Why Many New Cars Are Cheaper Than Used
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The age-old advice that buying a used car is the thriftiest way to roll has gone the way of chrome bumpers and fins, at least for now.
As new cars have become scarce because of supply chain problems and microchip shortages — and now the war in Ukraine, which produces a large part of the wiring harnesses used in every car — shoppers have been forced to find their desired vehicles in the used car market. This has driven up prices to the point that a “lightly used” car is now 1.3%, or $533, more expensive than its new car counterpart, according to a February study by car search engine site iSeeCars.
And that’s just the average.
Used vs. new
A typical used, year-old Mercedes-Benz G-Class luxury SUV is almost 36% more than new, commanding a staggering $62,705 premium over the manufacturer's suggested retail price, according to iSeeCars’ analysis of 1.5 million sales in January. Buying a used Chevrolet Corvette will cost you $16,645, or 20%, over a new one. Waitlists at new-car dealerships for the most sought-after models stretch well into 2023.
Well-off buyers — or those who simply need a car today — are finding their answers on the used-car lots. Fetching top dollar are two extremes: expensive, gas-guzzling SUVs and more economical small cars and hybrids, says iSeeCars Executive Analyst Karl Brauer.
“Even practical and budget-minded consumers are being forced to spend more for their vehicles,” he says.
Gas prices over $4 seem to be changing the math many buyers are doing as well. For example, the humble Hyundai Accent and the Kia Rio, compacts boasting good fuel economy to offset current high gas prices, cost over $2,000 more as used cars than purchasing them brand new, iSeeCars says. The Toyota RAV4 Hybrid crossover, sought for its 40 mpg EPA rating, typically requires an additional $5,298 to buy it used.
Semiconductor shortages “forced the automakers to prioritize producing larger vehicles, such as big SUVs or trucks, that are far more profitable,” says Jesse Toprak, chief analyst for Autonomy, which offers electric cars under a subscription payment plan. “This, in turn, caused an even larger price increase for gas-efficient used vehicles, EVs and hybrids.”
At the end of last year, a used Tesla Model Y cost $67,944, while buying it new would typically set you back only $63,242, according to Autonomy data. During 2021, the Model Y appreciated by $10,393 in just one year, outperforming the average rise in value of other luxury SUVs of $7,088.
It’s worth noting that the increase in resale values for electric vehicles is a key component in a leasing contract, known as the “residual value.” The higher the residual value, the lower the monthly payments, making leasing more attractive, Toprak says.
So where are the ‘bargains’?
Not all used cars have seen crazy price increases, according to Brauer. The iSeeCars study also listed the top 15 models that were still more expensive new than used.
Outgoing versions of redesigned vehicles such as Volkswagen GTI and Acura MDX made the list, as well as some vehicles that haven’t sold well even in previous years. Even so, prices are up across the board.
“Used car shoppers can still save money buying a lightly used car versus a new car,” he says. “But the savings are 25% to 30% what they would normally be.”
ISeeCars found that shoppers could save about $9,500 when purchasing a used 1- or 2-year-old Ford Mustang. Its list mentioned five Nissan models, including the all-electric LEAF, which was almost 11% more costly than the used car.
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Shopping in the new normal
If you absolutely have to buy a car now, here are a few strategies to consider:
Do the homework. Explore shopping online for your vehicle. Check both new and used prices in your area, since prices vary according to the region, Toprak says. Also, be forewarned and avoid models with the highest price increases, Brauer says.
Wait if you can. Toprak recommends ordering a car from the factory to avoid the premiums currently charged for new and used cars. It’s no guarantee you’ll pay sticker price, but the odds are better than trying to buy immediately.
Find an interim ride. For short-term fixes, look at a subscription service, such as Autonomy, that allows you to get in and out of cars easily. Similarly, you might pick up a car by finishing someone’s lease. Find cars on Swapalease.com or LeaseTrader.
There are also downsides to buying a used car over sticker price:
Higher financing. Incentives and subsidized financing rates typically apply to new-car sales, not used. And used-car interest rates are typically higher. Lenders typically cap the amount they will lend against a car’s sticker or book value, even for buyers with excellent credit, at 115% to 135%.
Limited warranties. Nearly all manufacturers offer at least a three-year, 36,000-mile bumper-to-bumper warranty on new cars. Buying a 2-year-old used car means that warranty will expire sooner and leave you responsible for repairs.
Gap insurance. If your car is totaled, gap insurance pays the difference between its fair market value — what the insurance company pays — and what you owe. You're much more likely to owe more than the car’s value if you pay new-car prices for a year-old car.