If you’ve tried to buy a new or used car in recent months, you’ve probably noticed that the cost of automobiles has spiked significantly, so what’s causing the surge? Let’s take a look.
The Federal Reserve has been doing its best to bring inflation down, but the only real tool in its arsenal involves hiking the interest rate. This might be good for the economy in the long run, but for now, it’s making it far more costly to borrow money. Each time the rate increases by one point, the average monthly car payment increases by about $20.
The current rate can be as high as 10% now, compared to rates that were just a hair above 4% just one year ago.
As with any consumer product, when demand increases faster than supply the price will invariably go up. Since many folks spend the first year of the pandemic at home and socked away some money in savings, they were eager to spend it — often on luxury SUVs and electric-powered automobiles — throughout 2022.
The chips that make modern cars operate were in short supply even as more people wanted to buy the vehicles that rely on them. Factories that shut down due to COVID-19 were unable to produce the chips and dealerships nationwide were left with sparse showrooms as a result.
What can you do?
According to recent stats, a record 15% of Americans who financed a new vehicle in the latter part of last year are now paying $1,000 or more each month. While costs and interest rates aren’t likely to go down significantly any time soon, you can stack the odds in your favor by identifying models that dealers are trying to unload and shopping for a pre-owned option if possible.