6 Ways to Save Money on a Car in Today's High-Price Market

Low inventory and high demand is good news for auto dealers. If you plan to buy a car, keep reading to learn how you can save money at the dealership.

Low inventory and high demand is good news for auto dealerships. If you plan to buy a car, keep reading to learn how you can save money at the dealership.

If you're thinking about buying a new or used car, expect to dip further into your bank account for the foreseeable future. According to J.D. Power, the average new car price was up 8.4% (to $37,200) from a year ago, while used cars saw a 7% uptick.

So what's fueling the price hike? Increased demand and limited car inventory caused mainly by a semiconductor shortage.

Keep reading to learn more and to see how you can keep costs reasonable in today's high-price market.

Car dealerships have limited inventory

When the pandemic hit, the automotive industry took a nosedive -- car sales plunged more than 30%. That caused many dealerships to close or reduce inventory.

Automakers, in turn, reduced their orders for semiconductors. These chips play an important role in today's cars, from in-car entertainment to advanced warning systems. All told, the average car may have anywhere from 50 to 150 semiconductors.

As demand for these chips declined for autos, it surged for personal computers and other electronics. By the time automakers were ready to ramp production back up, a full-blown chip shortage was underway, forcing car makers to remain shut down or operate at reduced capacity.

Today, as states loosen pandemic restrictions, people returning to work or gearing up for increased travel opportunities are ready to buy cars. Unfortunately, car dealerships may not be able to meet the demand. And to make matters worse, with more people in the market for a limited supply of vehicles, dealerships are hiking prices.

Analysts expect this shortage to last into 2022, so it's going to be a while before prices come down. In fact, they may keep going up, as automakers also deal with the rising costs of plastics, steel, resin, and other commodities.

If you're not able to wait for prices to come down, here are some tips to help you navigate the car-buying process.

Trade in

The car shortage could work in your favor if you have a vehicle to trade in. Car values have soared, and your vehicle may be a hot commodity the dealership would love to sell to someone else. That could put a dent in the final cost of your new car. Just make sure you take advantage of the moment by knowing the true value of your trade-in before you go to the dealership. That way, you'll know if a car dealer is low-balling you.

Loosen up

With costs on the rise, you may not be able to find an affordable vehicle with all the perks you want. And if you do, it may cost an extra arm and leg. It might be a good, cost-saving move to not focus as much on the most popular features. Be realistic about your needs and and focus on the features most important to you, which could include:

• Cost
• Fuel economy
• Dependability
• Reliability

Set limits

Know your budget before you start shopping for cars. Experts recommend spending no more than 10% to 15% of your monthly take-home pay on car payments. It's also a good idea to keep the length of a car loan to five years or less. Longer loan terms can lead to a number of problems, including having to pay more in total interest, and possibly even owing more to the lender than the car is worth.

Still, longer loan terms can be a solid option for anyone on a budget if the interest payments are low. That's because stretching out car payments reduces the amount you pay each month. This can help some people get into a more reliable vehicle. It can also help free up funds that can be put to better use, such as to:

• Build up an emergency fund
• Pay down high-interest debt
• Save for other financial goals

The trick is to only spend what you can afford based on a five-year loan (or less). If your monthly car payment budget, based on a five-year loan, is $300, you can stretch out the loan beyond five years to lower that amount. But if you extend your loan and stay around $300 or higher, you're getting sucked into a higher loan amount with a longer repayment period. That's a recipe for disaster when you're on a budget.

Don't forget insurance costs

When trying to figure out how much car you can afford, factor in the cost of auto insurance.

According to the Insurance Research Council, approximately 1 in 8 drivers is uninsured, and depending on where you live, the number of drivers on the road without insurance can be far higher. That means drivers who follow the rules and are insured have to pay more. That can make it harder for people to find affordable car insurance.

Do your homework and research the best car insurance companies. Even if you already have auto insurance, this can help make sure you're getting the best protection for you and your vehicle at the lowest rates. Don't over- or under-insure, either -- make sure you know how much car insurance you need. Likewise, get familiar with the terms you see when you get a car insurance quote.

Be prepared

A good credit score goes a long way in saving you money. No matter how low interest rates are, the better your score, the lower the amount of interest you will pay on a loan. If your score could use a boost, check out our guide for ways to build credit fast before heading out to buy a car.

It's also a good idea to secure financing ahead of time. Once you've taken the time to qualify for the best loan possible, you'll know the interest rate a dealership has to beat if they want you to finance through them. This also helps you avoid finance charge markups that increase the amount you owe over the life of the loan.

Try to avoid costly add-ons

Before you drive away in your new car, an auto dealership will likely offer you some add-ons. These may include:

• Extended warranties
• Window etching
• Gap coverage

Rolling these add-ons into your financing increases both your monthly payments and the amount of interest you pay over the span of your loan. These add-ons can also come with costly markups meant to help the dealership increase profits.

Before you put more money in the dealership's pockets, do your own research. You may find better deals online, or discover that a lot of add-ons aren't worth your time.

A low inventory and high demand for cars is good news for auto dealerships. And it can be bad news for our savings accounts. But just because it's a seller's market doesn't mean we're powerless. By doing your research ahead of time and knowing what to expect at the dealership, you can drive away knowing you've gotten the best deal possible for your new car.