Growing demand and the lack of supply have driven prices for used cars up with little relief in sight, according to a recent report.
Used car prices have softened recently but remain significantly higher than before the COVID-19 pandemic, according to a new Edmunds report. Prices on average for used cars dropped 6.4% in the first quarter of 2023 year-over-year, but they remained 44% higher than five years ago.
Part of why prices for used cars have soared is because supply can't meet demand. Drivers struggling with high inflation and interest rates seek relief in the used car market. However, the usual spigot for used car inventory – lease returns, trade-ins and daily rentals – remains constrained.
Lease volumes decreased to 559,000 vehicles in the first quarter of this year from 1 million cars five years ago, according to Edmunds. Similarly, trade-in volume dipped to 5.5 million cars in 2022 from 6.2 million vehicles in 2018. Off-rental vehicles, typically the most significant contributor to used car supply, are now much older and pricier.
"The good news is that used prices have softened enough in Q1 to offer some relief for consumers getting pushed out of the new market," Edmunds Director of Insights Ivan Drury. "The not-so-good news is that the used vehicle market continues to be challenging for car shoppers since there are fewer vehicles available and demand is keeping prices historically high."
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The $20,000 car is no longer on lots
Used vehicles priced under $20,000 are harder for shoppers to find, according to Edmunds. The share of used cars sold under $20,000 was 30.6% in the first quarter of 2023 compared to 60.5% five years ago. In the new vehicle market, the share of vehicles sold for under $20,000 was less than 1%.
Over the last decade, the shift to higher-end luxury vehicles, driven by a low-interest rate environment and extended financing loan terms, has meant that economy cars are less readily available.
"Consumers returning to the used market for the first time in years might find conditions a bit shocking: Not long ago, $20,000 was seen as an acceptable amount to spend on a used car to get an optimal blend of miles and age," Drury said. "In today's market, $20,000 puts consumers into a much older or much higher-mileage vehicle."
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High-interest rates impact auto loans
The Federal Reserve's battle against inflation has meant higher interest rates and borrowing costs across most loan types.
The average annual percentage rate (APR) on new vehicles financed in the first quarter of 2023 climbed to 7%, compared to 4.4% in the first quarter of 2022, according to a separate Edmunds report. That's the highest level since the first quarter of 2008, Edmunds reported. For used cars, the average APR increased to 11.1% from 7.8% a year ago.
Consumers paid an average monthly payment of $730 for new vehicles in the first quarter of 2023, compared to $656 a year ago, according to Edmunds. For used cars, consumers paid an average monthly payment of $551, a slight increase from the $542 they paid last year.
Consumers in the market for used car vehicles can use these tips to make sure they are getting the best deal, according to Edmunds:
Maximize your trade-in value
Knowing the value of your trade-in will likely get you top-dollar for it, and it could help lower the cost of your next purchase.
Shop for the best loan terms
Searching for pre-approved financing in a high-interest-rate environment could help you find a better deal. Edmunds advises consumers to shop for pre-approved financing as diligently as they shop for an actual vehicle.
Be flexible with your purchase
An older used vehicle could yield a better bargain but be sure to buy from a reputable dealer that offers a detailed vehicle history report, according to Edmunds.
If you are struggling with rising car prices and want to save money, you could consider finding a new auto insurance provider to lower your monthly premium. You can visit Credible to compare multiple car insurance providers at once and choose the one with the best rate for you.
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