How Inflation is Impacting the Cost of Owning a Vehicle
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Rising inflation has hit the U.S economy hard in the past few months. Americans recovering from the pandemic weren’t equipped to handle the rising costs of automobiles, groceries, or gas. In May 2022, the inflation rate reached an all-time high of 8.6%, the highest annual increase in over 40 years.
The rate of inflation has affected everyone, but especially those in the automobile industry. Households struggled to purchase new cars, while businesses had to adjust to keep up with rising costs.
This increased cost has significantly impacted the number of vehicles on the road, leading to one of the most significant car shortages the U.S has ever seen.
- Inflation has affected every area of our lives, especially vehicle ownership. We’ve seen costs of gas, used vehicles and car insurance increase.
- Low inventory, high competition and limited discounts makes purchasing a new vehicle more expensive than it previously was
- Keep in mind all of the costs of purchasing a new vehicle before making a decision to ensure you can afford the total cost of your car
Why Is There a Car Shortage?
So why is there a shortage of used cars?
At its core, the car shortage was caused by a supply chain issue. Many drivers were familiar with the computer chip shortage of 2021 caused by manufacturing companies closing for mandated lockdowns. The production of these parts slowed significantly, and there weren’t enough chips to go around. Without chips, you can’t produce vehicles at the same level.
But it didn’t stop there. A lack of new cars meant there was a lack of used cars as well.
Put simply; you can’t have used cars without new cars. During the pandemic, the reduction of car production revealed itself when the government lifted restrictions, and people were looking to purchase vehicles again.
The decreased production rate of new vehicles meant that dealerships weren’t ready to handle the demand for cars. This affected both households and businesses hoping to welcome a new era with a different set of wheels.
How is Inflation Affecting the Cost of Car Ownership?
Inflation doesn’t just affect the price of used cars or gas. It touches every aspect of owning a car. Here are a few areas in which inflation impacted the cost of car ownership:
- Gas prices: According to the Oil Price Information Service, the average American is now paying $450 a month for fuel compared to $100 a month in 2020. As of July 8th, the national average for gas is $4.71, compared to $3.14 in July 2021.
- Vehicle maintenance and repair: The cost of vehicle maintenance and repair rose by 4.9% in 2021.
- Insurance: According to Compare.com, the average monthly cost of car insurance jumped from $96 in 2021 to $133 in 2022.
- Loans & financing: With average loan prices jumping from $563/mo to $576/mo, many Americans struggle to keep up with costs.
- Vehicle parts and equipment: The average cost of vehicle parts and equipment saw an increase of 10.2% in 2021.
These are all significant increases separately, but add them up and it’s no wonder why budgets are feeling mighty tight right now for many Americans.
Trends in Car Buying in 2022
With inflation driving up car prices, many drivers are at a loss for what to do when shopping for new cars. With the average used car having a ticket price of $29,000, shoppers need to make wise decisions when buying new wheels.
They’re dealing with low inventory, high competition, and limited discounts when venturing out for a new car. With this in mind, here are a few trends of car buying in 2022 and how you can use these to your advantage.
Used Car Trade-Ins
If you have a used car you’re looking to trade in, the odds are currently in your favor. Dealerships desperately need vehicles for inventory, and they’ll offer favorable prices to get their hands on your wheels.
But don’t stop there. Car rental companies are currently purchasing used cars too. The lack of used cars available means they’re now forced to buy cars directly from dealerships instead of other options like wholesale auctions.
Just keep in mind that while you’ll get a good rate selling your current vehicle, you might lose that financial bump if you turn around and pay a premium for a different vehicle.
In the past, home deliveries of cars were only for the elite members of society. The general public had to travel to their nearest car dealership to purchase a new car. However, the Covid-19 pandemic created a shift in the car-buying culture.
The past two years saw year-long shutdowns for dealership showrooms across the nation. As a result, home deliveries were forced to become available to the general public. This trend is expected to continue since many drivers now prefer the convenience of purchasing a new car from home and having it delivered.
In June 2022, average gas prices in the US hit a record high of $5 per gallon, with many places in California seeing $6 per gallon or more. With gas prices shooting sky-high, many people are rethinking their stance on hybrid cars and other electric vehicles.
