only increased by 6% in the past year while Ram trucks have increased 40.5%. You can find a complete list of car manufacturers and their year-over-year increases here.
Why Car Prices are Going Up
Global supply chains were disrupted during the pandemic last year, and many car manufacturers did not produce as many vehicles as they normally would. The influx of stimulus checks and mass avoidance of public transit caused more people to buy cars, further limiting the available car supply.
Since 2020, there has been a global chip shortage causing massive delays for automakers. The average car can have hundreds of these chips, which explains why automobile production has slowed down even as other industries have begun to ramp back up.
How to Budget for Higher Car Prices
If you need to buy a car right now, prepare to pay higher prices than you might have paid a year or two ago.
Here’s how to plan ahead:
Look at your overall budget
Whether you’re planning to buy a car in cash or take out a loan, you should look at your budget to see how much you can afford to pay.
Because prices for other goods are also rising, it’s important to allow some flexibility in your budget. Don’t buy the most expensive car you can afford, and don’t raid your savings to pay for it. While the economy seems to be rebounding, you should still keep a sizable emergency fund in case of future layoffs or furloughs.
Compare interest rates
According to Bankrate.com, interest rates for auto loans are the lowest they’ve been since 2015. If you’re getting a car loan, one of the most important factors is the interest rate and 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, and then get outside quotes from other banks, credit unions, and auto lenders. Compare the APR and not just the interest rate. The APR is the more comprehensive number, reflecting both the interest rate and any fees.
Get the most for your trade-in
Because used car prices are going up, you will likely earn more for your trade-in than you would have in the past. Look up your car’s value on Kelley Blue Book and Edmunds.com to see what it’s worth.
Then, maximize your trade-in value by getting multiple quotes from dealerships and listing your car for sale on sites like eBay, Craigslist, and Cars.com. You’ll earn more from a private seller but may have to deal with flaky buyers. If you’re selling a car to an individual, you’ll also need to verify that the check or cash you receive is legitimate.
When selling to a dealership, try to leverage quotes from multiple dealers against each other to create a bidding war. Remember that inventory for used cars is low, so many companies are willing to pay more than you might 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 your next best option. Car loan terms range from 24 to 84 months, and interest rates generally increase as the term gets longer. Because car prices are higher right now, you may need a longer loan term to end up with monthly payments you can comfortably afford. Use a car loan calculator and play around with the numbers to find your upper loan limit.
Here’s how the monthly payments can change depending on the term. Let’s say you receive two quotes from an auto lender for a $ 20,000 car. The first option is a three-year term with a 5% interest rate and a $ 582 monthly payment. The second option is a six-year term with a 6% interest rate and a $ 331 monthly payment.
You review your budget and determine that the maximum amount you can afford each month is $ 350. In this case, you would be better off choosing the six-year term with the higher interest rate.
It’s better to have a payment you can easily make every month than a lower interest rate and less wiggle room in your budget. You can always make extra payments on the car loan to pay it off faster if your income increases. Most auto lenders don’t charge a prepayment penalty, so there’s no extra fee if you repay the loan ahead of schedule.
Budget for car insurance
If you’re about to buy a new car, call your car insurance provider and ask them what the new monthly premium will be. In most cases, buying a newer car will increase your premiums because it will cost more to replace if there’s an accident.
But if your new car has additional safety features that could reduce the chances of an accident, then your premiums may not change as much. Still, it’s better to find out now what the premium will be instead of after you’ve bought the car.
It’s impossible to predict where prices may be in the future. If you don’t need to buy a car right now, you might be better off waiting a few months to see if prices cool off.