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Used car prices have surged this year

Row of cars for sale with prices hanging from rearview mirror.
Pincasso / Shutterstock

While some households needed one, two or even three cars in years past, the pandemic has seen many people ditch their commutes and rethink their finances.

“If you’re eager to reduce your spending, I am going to suggest you look in your garage or driveway,” Orman writes in the post.

New car manufacturing has stalled due to a worldwide shortage of semiconductor chips. And with the supply of new cars drying up, demand for used models has skyrocketed.

Prices have finally leveled off after months of steep increases in the spring. Still, the average cost of used cars and trucks in August was up 32% compared to the same month last year.

But prices may not stay inflated for long.

“The pace of production of new cars is expected to pick up soon,” Orman writes. “When that happens, what you can collect for your used car will likely fall. Now’s the time to use a car sale to help you work on important financial goals.”

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Ownership can be a surprising burden

Car keys and money on table with man using calculator.
Tero Vesalainen / Shutterstock

Dan Demian, a financial advice expert with the money management service Albert, says Orman’s right on the money.

He estimates car ownership costs around $600 to $800 a month just for gas, loan payments and a reasonably priced auto insurance policy.

Once you add parking — which can cost hundreds in a big city — tires and regular maintenance, that budget could quickly double.

“It doesn’t really hit you [how expensive a car is] until you’re actually committed to it,” says Demian. “There are so many expenses associated with getting a car that it often defeats the purpose that the car serves.”

Coming around to that way of thinking? Demian suggests we’re currently at the peak for car prices, which should taper over the next six to 12 months before eventually returning to normal.

Where that money can go instead

View from woman above dealing with bills fanned out while sitting on bed.
Pormezz / Shutterstock

If you could survive without a second car — or without a car at all — Orman encourages you to consider all of the other things you could do with that money.

“This can be such a financially liberating move if you are currently paying off a car loan,” she writes.

Specifically, Orman suggests redirecting that money to:

  • Build up an emergency fund. That monthly $800 turns into $9,600 over the course of a year. That can be a substantial cushion of cash, and if you put it into a high-yield savings account, it will have a chance to grow at a reasonable rate while you aren’t using it.
  • Pay down credit card debt. The high interest rates on credit cards can bury you if you don’t pay them off quickly. Dealing with debt can be a huge relief both financially and emotionally, Orman says.
  • Fully fund a Roth IRA. With $500 a month, you could max out your allowable contributions. Orman’s a huge fan of these retirement accounts because you won’t face a big tax bill later in life. You can open a Roth IRA with a bank, brokerage or robo advisor — one popular app lets you build one with “spare change.”

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If you absolutely must buy a car right now

Young couple shaking hands with sales agent after a successful car buying.
Harbucks / Shutterstock

While today’s high prices are great for car owners, they can be terrifying for anyone who needs to buy a car in the near future.

“I would definitely say you should first rule out any other possible means of cheaper transportation,” says Demian. “There are so many options you can use to get around now.”

If you absolutely must buy a car now, he suggests spending a little time to save up for a larger down payment to help lower your monthly loan payments in the long run.

You can save even more by shopping around for a better rate on a car loan instead of accepting whatever your bank or dealership offers you.

Otherwise, Demian recommends looking long and hard for a secondhand car that fits your budget. He tells his clients to follow the 10/30 rule: Your car payment shouldn’t add up to more than 10% of your monthly income, and the vehicle shouldn’t be worth more than 30% of your annual income.

If driving from lot to lot looking for deals doesn’t work with your schedule, you can always simplify your search and buy a used car entirely online.

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Sigrid Forberg Associate Editor

Sigrid’s is Moneywise.com's associate editor, and she has also worked as a reporter and staff writer on the Moneywise team.

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