In addition, the Build Back Better Act contained significant tax breaks for owners of electrical and hybrid plug-in vehicles. So for drivers looking for extra savings, switching to an electric car could be beneficial in the long run.
That’s right; you might start ordering your new Honda or Toyota just like you order your new phone. It seems that built-to-order cars are the future of car sales. Ford CEO Jim Farley reported that pre-pandemic, pre-ordered cars only made up 5% of their sales. Now? Over 30% of cars sold by Ford are built-to-order.
Pre-ordering your car also comes with a few perks. For example, when ordering your vehicle online, you avoid pesky markups and dealer add-ons.
While you may have to wait one or two months to get your new car, you can get the exact color and options you want. In addition, since ordering your vehicle online allows you to bypass dealership lot fees and insurance for your parked vehicle, you’ll end up paying less than you would if you walked into the dealership.
To pre-order your car, use the automaker’s website to custom-build your vehicle, then choose to have it sent to your local dealership for pickup.
What to Consider When Buying a Car in 2022
There’s more to consider when buying a car now besides the color and trim package. In the past, you may have chosen a car simply because you liked the style or interior. Now, other factors are at play when buying a car. So here are a few things to think about when purchasing a car in 2022.
1. The overall cost of ownership vs. sticker price
You must look into more than just the sticker price when shopping for a car. Before deciding on a vehicle, consider the average cost of parts, insurance premiums, repair costs, taxes and fees, and gas mileage. The last thing you want is to take home a car that empties your pockets from day one.
2. Resale value
Look into the resale value of your preferred vehicle. Try and find out the average depreciation rates of your make and model. Dealerships are currently offering generous deals to buy back cars. Within a year or two, you could trade your car in for more than you paid for it.
Unfortunately, the widespread lack of inventory means that there is limited availability of several car models. If you have your heart dead set on a particular vehicle or trim level, be prepared to wait weeks or even months to get behind the wheel.
How to Save on Car Insurance With Inflation
With the cost of everything from milk to gas rising quickly, many Americans are struggling to afford their car insurance payments. Although there isn’t much you can do to stop inflation, there are things you can do to save on car insurance in 2022.
We’ve got you covered if cutting back on coverage isn’t an option. Here are six things you can implement in 2022 to save on car insurance while dealing with inflation:
- Compare rates often: Even if you love your current insurer, don’t be afraid to shop around and compare rates often. Rates can vary wildly between insurers, which means the competition may offer discounts or deals that your current insurer does not. By comparing rates from multiple providers, you ensure that you get the best auto insurance deal.
- Avoid lapses in car insurance: While it may seem like a good idea to cut car insurance from your budget, don’t be so quick to do so. Canceling your car insurance could lead to a lapse in auto insurance on your record. A lapse in coverage causes insurance companies to view you as high risk, driving up the cost of your future insurance premiums and you could incur additional penalties from your state’s Department of Motor Vehicles for having a registered vehicle that is uninsured.
- Bundle insurance policies: To keep auto insurance costs low, consider bundling insurance policies. If you have renters, homeowners, or condo insurance with another insurer, combine all coverages under one insurance company. Many insurers offer discounts for bundling, with some people seeing savings of up to 25%.
- Raise your deductible: If you have comprehensive and collision coverage, you must pay a deductible when filing a claim. You’ll have to pay this amount out of pocket before your insurance company pays the rest. Raising your deductible can decrease your monthly payments since you now hold more financial responsibility. However, if you decide to do this, make sure you can afford to pay your new deductible. Otherwise, you’ll be unable to get much-needed repairs done on your car after a loss.
- Inquire about usage-based discounts/coverage: If you’ve started working from home to save money, you’re probably driving much less. With your reduced annual mileage, you may want to consider switching to usage-based or pay-per-mile insurance.
Inflation has affected every area of our lives, especially car ownership. We’ve seen costs increase in gas prices, used vehicles, and car insurance.
If you’re looking to purchase a new car, start by checking the cost of car insurance with an online comparison tool. Compare.com makes it easy for drivers to get free, personalized quotes in minutes. By researching different vehicles and counting the cost of ownership, you can prepare your budget to deal with inflation now and in the future.
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