Cars

How to buy a car on a bargain during the chip shortage

White, red, and black two-door pick-up trucks lined up in rows during the chip shortage

This story is taken from Car Bibles.

There’s no other way to put it: the auto market sucks right now. Buyers are frustrated by the lack of inventory, and prices for new, used and lease cars are at stratospheric levels. the pandemic, the shortage of chips, supply chain disruptionslabor shortages and more have combined to create a kind of horrible voltron of auto price gouging.

Despite this predicament, buyers are still trying to navigate this process, and there are also some strategies you can use to successfully do this. I’ve been running a car buying service since 2012. My team and I handled over 500 car transactions in 2021, ranging from affordable compacts to high-end exotics. We have helped clients across the country in what was and continues to be an incredibly challenging market. Here’s what I’ve learned over the past year that can help you land a competitive deal right now.

I’ve been running a car buying service since 2012. My team and I handled over 500 car transactions in 2021, ranging from affordable compacts to high-end exotics. We have helped clients across the country in what was and continues to be an incredibly challenging market. Here’s what I’ve learned over the past year that can help you land a competitive deal right now.

Which new cars are so hard to find?

If you pass by your local car dealership, you may find that it is quite empty compared to what you are used to seeing. There are exceptions to this, but for the most part, dealerships just aren’t getting the typical inventory volume they normally would get.

One of the main reasons behind this remains the continued shortage of microchips from the vendor side. Without going into a deep dive on semiconductor production—our sister site The reader did it last summer— modern cars are filled with sophisticated sensors, electronic equipment, software and computers. Automakers still cannot obtain enough microchips to complete production of their vehicles and many of these brands have had to stop or reduce production of their vehicles.

Dealerships get fewer cars, so you don’t have to be an expert in supply and demand economics to figure out that fewer cars will mean higher transaction prices. Not a day goes by that we don’t see a story about an absurdly high markup, even on a regular vehicleor the car manufacturers themselves warn dealers not to go overboard.

What is the impact on used cars?

Most American car buyers don’t plan their purchases very far in advance. When buyers search for a brand-new Target model only to find it’s unavailable, they often look to something similar on the used market. With more buyers essentially being forced into the used market, that’s pushing prices up. It’s not uncommon to see used models with asking prices higher than the MSRP of the new car.

Yes, it’s that bad. Earlier this month, CNBC reported the average price for one- to three-year-old used cars is around $41,000, more than 50% higher than a year ago. And older used cars cost around $31,000 on average, more than $10,000 more than the same vehicles before the pandemic began.

So renting must be a good idea, right?

One would think that this increase in the value of used cars would have a positive impact on new car leases, since most of the calculation of the payment is related to the difference between the sale price and the resale value. of a certain car. Unfortunately, you would be wrong.

The reality of renting in this current market is very different. The financial services that underwrite the leases do not use the current values ​​of used cars in their calculations. The reason for this is that this market is unlikely to last for the next three years and if a bank bets that a model will be worth 70% of its value in the future and it turns out that the car has only retained 50 percent of its value, this bank is in bad shape when the lease returns. However, if the bank bets that the car is worth 50% of its value, but the car is worth more than expected, the lender is still in a good position.

This combination of standard residual values, coupled with a lack of discounts, minimum discounts, and rising monetary factors (interest rates), have combined to make most leases unpalatable to the average consumer.

In many cases, when you look at the total lease cost over the term and compare it to buying/financing that car and selling it after three years, the cost is often cheaper to buy -sale only for rental. For example, when I was helping a client with a $28,000 Hyundai Tuscon (about $31,500 with taxes and fees), the payments were $548 per month for a total lease cost of $19,728. If this customer bought the car for the starting price of $31,500 and sold it a few years later, it is highly unlikely that he would lose nearly $20,000 in value.

In other words, the vast majority of people buying new cars should probably focus on buying rather than leasing because the math doesn’t favor leasing. But run the numbers back and forth and compare total costs and payments. Often you will find that the loan payments and the lease payments are so close that it is better to buy it.

For people who have a current lease that is ending soon, there may be opportunities to take advantage of the equity you have in your rental car. It can be tricky as many automakers have imposed restrictions on so-called “third party lease buyouts”. So, in order to take advantage of this equity, the lessee would have to purchase their lease car from the bank that underwrites the lease, then turn around and resell or trade in that car.

Read the rest of the guide at Car Bibles.