Here's Why It's Getting Harder to Buy a Cheap Car
Cheap cars are no longer as inexpensive, thanks in part to easier online auctions, federal loans, and a low supply of affordable new vehicles.
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According to the Manheim Used Vehicle Value Index, the selling price of the average used vehicle has gone up more than 62% since April 2020. Popular trucks, vans, and compact cars such as the Honda Civic are holding their value despite rising interest rates and a slowing economy.
Why the sustained increase in used-car prices? Here are a few reasons behind the seeming lack of affordable and easily accessible used cars.
Fewer New Vehicles Built Due to the Chip Shortage
Since spring 2020, millions of planned new vehicles have never been built, due to a significant computer-chip shortage. This new-vehicle deficit drove buyers straight to the used-car market, which subsequently experienced a quick spike in prices.
Government Financial Relief
Another potential factor for rising used-car prices was the stimulus payments related to the COVID-19 pandemic. With slightly more money in the bank, some consumers were better able to afford a vehicle. From April 2020 to the end of the year, used-car prices went up by more than 28%, while inflation nationwide was less than 2% during the same time.
Dealers Had Access to Low-Interest-Rate Loans
Thanks to the federal government's Small Business Administration's Paycheck Protection Program (an emergency loan program created to provide economic security during the COVID-19 pandemic), small businesses such as auto dealerships could apply for loans up to $10 million with a fixed interest rate of 1%. Even some larger dealerships were eligible for these loans. The United States' largest dealer network, Autonation, received more than $95 million in loans. The loans helped thousands of dealerships that were grappling with a new-car shortage to fill their unexpected inventory gap with used cars.
Auto Auctions Have Gone Virtual
It used to be that most dealers went in person to buy vehicles at an auction. This meant they could only compete at one auction, limited to pursuing around a dozen cars that fit their customers' needs. Today, however, many wholesale cars and trucks are bought online, and dozens of auctions with thousands of used cars can be seen in a single day.
Even small dealers are able to click a button and buy used cars that are physically more than 2,000 miles away. This easy nationwide access can result in more competition and higher prices for those once-cheap used cars.
Written by humans.
Edited by humans.
Steven Lang is a special contributor to Capital One with nearly two decades of experience as an auto auctioneer, car dealer, and part owner of an auto auction. Some of the best-known auto publications turn to him for his expert insight. He is also the co-developer of the Long-Term Quality Index, a survey of vehicle reliability featuring over two million vehicles that have been inspected by professional mechanics.
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