Younger And Pricier
The answer is simple, in some ways: As the average price of a used car has risen to a record high of $18,800, loan terms have gone up to an average of 66 months. The price of cars and the length of car loans is tightly related; the more expensive it is to buy a car, the higher the monthly payment, and a longer loan term is a good way to reduce monthly payments at the expense of paying more interest.
However, those rising prices are complicated somewhat by the fact that used cars aren’t priced the way new ones are. The used car market is dictated to some degree by tastes in new cars a few years ago: The more “youthful” the cars hitting the market are, the higher the overall price of used cars. And the incoming stock is a lot newer than it used to be.
Part of this is the rise of leasing among Millennials; leasing has rapidly become more popular as a budget way to get a new car, and many leases return to lots as “certified pre-owned” vehicles. Similarly, it’s become much easier for a subset of drivers to turn in their car after their loan is paid off and buy a new car, which also drives up the availability of newer stock. It helps substantially that this newer stock is more likely to have aftermarket options and other popular items that increase the overall price of a car, and fuel efficiency is also in increasing demand.
Price pressure in the new market also plays a role. As the price of new cars rise, to an average over $32,000, it drives customers unable or unwilling to pay that premium are coming to the new market. In other words, there’s more and more demand for assets that are rapidly rising in value. Prices going up is just a matter of economics. But what does this mean to consumers?
Older And Cheaper?
To be fair, the used car price is skewed somewhat; many cheaper used cars are paid for up front, in cash or on credit cards, so we’re only looking at the relatively “high-end” subset of used car purchases. Still, the trends raise a question of what will happen when all these “young” cars return to the market with more miles and more years on them.
The short answer is that no one is really sure, but it will likely have an effect on prices. The best thing to do if you’re shopping for a used car is to factor this into your borrowing; having your financing on hand will make it easier for you to buy the used car you need, especially in a competitive market.