Used Cars Are Having A Moment
Why a Record Number of Prime-Credit Customers Are Choosing Pre-Owned Cars Over New
As a seasoned American buyer of things, there’s one purchase that has always ranked in my mind as the consumer’s version of Manifest Destiny: a new car.
Factory-fresh and sporting its famously elusive smell, a new car’s never-been-owned pedigree and obsidian-like tire walls never fail to command every penny of a dealer’s full and unflinching retail price from me.
For me, a car is either new or it’s not happening. I accept no substitutes. I do not compromise.
I am a sucker.
Well, the “old” me was, at any rate. These days, I’ve seen way too many bad financial decisions come home to roost to fall for the fool’s gold that is unsheathing the dashboard displays of a new car from their virgin plastic and driving it off the lot—right into an instant pothole of depreciation and regret.
Fact is, new cars are losing headway to an unlikely rival: pre-owned cars, which are far more affordable, better-maintained than ever, and often indistinguishable from their right-off-the-assembly-line cousins.
In fact, the percentage of consumers with prime credit who financed pre-owned cars instead of new ones hit a record high of 62% in the first quarter of 2019, according to a report from CFRA research.
"In our view, the fact that the most qualified consumers are increasingly gravitating toward used vehicles is a potential red flag for automakers who continue to push the limits of consumer affordability," wrote Garrett Nelson, the author of the report.
The High Price of Buying New
If you’ve been cruising dealerships recently, you’ve no doubt discovered that the cost of actually buying a new car has risen substantially. The American Automobile Association suggests that the cost of a new car transaction is up as much as 5 percent from past years, with the biggest factor being a 24 percent spike in financing costs.
“New cars depreciate quickly and when comparing options, a used car just makes financial sense," notes Morgan Taylor, a marketing officer and financial advisor for letmebank.com. “For example, a 2020 Toyota RAV4 can easily cost over $30,000, while a model less than three years old with low mileage can be had for less than $20,000. A 33 percent saving is substantial enough to steer people into a used car.”
The days of those zero-percent loans are dwindling, and with people making the move into much larger and more expensive SUVs and trucks as their daily drivers, costs have gone up—with many precariously agreeing to much longer loans, as well. According to Kelley Blue Book, which monitors car values and transaction prices, the average transaction price for a light vehicle in the United States was a whopping $37,185 in May 2019.
The AAA’s research found that drivers now pay approximately $9,282 a year—almost $750 a month—to own a new vehicle, if you include everything from maintenance, depreciation and financing costs. And annual financing costs alone have jumped from about $744 last year to $920. Add that all together, and a new car turns out to be a huge monthly hit on your paycheck.
“Banks seem more and more willing to make five-, six- and even seven-year car loans, which has the advantage of a lower monthly payment, but as AAA points out, the hidden cost is the accompanying higher interest rate, and the resulting higher total interest paid out over the longer time period,” notes Richard Reina, product training director at CARiD.com.
Insurance Costs For New Cars Are Also Booming
Used cars are now more popular than new ones – even with customers who have the best credit.
Others suggest that the cost of insurance is also another major hidden factor in the spiraling costs of owning a new car, stemming from both vehicle costs and accident issues. According to Leslie Kasperowicz of ExpertInsuranceReviews, the average expenditure for auto insurance premiums went up by more than 15 percent between 2012 and 2016, pulling data from the National Association of Insurance Commissioners.
“As cars become more complex and more technologically advanced, the cost to repair them goes up, and that increases the cost of car ownership on multiple fronts,” she says.
Laura Gonzalez, marketing manager for AutoNation Volkswagen Las Vegas, takes a slightly existential approach to the admittedly expensive appeal of brand-new cars, especially among newer and younger buyers.
“We are living in a throw-away culture where consumers are used to tossing rather than fixing broken objects, which has resulted in consumers becoming less inclined and lacking the knowledge to do maintenance and repairs on their own vehicles,” she observes. “Plus, modern cars are much more difficult to work on than cars from the past—many require special tools that are neither affordable nor readily available to the public.”
Buyers Warming Up To Used Cars – And Other Avenues
Costs for new cars are up so much that many budget-minded consumers are much more likely to consider pre-owned vehicles, says Sam Olmstead, a consultant with Superior Honda in New Orleans.
Olmstead says one of the reasons for escalating new car prices is the fact that even very basic vehicles are now loaded with sophisticated safety aids and technology that would have been out of place on anything but an expensive import just a decade ago.
Customers are also changing how they're getting into pre-owned cars, with many using vehicle subscription services like Fair, which includes routine maintenance (alongside roadside assistance and a limited warranty) right in the car's monthly payment.
“The most important difference in cars today is that consumers are getting a lot more out of available standard models,” Olmstead tells Fair. “Features that used to be added amenities are now par for the course, and those prices have been folded into the overall costs.”
Olmstead says the mindset that auto customers with the best credit will automatically go for new cars is changing, with many consumers embracing the economic benefits of buying used or considering other options such as vehicle subscription platforms.
“The stigma of buying a used car has faded, and this option may shift overall trends in the industry, with lots of consumers looking toward used or pre-owned vehicles as a reliable, cost-effective alternative,” Olmstead says.