Whether you believe we're in a recession or simply a slow economy, the news hasn't been good. The housing debacle, credit crunch and tumbling dollar mean many consumers have a hard time making car payments and paying for fuel. As a result, more people need to get out of their car lease early, delay buying a new car, or buy a used car instead of a new one. And with gas prices near $4 per gallon, there will be more demand (and probably fewer deals) for compact and hybrid vehicles.
Automakers are also tightening their belts, closing dealerships, eliminating "twinned" vehicles and carrying some of their lowest inventory levels since 2002. That translates to less selection on the car lot.
So consumers are caught in a tug of war: Car dealers, most of whom already are facing hard times, need to increase their profitability — just as car buyers are trying to spend less. This affects the entire car-buying process, from vehicle availability to new car financing and incentives to lease deals and the price of used cars. Here's what you can expect and how to best take advantage of the slow economy's impact.
Financing Your New Car
Historically, automakers and dealers have pumped up sales with financial incentives, and this slow economy is no exception. Expect to see higher cash rebates (manufacturer-to-customer and possibly dealer-to-customer), and more zero-percent financing and low APR programs, particularly from domestic automakers.
While such auto incentives used to blanket an entire brand, this time around expect automakers to cherry-pick which models get big incentives. Understandably, the biggest discounts will be on large, gas-guzzling trucks and SUVs. Incentives will also vary from one geographic region to another depending on vehicle demand.
Rules of thumb for auto incentives:
- Unless there's a zero-percent program or the interest rate is less than the prime rate, keep your term as short as possible. To help decide which program is better for you, use our Low APR vs. Cash Back calculator or this basic rule of thumb: If you'll keep your car three years or less, take the cash. Four years or more, take the low APR.
- If you're considering switching brands, ask the sales manager (not just the salesperson) about any "conquest" rebates. This can mean up to $1,500 toward sweetening the deal.
- Beware of the six- and seven-year car loans that are trickling down from very expensive brands to more mainstream ones, such as Toyota. Don't use a longer-term loan to get into a vehicle you can't really afford or to spread the cost of a negative-equity trade (being "upside down" on your current vehicle).
- Unless your credit is good, be prepared to put down a larger down payment or look for a used car instead. It's more difficult than before for folks with below-average credit to find car financing, as banks and finance companies are tightening their standards.
As a countermeasure against falling residual values, a number of manufacturers have overhauled their leasing programs. So if you leased in the past, the same rules may not apply. Additionally, many lease payments will be so high that consumers will have no choice but to go to a less expensive vehicle — one they can actually afford.
In addition, keep the following advice in mind as you shop for a new lease:
- Credit requirements will be tighter. In some cases, only people with the best credit will qualify for manufacturers' leases.
- Dealers will urge people to buy rather than lease and extend the loan terms to 60, 72 and even 84 months. (Warning: This results in more "upside-down" buyers and more buyers will carry negative equity from one car loan to another.)
- The higher payment might still make sense if you can take the tax write-off as a business deduction.
- Check several banks, smaller leasing companies or your credit union for a good lease. (Our financing tab will help you get rates from different companies.)
- If it suits your needs, look to foreign automakers, whose lease programs are stronger.
- Consumers looking to take over someone else's lease can visit Lease Trader or Swapalease.
- Buying looks better than ever, especially with dramatic incentives in both cash and financing.
- Carmakers will offer low-interest financing to try to match low lease payments of the past.
Used Cars Are Affected, Too
As the amount of money in consumers' pockets goes down, people who cannot afford the new car they want will look at less expensive new models, but will consider used cars as well ¿ possibly for the first time. Say you're a Ford guy with your heart set on an Explorer, but you can't afford a new one. You could consider an Escape, or you could simply buy a used late-model Explorer instead.
This means that older cars that are "clean" — in good condition — will hold their value and depreciate less quickly. For example, a very clean eight-year-old Honda Accord with 60,000 could sell for a few hundred dollars more than it used to, as consumers compete for quality used vehicles.
Rules of thumb:
- Be mindful of when you sell or trade in your late model used car. If a manufacturer is offering employee pricing or heavy discounts on new cars, it may not be the best time to sell. People are less likely to pay top dollar for your used car, when they can easily get a new one for a bit more. Use Edmunds' Used Car Appraiser to learn your car's True Market Value® (TMV®).
- If your current car is still under warranty and in very good condition, dealers will want it for their Certified Pre-Owned (CPO) programs. For now, buyers can find special finance rates through captive finance arms.
- Because leasing has dropped off so dramatically during this slow economy, Edmunds analysts predict that there will be fewer high quality used vehicles in 2010 and even less in 2011.
- If you want a greater selection, now is the best time to buy a CPO vehicle. Since there may be fewer cars on the market in a couple of years, this could potentially drive up CPO prices for high demand vehicles.
- The window of opportunity for selling or trading in a compact for a great price is probably over. Since many people purchased compact vehicles when gas prices were at record highs, there are a lot more used compacts available on the market today.
So Where Are the Deals?
If you do nothing else before buying a new car, at least check the latest auto Incentives and Rebates and Deals of the Month for a head start. Remember, there are always bargains to be had, even in tough economic times.
For new cars:
- Look again at larger vehicles. If you don't put a lot of miles on your car each year, the discount programs on these vehicles may more than outweigh the difference you'll spend in fuel.
- Due to the weak dollar, luxury and midrange vehicles from European automakers may offer new incentives.
For used cars:
- There are very sweet deals on recent model-year vehicles that didn't sell that well when they were new. Many of these are rental or fleet vehicles (former company cars), including Chryslers (like the 300) and minivans. Some examples: A 2007 Ford Five Hundred SEL four-door sedan with a 3.0-liter engine and automatic transmission had a $23,785 MSRP, and an invoice price of $22,031. You can buy it used at a dealer for around $13,880. Similarly, the 2007 Kia Sedona LX with a new MSRP of $24,295 can now be bought used for under $12,500.
- Don't wait too long to buy: There may be less selection to choose from come summer/late summer than in years past, since people who don't have the money to buy a new car may choose to hold onto their cars longer.
Edmunds' Jesse Toprak, Richard Arca and Joe Spina contributed to this article.
Need help deciding whether to keep your car or buy a new one? Check out "Fix Up or Trade Up" In the meantime, if you do decide to hang onto your car for a while longer, make it last using our tips, "Top Five Ways to Make Your Car Run Forever."
To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.