4 Car Buying Mistakes to Avoid in a Tough Market
Buying a car in a seller's market can be challenging, from pricing to availability. Avoid these mistakes when you're car shopping in a tough market.
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It's a tough market for car buyers.
The average price of a new car is up 20% from last year. Thanks to a microchip shortage, dealerships don't have enough inventory to meet demand. Many buyers are paying above the sticker price rather than leave the car lot empty-handed. To top it off, interest rates are higher—the prime rate is up to 7%. In March 2020 it was 3.25%—so financing is more expensive, too.
Buying a car in any market requires some research and planning. If you find yourself shopping for a new or used car in a tough market, there are some key mistakes you should avoid:
Paying too much for financing
More people are opting for auto loans with longer terms to get a lower monthly payment, but there's a tradeoff. Spreading your payments out over 72, 84, or 96 months makes your loan more expensive. That's because rates are higher for these loans and the balance has more time to accrue interest.
Since most vehicles depreciate quickly within the first few years, long-term loans also put you at risk of being upside down. Plus, you're likely to start needing major repairs while you're still paying off the loan.
Skipping pre-approval
By getting pre-approved for financing, you can shop different lenders, compare offers, then choose the best deal before the excitement of a new car sets in. With financing out of the way, you know your budget upfront and you can shop for cars within that range.
You can still apply for dealer-arranged financing, for instance if the dealership is running a financing special. And with a pre-approval under your belt, you may have a little room for negotiation.
Not doing any research
Research gives you the confidence to negotiate or to walk away from an offer when you're sure you can get a better one somewhere else. Start by searching local dealership inventories online to see what's currently in stock, the features, and price. Check the manufacturer's suggested retail price, or MSRP, for the year, make, and model you're considering. That way, you can tell when a dealership has marked up the price and, if so, by how much.
Forgetting to factor in ownership costs
The factors that lead to a challenging car buying market can also contribute to overall higher ownership costs. Before your purchase, estimate the cost of insurance, gas (or charging costs), and maintenance and repairs. If ownership costs and your auto loan payment are more than 20% of your net monthly income, you could be spending too much.
Should You Buy or Wait?
Waiting until the market improves gives you time to let the market cool off. If you're financing with a lower FICO® Score at a time when interest rates are high, waiting gives you a chance to improve your credit. Of course, that's if you still have reliable transportation and you can wait.
Otherwise, if you can't wait, look for the best deal available on the vehicle and with financing so you don't end up overpaying.
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LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.