Average car price is at an all-time high of $47,000 going into 2022

By the end of 2021, the average car price topped out at just over $47,000 — a record figure caused by COVID-19 pandemic effects felt worldwide. Full-size trucks bore the brunt of the increase at 12%. If you’re in the market to buy a new car, it’s important to understand the current state of the auto industry and how it could affect your buying process and auto insurance decisions.

Read on for a deeper dive into car price trends, what’s causing the rising numbers and tips on car buying in today’s market, or skip forward to our infographic.

Car price trends

At the beginning of the past decade, average new car prices increased less than 3% annually until the COVID-19 pandemic began. Between 2019 and 2020, prices rose 5%. Then, average new car prices spiked — by 17.2% — between 2020 and 2021. Similarly, the average car payment for new vehicles rose 11.8% to $644 in 2021. 

Used cars are following similar trends as new vehicles. Average monthly car payments on used vehicles rose 18.2% over the same period to $488.

Americans tend to hold onto vehicles for a while, well past when loans are likely paid off. With higher-than-ever trade-in values today, we might see a slight decrease in the average length of car ownership from owners who want to take advantage of earning positive equity. Currently, pickup trucks have the highest trade-in values.

Are car prices going down in 2022?

Since peaking in December 2021, average new car prices began to drop slightly to about $46,000 in January and February 2022. Unfortunately, it’s unlikely that car prices will drop significantly this year due to the effects still felt by the COVID-19 pandemic (more on that below). If prices do continue to drop, they likely will be small changes until manufacturers can increase production or consumer demand levels out.

Contributing factors to car price inflation

Like many fields, the auto industry was significantly impacted by the pandemic. In fact, most of the contributing factors to car price spikes are related to the pandemic in some form. The pandemic spiked inflation across the country, and we’ve started to really see the effects over the last year.

Pandemic-related delays and increased manufacturing costs

Since the pandemic began in 2020, manufacturers of all sorts have experienced delays — whether due to facility shutdowns, social distancing restrictions, labor shortages and so on. Since most manufacturers are facing the same issues of low supply, increased prices on vehicle parts are also driving auto manufacturing costs. 

With less supply than in typical years, existing demands are unable to be met, resulting in higher prices. Pandemic-related safety precautions are easing and as a result, it’s predicted production will pick back up. However, the effects of the decreased supply over the last two years will still be felt for some time.

On top of manufacturing delays and low supply issues, there are also shipping delays, in part due to some of the same labor shortages and facility shutdowns in manufacturing.

Chip shortages

One specific auto part that has run into major supply and production issues is semiconductor chips. These chips control the electrical functions of a vehicle — from power windows to lights to navigation systems. One vehicle can contain from 500 to 2,000 chips. 

The chip shortage came as a result of the increased demand for vehicles. Semiconductor manufacturers just can’t keep up production to match the demand, as chip production is a time-consuming process. Plus, it can take years for a new semiconductor facility to be ready for production, so building more factories would not help immediately. 

It’s predicted that chip shortages may run into 2023 or 2024 unless demand significantly drops, which it may if prices continue to rise.

More luxury cars

Another reason for the increased average car price is that Americans are buying more luxury cars — cars worth more than $80,000. This is in part related to the pandemic because back in 2020, America’s wealthiest were unable to spend their money on expensive vacations and experiences so many indulged in expensive goods, like luxury cars, instead. 

As we enter into a potential post-pandemic world with relaxed guidelines, the trend has shown no signs of slowing. Luxury car sales increased 10.2% between 2021 and 2022.

Some automakers, like Mercedes-Benz, have halted some lower-end and cheaper cars’ production to earn the most value from the chip shortage by prioritizing their more expensive models.

How to buy a car during a car shortage

Although the current status of vehicle supply and higher prices lend themselves to less-than-ideal buying conditions, it’s understandable that you might not be able to wait out the chip shortage.

Whether you’re looking for safe SUVs for a growing family or eco-friendly cars because of surging gas prices, check out this car-buying checklist before heading into the car-buying process. Furthermore, here are a few extra tips on car shopping in today’s tricky market:

• Know what you’re getting into: By reading this post, you’re already getting ahead of the game in understanding the current buying climate.
• Be ready to compromise: You might not be able to find or afford your dream car right now. If you need to buy a car right now, you might need to buy a different brand, color or vehicle type.
• Widen your search area: You may need to drive farther to find better deals on vehicles. A couple of hours' drive is worth saving a few thousand dollars.
• Consider ordering from the automaker online: If you aren’t in a rush and don’t want to compromise on your dream car, you can order online directly from the manufacturer. The downside here is that delivery times on factory-ordered new cars range anywhere from a couple of months up to a year.
• Try leasing temporarily: If you can’t get the brand you really want and don’t want to commit to buying something else, try leasing.

