Everything You Need to Know About Buying a Car in 2021

Buying a car is a huge decision. For most people, it is the second most expensive purchase besides their house.  Like other industries, the automotive industry has seen its fair share of challenges since the onset of the COVID-19 pandemic.  Here we will detail everything you need to know before buying a car in 2021.

If you are looking for a used car or even a new car, be sure to check the car’s history. You can easily do this by running a free car history report using the vehicles VIN. You can see title information, accident and ownership history, and much more.

COIVD’s Effect on the Automotive Industry

You may have heard that the prices of new and used cars have both hit all-time highs. This is definitely not something you want to hear when you are in the market for a new ride.  According to Kelly Blue Book, new vehicles prices increased over $2,500 since June 2020. The estimated average transaction price for a light vehicle (i.e. cars, not SUVs or Trucks) was roughly $42,000. This is crazy! Especially considering the average house price in 1975 was only $38,000.

There are several reasons that can be attributed to this spike in prices. For the most part, they can be categorized as either supply or demand pressures.

Supply Issues

As you can imagine, it must have been difficult to manufacture cars and their components during the COVID-19 pandemic. Many plants had to completely shut down effectively halting the manufacturing process.

One specific issue is the semi-conductor (chip) shortage. Today, cars have much more technology in them than they used to. Just think of all the sensors that are in a new car.  All these tie back to a computer somewhere that relies on a chip to work.

Today, the supply just isn’t what it was pre-pandemic. This is leading to many dealerships marking up vehicle MSRP to some unreasonable levels.

Demand Pressure

On the other side of this equation we have demand pressure that is increasing prices as well. First off, over the last year and a half Americans have received upwards of several thousand dollars from stimulus packages. For those that didn’t necessarily need the cash, this free money could have been used as a car down payment.

To make this situation worse, the cost of borrowing was near all-time lows.  Some manufactures were even offering 0% financing for 72-84 months which is a huge incentive.

Used Car Market

You may be thinking that instead of buying a new car, you can just find a used one instead of a reasonable price. Well, not so fast – you’re not the only one thinking this.  Due to these record high prices, many people have been priced out of the new car market. Therefore, they are turning to the used car market.

The used car market isn’t what it was a year and a half ago either for several reasons.  First, people that tend to buy new cars may not have been able to purchase one due to the aforementioned reasons. If they got a new car, they would have sold or traded in their old one.

Also, due to work from home policies, many are simply holding onto their aging autos as they don’t drive much.

Take these supply issues and pair that with the demand pressure and now you can see why used car prices are up as well.

Wait If You Can

Considering all those factors contributing to the challenges facing the automotive industry, what do you do if you really need a new or new to you car? Honestly, at this point it is just a waiting game.  Once the supply issues are corrected and the demand normalizes, prices should come down.

Don’t expect prices to be at pre-pandemic levels. The last year and a half is going to have lasting implications to the automotive industry that some experts are saying could last several years.

Don’t be fooled by high trade in values.

Still not convinced that you should hold off on buying a car in 2021? You may be able to get the most for your used car at the moment. However, just because it is a sellers market for autos doesn’t mean you should sell it or trade it in for something new.

Let us look at a hypothetical situation.  You get offered several thousand dollars over what you think your current car is worth. Great! But now the cost of a replacement car is much higher than what it was when you bought your last car.

On top of that, you are going to have to pay DMV and other fees just to get your car on the road.  The worst part is that if you live in a state that requires you to pay sales tax or property tax on your new car, you are going to get hit hard.  You are going to have to pay more than you would have previously considering the assessed value will be higher than in years past.

Also what is going to happen when you buy a $40,000 car with a loan and within several months the bottom falls out of the market? Now your $40,000 car is worth $35,000 and you have negative equity.

What if I really need a car?

There are many factors to consider when purchasing a car – now more than ever. What we recommend is holding off for a few months if you can. If not, then you still have a few options.

First, do not be picky. If all you want is a good deal, you can’t worry about the color, trim level, or what options/features the car comes with. Yes, automated cruise control and ventilated seats are nice, but do you really need them?

Also be sure to conduct your due diligence. Look online but also check the car out in person if possible. The best case scenario is to get a pre-purchase inspection (PPI) completed by your trusted mechanic. A great site that helps you find the car you are looking for is AutoTempest. AutoTempest aggregates auto listings from a ton of other sites out there and lets you see them all in one place!

Once you find the car you want, be sure to shop around to get the best rate if you are financing it. You may also want to consider leasing a vehicle if decide to get a new car. If you lease, you are hedging downside risk of your car losing a good portion of its value. In a lease, you aren’t stuck with the vehicle once the term is up.

Buying a Car in 2021 – Summary

If you are thinking about buying a car in 2021, our best advice is to try to wait it out. There are many supply and demand challenges that have led the new and used vehicle markets to all-time highs.

If you can’t wait it out, then be sure to keep your options open and to not be picky with what you want. Also be sure to look online to compare prices and also consider leasing.

Good luck!

For more articles like this, be sure to check out the financial planning section of the site.