One question we get asked most often is: Will Car Prices Drop in 2023? Buying a car is a huge purchase for most of us. You want a new vehicle, but can you afford one without overwhelming your budget? With increasing inflation, supply shortages and a push for more electric vehicles by 2030, here are seven factors to consider before buying a car in 2023.
Cost of Ownership Is Up
A recent study conducted by AAA says the cost of simply owning a vehicle is now over $10,000 a year—an increase of nearly $1,000 from 2021 figures.
Greg Brandon, AAA’s Director of Automotive Engineering says “Consumers are paying more attention when purchasing a new vehicle since everything is more expensive right now. With the recent increase in fuel prices, more and more people want to know the true costs of owning a car beyond their monthly payment.”
In light of that, AAA has launched an online Your Driving Cost Calculator to help you compare the true cost of vehicles you are considering. The calculator has data for new and used vehicles five model years back, and you can customize the results based on your location and driving habits.
Bottom Line: You need to factor in all the costs of owning a vehicle before you decide on a budget for purchasing a car.
Are Chips Still an Issue?
Microchips or chips are used in vehicles to control electrical systems—each car contains over 500 of them. The short answer is yes, chips are still an issue but it’s not as simple as a supply versus demand problem. Prior to the pandemic, Kelley Blue Book says Americans purchased more than 17 million new vehicles a year. Once the pandemic began, fewer people were buying new cars.
In response, auto manufacturers pulled back on their chip orders. Manufacturers did this to avoid having too many new cars sitting on their lots with fewer consumers buying. Too many new cars on the lots would cause prices to drop. Even now, Cox Automotive is predicting only about 14.4 million new vehicles will be sold in 2022, still far below pre-pandemic levels.
Bottom Line: Auto manufacturers don’t want a surplus of cars sitting unsold on their lots, so their chip orders will remain low to match the number of consumers looking for new vehicles. This will keep vehicle prices steady, as opposed to falling during a glut.
Increasing Financing Rates
If you’re planning on financing a car, you’re going to pay more. The prime rate determines the financing rate for your vehicle loan. The prime rate is usually 3% higher than the federal benchmark rate, but that doesn’t mean you’ll get the current prime rate when financing a new or used vehicle. Only the best customers or corporations with high credit scores may be offered the prime rate from a lending institution.
Taking a look at Bank of America, for example, in March of 2022, its prime rate was set at 3.5%. By May, the prime rate was at 4% and the latest rate released in July 2022 stood at 5.5%. This means that a person with excellent credit might have paid only a 3.5% rate if they bought a car in March versus the most current rate of 5.5%.
Let’s break that down into payments and total cost. If you bought a $30,000 car in March 2022 at 3.5% interest for 60 months, your monthly payments would be around $545.75 a month. Over the lifetime of the 5-year loan, that’s $2,745 in interest on top of your original purchase of $30,000. Now take today’s rate of 5.5% for a $30,000 car for 60 months. Your monthly payments go up to $573.03 and you’ll spend an additional $4,382 in interest over the life of the loan. That’s a big difference.
If you don’t have excellent credit, the lending institution may decide to tack on a higher rate. Think of the prime rate as a base and know that most people are going to pay more than that. It’s a good idea to shop around for financing rates before you head to the dealership. Credit unions have been known to give their customers a better interest rate.
Bottom Line: Expect to pay a higher financing rate, but shop around to get the best rate you can before heading to the dealership.
Not Enough Vehicles
New or used, there simply isn’t enough inventory to meet demand. Dealerships are paying a premium for used vehicles, so your trade-in will be worth more. However, finding exactly what you want in a new vehicle may take you extra time and you may need to settle for a few unchecked boxes on your wishlist.
From personal experience, when I wanted to sell my car, I shopped around different dealerships to see what my current vehicle was worth. I took the highest offer from a dealership and then went to CarMax. CarMax will match the highest offer and give you an additional $100 on top of that. Even with the CarMax offer, I ended up deciding to sell my vehicle myself. I was able to get $2500 more than the CarMax offer.
I feel I should point out that selling a vehicle yourself can be intimidating and potentially dangerous in today’s world. I was lucky enough to have a friend, who also happens to be a mechanic, field the inquiries, do the test drives and negotiate the price for me.
Now, would I buy a used vehicle from a stranger? No. Most dealerships offer some type of certified pre-owned program. The dealership’s technicians go over the vehicle and check and fix any common problems. Plus a lot of dealerships offer some type of warranty even on their pre-owned vehicles. To me, a dealership certified pre-owned car offers peace of mind when buying used.
Bottom Line: Demand for new and used vehicles will continue to grow in 2023. You might not be able to find exactly what you want in a vehicle. You’ll also be paying top dollar for a used vehicle.
Dealers are Getting More than MSRP
In most cases, the sticker price is considerably lower than what you’ll actually pay, especially if you’re looking at luxury vehicles in 2023. Edmunds says in May 2022, dealerships were charging anywhere from about $700 to over $45,000 more than the sticker.
CarPro radio show host Jerry Reynolds points out that manufacturers set the MSRP, Manufacturer's Suggested Retail Price, but that dealerships are the ones that actually set the selling price. With a high-demand vehicle, dealerships can ask for more, knowing eventually someone who really wants that particular vehicle will pay the higher price. Reynolds says haggling below the MSRP is not an option in today’s market.
