First-time car buyers battle skimpy supply, sticker shock
By Shannon Bradley | NerdWallet
Imagine buying your first car during the worst car market in recent memory.
Inventory shortages and rising prices began with the pandemic-driven computer chip shortage in 2021. In May of this year, the supply of new vehicles available to buy was about 1.1 million — or about 1.7 million fewer than in 2020 — according to automotive marketplace and data company Cox Automotive. The average transaction price jumped to $47,148, up more than $5,000 from a year ago, as most buyers paid more than the sticker price. The average used car price remained near record levels at $28,312, with some models fetching higher prices than new.
First-time car buyers have long been guided by internet lore and the experiences of their friends and relatives. What’s it like to shop when those rules no longer apply?
For Kevin Nguyen, it meant buying his first car when traditional car-buying advice had gone out the window. Nguyen — whose data analyst job moved him from using public transportation in Toronto, Canada, to needing a car in Austin, Texas — said in an email, “Everything I knew about cars, especially the depreciating asset part, was no longer true today.”
He added, “Cars were more expensive than their original purchase price, even if they were used with thousands of miles over several years.” Nguyen said this was a rather expensive option and that purchasing new wasn’t much better. “Dealers had no idea when they would get inventory. I got quoted late summer 2022 when I inquired in November 2021,” he said.
But Nguyen did find the vehicle he needed, as did first-time car buyers Ben Johnson, of Evansville, Indiana, and Ellie Morris, of Nashville, Tennessee. All shared what they learned along the way.
Prepare before you shop
With the current car shortage putting dealers in the driver’s seat, it’s important to arm yourself with knowledge. Nguyen, Johnson and Morris all used online car retailers like CarMax, Carvana and Vroom to research car prices and various makes and models before they ever approached a dealership.
Nguyen used online retailers to “get a general idea of how much cars were going for.” Using this benchmark pricing, he then approached local dealers to see what inventory was available based on his preferences for a Hyundai Elantra or Honda Civic.
Johnson’s plan to use a car given to him by his parents through the completion of a physical therapy degree and Ph.D. took a detour when the vehicle developed mechanical issues. Needing a car right away, he used online sites to quickly research must-have features, fuel efficiency and safety ratings for his next car.
For Morris, it was time to replace her old car after finishing college and finding a job with a strategic communications company. At the advice of her dad, Morris used the CarGurus car-buying app along with other online sites. In fact, she credits the app with helping her find the 2017 Ford Edge Titanium she bought at a local dealership in May.
After locating the car, she returned online to confirm she was getting a good deal. She says, “A lot of other Fords just like this one, their miles were a lot higher and the price was a lot higher, even though they were pretty much the exact same car. So we quickly found this was definitely the best deal we could find.”
Make your financial plans
Another important aspect of preparation is setting a budget so you can determine a price range and avoid overspending. Johnson, who took out his first car loan, says the money side of buying a car was the most difficult.
Even though he had been saving to buy a car after graduation, he wasn’t ready to buy one yet. He had to make some financial adjustments to fit a car payment into his budget, like swapping a gym membership for exercising around his apartment.
Experts recommend spending less than 10% of your take-home pay on a monthly car payment and less than 15% to 20% on car expenses overall, including gas, insurance and maintenance. A car affordability calculator can help with crunching these numbers.
To reduce the amount he had to borrow and get a better rate, Johnson used the money he had saved and traded in his existing car to make a sizable down payment. At the suggestion of the dealership, he made repairs to his existing car to increase the trade-in value.
If possible, car buyers should strive to put down 20% of the purchase price for a new car and 10% for a used one.
Johnson financed through the dealership and felt he received a good loan interest rate but says he wishes he had more time to shop around. “It’s possible that I could have gotten a cheaper deal,” he says, “but I was kind of frustrated and I really needed a car.”
Getting preapproved for a car loan before you shop is always a good idea. Most credit unions and banks offer preapproved car loans, and many credit unions have first-time car buyer programs to help those without extensive credit history qualify. Taking that preapproved loan to the dealership gives them a rate to beat. For first-time car buyers, lining up a loan co-signer can also help with getting approval and a lower interest rate.
In this car market, be fast and flexible
Being able to move fast enough to get a car before someone else was a challenge all three car buyers said they faced. The research they did ahead of time, and the advice of parents or other, more-experienced car buyers, increased their comfort level with making fast decisions. Also, being flexible was key.
Johnson’s first choice was a Toyota RAV4, but after finding none available within a two-hour drive, he began visiting local dealerships for other brands with his must-haves list in mind. He ended up buying a 2022 Hyundai Kona.
“Once I drove the Kona, it did everything that I wanted in the RAV4,” he says. “I had never looked at Hyundai as a brand. So now it’s six months later, and I’m still thoroughly enjoying the vehicle. I don’t know if I would have enjoyed the RAV4 as much as I do my vehicle now.”
After finding that local dealers wouldn’t have the brands he wanted for at least six months, Nguyen returned online to buy a 2020 Hyundai Elantra SE.
“I went back to online websites like Carvana and CarMax and looked at the website nearly four times a day,” he said. “The Hyundai I eventually purchased was priced rather low and I immediately contacted CarMax to get a viewing. The car itself has no problems, with a spotless inspection and only 10,500 miles, so I was very happy.”
Nguyen’s final bit of advice about finding a car: “If there’s a deal, then just go for it. Being indecisive will cost you a good deal as someone else will snatch it up immediately.”
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Shannon Bradley writes for NerdWallet. Email: [email protected].