Most Americans depend on cars to get around, but recent data shows that buying a new vehicle may now be out of reach for average earners.
The average cost of a new car sold in May was $47,148, up $472 from the previous month, according to Kelley’s Blue Book. This coincided with the average monthly car payment exceeding $700, the highest on record, according to the Cox Automotive/Moody’s Analytics Vehicle Accessibility Index.
Although demand for new cars has increased since the start of the COVID-19 pandemic, the inventory of cheaper vehicles is low due to the absence of a key component used to manufacture most vehicles.
Here’s why car prices are rising, how car payments are determined, and what you can do to get a bonus on your next purchase.
Why are car prices rising?
A shortage of computer chips, which are used to control windows, navigation screens and passenger screen sensors, caused by the pandemic has led to skyrocketing car prices, NPR reported.
At the start of the pandemic lockdown, when most employees were working from home, car sales plummeted and automakers reduced chip orders. During the same period, people bought laptops, iPads, televisions, and other electronics, so chipmakers shifted production to serve the companies that make those products.
However, as people moved from cities to suburban areas, demand for cars increased, according to the NPR report. With a limited supply of computer chips, automakers started making more expensive SUVs and less affordable sedans.
How are car payments determined?
When buying a car, many buyers rely on loans from a bank or dealership to finance their purchases.
The amount you pay on a loan is based on the price of the car, whether new or used, the down payment, the term of the loan and your credit score, depending on Investopedia.coman online source of financial information.
According to Investopedia, car loan interest rates can significantly increase the total cost of a car. Here’s what you need to know:
The best way to get a lower rate is to improve your credit score. If you have a low credit score, you should consider delaying buying a car.
If you have a lower debt-to-equity ratio or the amount of money you spend on your monthly debts compared to your monthly income, you’re more likely to get a lower rate.
Used car loans have higher interest rates than new car loans because used cars have a lower resale value.
Longer loan terms usually have higher interest rates.
You can use Investopedia auto loan repayment calculator to find out how much you can afford for your next car.
Can we negotiate the interest rate of a car loan?
Like the price of a vehicle, the interest rate is negotiable, depending on the Consumer Financial Protection Bureau.
The first rate for the loan a dealer offers you may not be the lowest rate you qualify for, so it’s best to apply for a loan with better terms, says the CFPB. Since dealerships and lenders aren’t always obligated to give you the best deal, negotiating could save you thousands of dollars over the life of the loan.
Getting offers from multiple dealerships can help you get the best price for buying a car, and you can take the stress out of the negotiation process by buying a car online, Karen Bennett writes for Bankrate.com.
You can also negotiate the value of your trade-in, as well as dealer fees for preparation, documentation, advertising and other miscellaneous costs, American News reported.