Bottom Line: Prices can be more than the MSRP.
Leasing Will Cost You More Money
As the saying goes, the devil is in the details. A leasing agreement has fees for driving over the agreed upon mileage. Your cost of insurance will go up. You need good credit to lease. The agreement itself is confusing and it’s difficult to cancel, plus you’ll pay additional fees if you cancel the lease early.
When thinking about leasing, be honest with yourself. Will you really only drive 10,000 miles a year? If you even think you’ll come close to 10,000 miles in a year, it’s better to be upfront and ask for more miles on your initial lease agreement. Yes, you’ll pay more monthly when you increase the contracted mileage, but you’ll avoid paying a huge fee for going over.
For example, let’s look at Cadillac financing. In August 2022, Cadillac was charging 20 cents per mile over 10,000 miles per year. In September that charge increased to 25 cents per mile over the agreed limit.
Forget to pay your lease on time? In August 2022, Cadillac charged a delinquency fee of $20 or 10% of payment, whichever is greater. In September, the delinquency fee rose to $25 or 5% of payment, whichever is greater.
Like the latest and greatest? Higher trim levels and additional features will cost you extra. Most advertised lease rates are shown on basic models. You’ll also be charged extra for excess wear and tear to your vehicle when you turn it in. And if you need to terminate your lease early, you’re going to pay more for ending the lease. In August 2022, Cadillac quoted a $400 early termination fee. By September, Cadillac warned lessees will pay a “substantial charge”, which may be up to several-thousand dollars for canceling early.
Even though you are leasing, you’ll still have to pay insurance, maintenance, repairs, acquisition fees, documentary/deputy fees, tax, title, licensing, and have your first payment ready. Some financial institutions may also require a security deposit.
So how much does a lease really cost? In August 2022, looking at a 2022 Cadillac XT4 front-wheel drive, the MSRP is $36,990. With a monthly lease rate of $499 a month, the total for a 39-month lease adds up to $19,461 over the lifetime of your lease. Take that same vehicle and purchase it at MSRP at the current rate of 5.5% interest, your monthly payments go up to $709 a month and you own it in five years or 60 months.
Bottom Line: Be careful when leasing; it could end up costing you.
The Push for Electric Vehicles
In December 2021, the Biden administration set a goal that 50% of all new vehicles manufactured be electric vehicles (EVs) by 2030. Should you hop on the EV train now?
A recent AAA consumer survey says that more people are looking at EVs to save on fuel costs. AAA’s Driving Cost analysis shows you will save big at the pump with an EV. EV owners charging at home will spend about 4 cents per mile for charging while a typical gas powered vehicle costs 18.4 cents per mile using gas. If both the EV driver and gas-powered drivers hit the road for 15,000 miles, the cost difference is $600 to charge the electric vehicle while the fuel-driven vehicle averages around $2,700 for gas.
Two more reasons to consider an EV: 1) They are shown to require the lowest maintenance and repair costs and 2) There are still some federal and state rebates offered to EV buyers.
For those with range anxiety, most EVs can go up to 350 miles on a full charge. An average driver in the U.S. travels about 30 miles a day. EVs also recapture energy from braking which recharges the battery while you’re driving. Most EV owners charge at home with a Level 1 AC charger and even at the slower charge rate, an EV gets between 2 to 5 miles of range per hour of charging. While fast charging stations are being added throughout the country, more will be required to keep up with current demand. Don’t let that stop you from taking a road trip in your EV—there are many free apps to help you locate fast chargers along your route!
Manufacturers can also help answer any questions about EVs. Recently GM launched a new interactive digital platform called EV Live. Customers can make appointments to speak to a GM expert and take a live tour. The GM specialist can cover all aspects of owning an EV such as range, ownership, maintenance, and home and public charging. Best of all, it’s free.
For commercial customers, Ford offers Ford Pro Solutions to help businesses with everything from buying an EV fleet to managing vehicle performance and installing charging stations.
Bottom Line: Fewer gas powered vehicles will be built. EVs might prove to save you money.
Some Reservations are Already Closed for 2023
Some vehicles are so white hot right now there is absolutely no reason why a manufacturer would even consider lowering the price. For example, the Ford F-150 Lightning all-electric pickup has closed reservations for 2023. Also closed for the 2023 model year is the Cadillac Lyric and Hyundai Ioniq 5. The Lyric is taking reservations for 2024 now. The GMC Hummer EV SUV is sold out thru 2024. You can see the reservation status on other vehicles here.
Will Car Prices Drop in 2023?
There’s no way around it. It’s going to cost you more for a vehicle in 2023. You can lessen the cost by having good credit, shopping around for financing rates and considering an EV. Check all the fine print and understand the true cost of leasing before you sign on the dotted line. And finally, if you don’t have the time to wait for a vehicle with all your favorite features and color, you might consider going to your second best option.
CarPro is a one-stop-shop for everything automotive. Buy a car, sell your car, and get the latest auto news and advice all on carpro.com. CarPro has built a network of vetted, certified dealers (CarPros) in large metro areas in California, Ohio, Oregon, and Texas known for providing exceptional customer service. Think of us as your personal auto dealer referral service, connecting you with trusted experts—for free. CarPro can also help you sell your car nationwide for payment on the spot. We're here to help you make informed decisions.