The first Model-T cost as little as $825 in 1908, which is about $18,000 adjusted for inflation. Today, the average car buyer can expect to leave a dealership with a new car for around $35,428. That was the average transaction price for a new vehicle in October — an all-time high — according to auto comparison website Edmunds.com.
The average new-vehicle transaction rose 2 percent from October 2016 and 12 percent over the past five years. The average down payment on a new car also hit a new record: $3,966, which is up $374 from last year and $454 from five years ago.
Why are prices up?
The increase is due in part to a rise in the number of features that come standard with a new car these days, like automatic emergency braking and backup cameras, says Ronald Montoya, senior consumer advice editor for Edmunds. In addition, consumers are moving away from lower-cost, smaller sedans, climbing into higher-priced, larger SUVs and trucks.
Montoya says the general decline in overall gas prices since 2008 is partly responsible for the shift in consumer preferences. Plus, many shoppers favor a higher driving position and having more storage space.
Before we get to how you can find savings on a new car despite the higher price tags, let’s talk about a savings strategy that can backfire.
Looking beyond your monthly payment
Many are opting for longer auto loans to cope with rising car prices, says Matt DeLorenzo, managing editor for kbb.com, the website for vehicle research publisher Kelley Blue Book. Recently, the Consumer Financial Protection Bureau (CFPB) found that 42 percent of auto loans made in the last year were for six-year terms or longer, up from 26 percent in 2009.
Taking out a longer auto loan to pay a lower monthly price isn’t an ideal hack, DeLorenzo tells MagnifyMoney. While a longer term keeps your monthly payments lower, you end up paying more in interest over the life of the loan than you would with a shorter-term product. That makes your new car even pricier, so avoid taking out a longer loan to squeeze an expensive vehicle into your budget..
The CFPB found that six-year auto loans cost more in interest over time, are used by consumers with lower credit scores to finance larger amounts, and have higher rates of default. Here’s a good rule of thumb to keep in mind when you’re reviewing financing options: If you are unable to afford financing an auto purchase over four years, perhaps it’s out of your price range.
DeLorenzo says going with a longer loan is one of two actions people are taking in response to higher prices. The other: leasing.
It is true that leasing a vehicle saves you money on monthly payments in the short run, but there’s more to this financial story. Indeed, if you drive a lot of miles, leasing may be a bad idea. You may be hit with extra mileage and wear-and-tear charges at the end of your lease.
How to save on a new car
So prices are at record highs. The experts we talked to say there are still ways you can save when buying a new vehicle in this market.
Try a compact vehicle
If you’re shopping for a car in 2017, you’re likely looking at a crossover, midsize vehicle or truck. Those larger vehicles are in demand right now, and, according to Edmunds, the shift to the larger vehicles has driven interest rates and prices up. However, automakers are struggling to move less-popular 2017 models like compact sedans off dealership lots.
DeLorenzo, the KBB editor, recommends purchasing a less-in-demand sedan or crossover vehicle to find savings.
Many new compact cars may be sold for up to $10,000 less than a larger SUV or truck by the same manufacturer, he says. By choosing a sedan or other compact vehicle, you trade size for better fuel economy and a more affordable car.
And because dealers are having a hard time selling these models, you might see better discounts, more incentives and improved lease deals on more traditional sedans and family cars, according to DeLorenzo.
Pair a lower down payment with GAP insurance
Common savings advice for car shoppers includes making a down payment of at least 20 percent of the vehicle’s transaction price. This tactic is intended to save you money right away, as a new car loses about 20 percent of its value in its first year of ownership, according to Montoya.
People are putting down closer to 12 percent of the vehicle’s value at signing because it’s tough to save up 20 percent since vehicle prices have gotten more expensive, Montoya tells MagnifyMoney. He says most people tend to go with making a down payment that results in a monthly payment they are comfortable with.
But, since a new vehicle loses about a fifth of its value in its first year of ownership, “if you put down payment of 12 percent, you are already in the red,” Montoya adds. He says you may want to look at GAP insurance if you put down less than 20 percent.
Services like GAP — Guaranteed Auto Protection — insurance and new car replacement insurance will cover the difference between what the vehicle is worth and what is owed on the loan in the event of total loss or accident.
Ask your insurance company if it offers new car replacement insurance or GAP insurance. If your insurance doesn’t offer new car replacement or the monthly cost of the insurance is outside of your budget, Montoya says to consider getting GAP insurance from the dealership.
Adding GAP insurance may tack on another monthly transportation cost, but it can save you from possibly owing thousands on an upside down auto loan in the event you have an accident and lose your vehicle.
On the downside, GAP insurance coverage may vary from insurer to insurer, so be sure to ask what the insurance can apply to. Some policies, for example, may cover collisions but not flooding or theft.
Look out for incentives
A little research can go a long way when you’re car shopping. Keep an eye out for extra savings in the form of incentives from both the dealer and the manufacturer.
Both Montoya and DeLorenzo recommend checking the manufacturer’s website or comparison websites like KelleyBlueBook.com or Edmunds.com for savings before you set foot on a dealer’s lot.
There may be special incentives you qualify for based on your status as a veteran, student or ride-share driver. You may also find a loyalty incentive, reserved for those who already own a car by the same manufacturer, or a conquest incentive, offered to customers willing to trade in a competing brand.
Be sure to enter your ZIP code to find incentives most relevant to you at local dealerships, and to search based on the exact model you’re looking for.
Even if you think you’ve found all you could dig up, you may discover additional savings if you ask the salesperson about any deals or promotional offers the dealer may be running when you come in. Wait until you’re at the negotiating table to bring the deal up, advises DeLorenzo.
“Keep that in your back pocket,” he says. “If they don’t offer them to you. then bring them up.”
Get preapproved for financing
You don’t have to leave the financing to the dealer, and you shouldn’t if you want to ensure you’re getting a good deal. Get preapproved for financing before you show up at a dealership. That way, if the dealership offers you financing at a higher interest rate, you can counter the offer or, at the very least, have a benchmark for offer comparisons. Naturally, you should aim to finance your new vehicle at the lowest interest rate possible.
The first step to saving money on anything is shopping around. Compare prices of the vehicle you want across multiple dealers.
“A lot of people tend to go to the dealership that’s closest to them and they don’t shop around,” says Montoya. He recommends going to at least three different dealerships. “You’ll see three different offers and you’ll get a better idea as far as price,” he says.
Websites like Kelley Blue Book, TrueCar and Edmunds make it fast and simple to compare prices of new and used vehicles online. Use the sites to compare sticker prices before you head out to the dealership. Beyond the physical vehicle, take the time to compare what you can expect to pay for must-haves like auto insurance and vehicle maintenance, as they can fluctuate depending on the vehicle you choose.
Time your purchase just right
Simply walking onto the a dealer’s lot at the right time of the year can save you a chunk of cash. Montoya says the holiday season is a good time to shop for a new vehicle; dealers are looking to clear out their inventory of the outgoing year’s models to make room for new vehicles.
“Look at vehicles on the outgoing year,” says Montoya. “They will have more discounts and there is more incentive for dealers to sell those models.”
You also want to pay attention to when the vehicle came out. The longer a car is out, the more likely it is to have more discounts than newer models, adds Montoya. He recommends going back a model year to save money if you don’t mind getting a used car instead of a new one.
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