Car shoppers should expect high prices and limited inventory this spring

It’s a challenging time to be a car buyer.

High consumer demand coupled with a manufacturing shortage of microchips — key parts needed for today’s autos to operate — have pinched new-car inventory at dealerships across the country. And with drivers seeking affordable options for hitting the open road, the used-car market isn’t offering much of a reprieve.

“It’s a seller’s market, not a buyer’s market,” said Kelsey Mays, senior consumer affairs editor for Cars.com. “And sellers don’t have that much to sell.”

The average price paid for a new car is about $40,000, according to Edmunds.com. For used cars, it’s roughly $23,000.

A year ago, when dealerships and manufacturing plans were shut down due to the pandemic, chipmakers pivoted to focusing on the consumer electronics industry — i.e., computers and gaming consoles — and are still scrambling to meet the renewed demand from automakers.

“The chip shortage is causing a lot of mayhem,” said Ivan Drury, senior manager of insights at Edmunds.com. “But those chips are critical to a car because it’s basically a rolling computer.”

Some manufacturers have new cars produced that are sitting in their parking lots and waiting for chips to arrive and get installed, Drury said.

“It’s what they can do to get the cars as close to completion as they can,” he said.

One result from squeezed inventory is that fewer lower-cost vehicles are available. At Cars.com, listings for cars selling below $25,000 dropped about 19% in March from February. There’s also just 38 days worth of inventory at dealerships, Mays said. That compares to the usual 65 to 70 days’ worth.

“What’s remaining on dealer lots is inventory that’s more expensive,” Mays said.

More from Personal Finance:
How investors can spot the next Bernie Madoff
Pressure mounts for Biden to forgive student debt
Here are smart things to do with your tax refund

However, while the chip shortage is expected to impact production through the end of the summer or early fall, not all automakers — or specific models — have been affected equally. 

“It could be a good time to explore other brands if you’re usually loyal to just one,” Drury said. “There could be a vehicle that has the same features, the same color … but just might be a different brand.”

Although manufacturer incentives are not as plentiful as they’ve been in the past, there are some models that continue to be discounted. The average incentive amount is $3,527, down from $4,415 in March 2020 and $3,789 in March 2019, according to estimates from J.D. Power and LMC Automotive.

Chevrolet, for example, is offering deals on the 2021 Equinox that range from $3,500 to $6,500 for most versions through May 3, according to Cars.com. After the discount, the price would be anywhere from $21,000 to $38,000. The new Jeep Renegade comes with a factory discount of $2,000 to $6,000, putting the price you’d pay between $20,000 and $33,000.

If you’re able to get a manufacturer’s discount, don’t assume there is no additional wiggle room in the price.

“That [reduced price] should be the starting point for negotiations,” Mays said.

Additionally, high demand for used autos means your existing car may be more valuable, as well. The average amount for a trade-in is about $17,000, according to data from Edmunds. The average age of those cars is about 5.5 years.

“Those trade-in values are pretty dramatic,” Drury said.

Regardless of whether you’re considering a new car or a pre-owned one, it’s worth looking beyond just dealerships close to your home, Drury said. The bigger the radius of your search, the more options you’ll have.

There are also other ways to bring down the cost of your purchase. Depending on your credit score, you may be able to find a 0% financing deal on a new car. Otherwise, the average interest rate paid on a new-car loan is about 4.5%, according to Edmunds. For used cars, it’s 8.1%.

Be aware that the longer you stretch out your loan — say, for 72 or 84 months (six or seven years) — to afford the monthly payments, the more you’ll pay in interest (unless it’s 0%) and the greater the chance that you’ll end up trading it for a new car before you’ve paid it off.

And in that scenario, if the trade-in value is less than what’s owed on the loan, may consumers end up rolling that “negative equity” into the loan for their next car.