Prices are up everywhere, and used cars are no exception. Used car prices increased roughly 55 percent between 2019 and 2022. The question of how high they will go remains in many people’s minds.
Used Car Prices on a Roller-Coaster Ride
During 2019, you could purchase a used car, on average, for $20,000. That price ballooned to $31,000 by 2022. In 2023, that same car is sitting at around $27,000.And because wholesale prices have jumped 8.6 percent in the first quarter of 2023, will there be another increase? Although not as significant as in the past, Cox Automotive still expects a 1.6 percent increase from the already high $27,000. Initially, the expectation was a 4 percent decrease. But does everyone agree with this conservative price increase?
The Manheim Used Vehicle Value Index (MUVVI), which tracks how much dealerships pay for used cars, reports a promising development. They note that during May–June 2023, wholesale used car prices dropped 4.2 percent. This was the largest decline in MUVVI history.
Despite this drop, fewer used cars are entering the market, which affects inventory levels—and lack of inventory fuels prices. There are still some lofty used car prices.
Why Did Used Car Prices Go Up?
Several factors contribute to high used car prices. One factor is leasing. Thirty percent of used cars on the market come from expired leases. Three years ago, we were in a lockdown, and people weren’t leasing cars. Many people who did lease bought their leased car due to the turbulent automotive market.Because of high inflation and price increases, drivers hold onto their vehicles longer. This adds to strained used car inventories.
In 2022, the surge in used car prices was related to new car shortages. There were computer chip shortages and other supply disruptions.
Is It the Right Time to Buy a Used Car?
Whether it’s a good time to buy a used car depends on your needs and finances. There’s still a scarcity of inventory, and prices are still inflated.Although the average used car transaction price in the first quarter of 2023 was 6.4 percent lower, year over year, it’s still up almost 44 percent from five years ago.
How Do High Used Car Prices Affect Loans?
Unfortunately, there are consequences to financing overpriced used cars. There may be troubles down the road.Larger and larger car loans are being taken out for longer terms. Between 2020 and 2022, loan length increased from 66.97 to 68.08 months. The average financed amount also increased. And although this was due partly to people buying high-priced SUVs and crossovers, used car prices were a contributing factor.
Larger loans with longer terms can be a problem. Due to natural depreciation, the value of a car can drop over the potential 68.08 months. The value could drop faster than the balance of your loan. In other words, you are upside down.
This could be a major problem if your car is stolen or a total loss. Insurance pays actual cash value, not replacement cost. You also may have little equity toward purchasing a new car.
Buying a Used Car in a Volatile Market
Approach buying a used car the way you’ve always done it. Set your budget and decide what you want ahead of time. You’ll need to be prepared to negotiate. And make sure you act quickly. If you find a decent priced used car, don’t wait because it won’t be available for long.Cars in the one- to three-year-old range may not be the best deal; consider a new car. And if you must borrow money to purchase the car, a new car may allow you to qualify for a lower interest rate. Interest rates tend to be higher on older cars.
Reality Check on Used Car Prices
High used car prices may be the way of the world for a while. Even if experts could agree on whether prices will go up or down in 2023, they'll still be higher than in 2020.And if used car prices start to come down, there are still interest rates to contend with and the potential risk of becoming upside down in a car loan.
In some instances, it may be better to consider a new car.