How to lower your costs when buying a new car

With new car prices at an all-time high and dealerships negotiating less, it’s best to have a plan of attack before taking a step into a car dealership — starting by setting a budget. A car affordability calculator can help you get an idea of where to start price-wise.

It might seem like there’s not much you can do to save on a car purchase right now, but there are things you can try.

1. Negotiate the sticker price

Many vehicles are selling well over MSRP today. The MSRP is only a suggestion from automakers on what the vehicle is valued at, but dealerships are free to sell at whatever price they decide. Supply and demand, plus the dealership’s profits, are the main reasons prices are highly marked up.

While it might be difficult in today’s market, it’s worth at least trying to negotiate the sticker price. If the dealership won’t budge on the sticker price, see what other incentives and add-ons you can negotiate. Some things to consider asking for could be window tinting, tire upgrades, all-season floor mats, entertainment systems and more.

2. Compare car insurance quotes

The average cost of car insurance in the U.S. is $124 per month. While premium costs vary depending on an individual’s age, location and vehicle, there are ways to save on auto insurance. 

You may want to reconsider whether you’re purchasing a new or used car. Insurance on used vehicles is typically cheaper than insuring a new car, but that’s not always the case. Shop around for quotes from different providers when it comes time to buy a vehicle. On average, Nationwide, Geico and Progressive tend to have the lowest rates.

3. Pay cash if you can

Buying a car in cash is not something everyone can afford. However, if you can, you’ll not only save money by avoiding interest but also avoid negative equity. Negative equity is when you owe more on a loan than the vehicle is worth.

4. Put down a higher down payment

If you can’t pay cash, it may be worthwhile to put down a higher down payment. When buying a car, you should expect to put a minimum of 10% down. However, to reduce monthly payments and earn a better loan interest rate, consider putting 15%-20% down instead. 

5. Improve your credit score

Another way to earn a better interest rate on an auto loan is to increase your credit score. Having a score of at least 661 will likely get you a good interest rate between 3.5% and 5.5%, depending on if the vehicle is used or new. 

A few things you can do to make small improvements to your credit score are:

• Make frequent payments on credit cards and never miss a payment
• Pay your minimum balance and any interest you can afford 
• Keep credit card usage under 30% if possible
• Pay off smaller credit card debts first to lower your average credit card usage
• Don’t open new credit cards just to increase your overall spending limits or to lower average card usage
• Do not close paid-off credit cards before making a big purchase
• Prioritize paying off credit cards vs. loans as closed accounts can temporarily hurt credit scores
• Download a personal finance coaching app, like Credit Karma, so you can evaluate your score and get personalized suggestions

If your score is on the lower end, spend a few months focusing on your credit score prior to making the purchase.

6. Shop around for interest rates

If you can’t pay cash and need a loan, shop around for loan servicers with the best interest rates. Though volatile, average new car loan rates are on a year-over-year decline and down 1.4% to 3.86% in 2021.

Newer car loans inherently have lower interest rates, so while used cars have lower sticker prices, sometimes it’s worth buying new for a lower interest rate to save money over time. Keep in mind that interest rates vary significantly depending on the purchaser’s credit score. If your credit score is good, you can try negotiating interest rates with loan servicers.

7. Trade in your old vehicle

If you don’t have savings to put toward a down payment, you can trade in your current vehicle to put toward a new purchase. Since supply is so low currently, many dealerships are offering more than a vehicle’s worth as mentioned above, especially for specific models like the Kia Telluride and Toyota Tundra.

When trading in a vehicle, come prepared knowing what your car is worth. You can do this through sites like Kelley Blue Book or by getting a quote from an online car dealership like Zroom. Knowing your car’s worth or having another offer can help you negotiate with a dealership if their offer seems low.

8. Travel to find the best price

When shopping around for new cars, it might be worthwhile traveling a little farther out of your typical radius to find a better deal. Be broad in your online search. 

Buying a car is cheaper in some states compared to others, and specific makers might be more affordable in certain states where they are manufactured. For example, five states, including New Hampshire and Delaware, don’t have sales taxes, so the upfront costs of buying a car would be cheaper.

If you are headed out of state to purchase a new car, be aware of the tax laws in your home state and the state you’re buying in. In most cases, you’ll be required to pay double sales taxes — once in the purchase state and once when you register the vehicle in your home state.

Depending on the dealership you’re buying from, you might be able to have the vehicle shipped to you or a local dealership for a fee. The shipping fee will more than likely be less than paying double sales taxes.

The average car price spiked in December and customers can begin to see the light at the end of the tunnel. Unfortunately, that light is still a ways away. For customers in the market to buy a new car now, be prepared. There are ways to save elsewhere, like on auto insurance. Check out The Zebra’s car insurance calculator for an estimate on your premium costs for a new car purchase.

Sources: US News | CNN | Business Insider | KBB | NADA | KBB | KBB | Edmunds | iSeeCars