In today’s car market, prospective buyers are finding themselves facing numerous challenges and tough decisions. The car market has been affected by many outside factors, such as rising interest rates and prices. These factors can cause things to get more expensive. In the face of these challenges, potential car buyers must be careful to protect their financial health. Having some understanding of all the factors that could affect your car purchase, and knowing how to approach your decision-making could help prevent your new car from hurting your pocket.

1. Supply and demand

There has been a supply and demand problem. In fact, many people have been ready to purchase cars, but options have been limited since there aren’t enough available at affordable prices.A big factor in the supply and demand issues is an ongoing semiconductor chip shortage, which has spanned from 2021 to 2023, according to J.P. Morgan. This shortage has significantly impacted the production of vehicles and caused car lots to sit half full, limiting buyers' options and causing prices to skyrocket. 

2. Rising prices

According to AutoTrader’s September 2023 Price Index, new car prices average $67,817, up 19.4% from 2022. In response to the semiconductor chip shortage, car manufacturers want to maximize their profits. So they began making more expensive cars. A lot of these cars are unaffordable for the majority. Many people would need to compromise and decide whether they are willing to go with a car that may not be everything they want, or purchase a high-priced car that could set them back for years financially.

3. Rising interest rates

Along with the higher car prices, interest rates are also driving up monthly payments. According to J.D Power, the average monthly loan payment on a new car is up 10% from $800 in June 2022. The average monthly household income after taxes in Canada is $6,287.67, according to Insurdinary. A 10% increase in car payments compared to the average monthly household income could create financial burden for many, and cause them to need to adjust other financial obligations. As a result, people must be cautious about the terms of their loans, and ensure they can comfortably manage the payments without jeopardizing their finances.

4. Depreciation

You’ve probably heard about how cars lose value as soon as you drive off the lot. Cars also depreciate over time due to wear and tear, mileage, and changing market demands. New cars depreciate much faster than used cars. On average most cars will lose 20% of their value within the first year, according to Autotrader. And after five years, the vehicle is typically worth half of what it was when it was new. High-end luxury cars also tend to depreciate faster because the features and technology aren’t as valued by used car buyers, according to Investopedia. 

However, conditions are a bit unusual at the moment, as cars aren’t depreciating as fast as they normally would. Because used car prices have skyrocketed, some used cars are selling for the same amount that they were when they were bought new, and some have even appreciated in value. These conditions should not last forever; just until the car market normalizes again. 

5. Ongoing costs

You also have to think about the ongoing cost to keep the car running and maintained after the initial purchase. Since there have been shortages impacting the availability of car parts, it may be pricey to get specific parts if supply is low. Additionally, these parts often need to be shipped from somewhere, and the cost of shipping can outweigh the cost of the actual part itself, especially if it’s a foreign car. 

Insurance premiums for cars can become hefty as well, as premiums have been increasing due to various factors, like increased car thefts. Also, gas can be costly. Gas prices fluctuate and historically have trended upwards. According to Statistics Canada, average gas prices in Canada in Sept. 2023 were $1.683 per litre. Compare that to 10 years ago, in Sept. 2013, the average price in Canada was $1.303 cents per litre. Keep in mind that some cars, especially larger ones, go through gas more quickly.

Tips to navigate the car market

With so many challenges and considerations when purchasing a new car, here are some tips to help you in your decision-making process.

Do your research: Make sure you do thorough research when thinking about car options. Think about factors, such as what your car will be used for the most, what kind of features you actually need, and what type of weather you’ll drive in, and then see what type of makes and models would meet your needs and compare ] prices. Good places to find this information are car comparison websites or look for experts online who review cars and go over all the features. Don’t just go to the dealership and have them recommend cars. Really look into what works best for you and your financial situation.

Figure out what you can afford: To ensure you don’t end up purchasing a vehicle that is going to cause you financial strain, take a good look at your cash flow and create a plan. Speaking with a Certified Cash Flow Specialist and having them review your finances and create a cash flow plan can help you better understand what you can afford. 

Evaluate financing options: When getting a car loan, have a good understanding of the total cost of the loan, including interest and the term length so you can make sure it fits your financial situation. Keeping amortizations of car loans in the  36-48 month range is a good approach. This prevents you from stretching the loan out over a long period of time, and can prevent financial strain if you need to have your car repaired because the loan is paid off. Longer terms often mean higher interest rates, and you could get to a point where you owe more than the car is worth. If you are unable to afford the payments on a 36-48 month loan, it’s an indication that the car is not within your financial means. 

Consider the long-term costs: Figure out if the car you want has any common issues that could need repairing down the road, and how much replacement parts would cost you if you needed to have something repaired. You can usually get this information from the manufacturer’s website. Or consider consulting a mechanic, or looking at consumer reports or even online car forums to see what common issues people have had with the car you have in mind. Also, consider the general maintenance costs for the car to keep it in good shape.

Wait it out: If you realize that purchasing a car right now may be financially challenging, and if your current car is still in working order and doesn’t need any major repairs, you could consider keeping it for a while longer. Being patient and waiting until the car market normalizes, or your financial situation changes can help you make a better decision that fits within your means. 

Buying a car in today’s market hasn’t been easy for many people. But with the right approach, it’s possible to find something that works for you without hurting your pocket. What’s most important is to do your due diligence and understand what you need, what you can afford, and what you’ll end up paying. Having this knowledge will help set you in the right direction to make the best purchasing decisions.

To learn more about car loans and leases, watch the Financial Capability Series - Car loans & leases

About CacheFlo

CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, which allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.

About the Certified Cash Flow Specialist (CCS) program

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