3 Reasons to Avoid Buying a New Car in 2023

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KEY POINTS

  • Chip shortages are expected to continue through 2023.
  • Competition is not going away anytime soon.
  • Rising interest rates make buying a new car even more expensive.

One of the hardest parts of being an adult is delaying a dream because it's the smart thing to do.

There's nothing quite like driving off the lot with a brand, spankin' new car. The new car smell. The dashboard that looks like it belongs on a spaceship. It's exhilarating. Sure, most vehicles lose about 20% of their original value that first year, but still, it's exciting.

If you've been dreaming about buying a new car, you might want to put that dream on hold -- at least until we get through 2023. Here are three reasons why.

1. Chip shortages will continue to be an issue

Once pandemic-related shutdowns began in 2020, more people were working from home, fewer people were on the road, and fewer were buying cars. In response, auto manufacturers put the brakes on microchip orders. Fast forward to 2022. Car sales remain cool relative to pre-pandemic days. For that reason, auto manufacturers still have not ramped up orders.

There was also the issue of how many microchip factories are now located outside the U.S. and how little control the U.S. has over availability. To deal with the problem, President Biden signed the $280 billion CHIPs and Science Act in August. $52 billion was set aside as subsidies to encourage chip manufacturers to build fabrication plants in the U.S. While there's plenty of interest, it takes time to build plants and get them up and running.

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There's no reason to believe the U.S. will be flush with microchips in 2023. They will come, but not necessarily next year.

The availability of microchips is one reason inventory will remain low in 2023 and prices will remain high.

You never want to buy when prices are at their peak. Holding off until inventory increases and you can once again negotiate with dealers will be better for your bank account.

2. Demand will continue to grow

Despite the fact that auto prices are red-hot and haggling is not an option, there will always be people who need their new car fix. Those are the folks you're going to be dealing with if you head to the car lot.

According to CNBC, September marked the 16th month that buyers paid over sticker price for a new car. The average price paid? More than $48,000, up 6.1% over 2021.

It's difficult enough to pay full price for a new vehicle, but do you really want to compete with buyers willing to pay more than MSRP?

Like all economic trends, this will pass. As tough as it may be to wait it out, it could be your best bet.

3. Interest rates are on the rise

As you are undoubtedly aware, interest rates are on the rise. In an effort to cool inflation, the Federal Reserve has steadily increased the rates. Unless you're paying cash, your budget will be impacted by the higher rates.

Let's say you purchased a vehicle shortly before the pandemic, borrowing $40,000 at 4% interest for 60 months. Your monthly payment would have been $737 per month and you would have paid a total of $4,200 in interest.

Borrowing the same $40,000 today at 7% would cost you $792 per month and more than $7,500 in interest. That's $3,300 you could have invested or used to build an emergency fund.

Giving the Federal Reserve time to do their thing may just save you money.

If you're determined to purchase a car in 2023

One of the best things about being an adult is that you get to decide what's right for you. And if you decide that 2023 is the year you're driving away with a new vehicle, these three tips can help.

  1. Consider waiting for your dream car. If the issue right now is that you desperately need reliable transportation, think about delaying the purchase of your ideal vehicle and instead, buy something less expensive and perhaps, more practical. Hopefully, there will be plenty of time to buy the car you've always wanted down the road.
  2. Focus on your credit score. You may get tired of hearing it, but the higher your credit score, the lower the interest rate you'll end up paying. By federal law, you're entitled to one free copy of your credit report from the "big three" credit bureaus once a year. Right now (and through 2023), you can get them for free weekly. You can order all three through a site like annualcreditreport.com. Once you receive the reports, go over them line-by-line. What you're looking for are any errors that may exist (like a debt you've already paid off showing as active). If you do find a mistake, dispute it with the credit reporting agency in question. It has 45 days to either verify that the information is correct or delete it from your report. You may be surprised by how much one piece of negative information can drag your credit score down.
  3. Shop around for the best interest rate. Although interest rates are on the way up, they vary by lender. Take time to rate shop several lenders before borrowing money. A difference of as little as 1% can cost thousands.

There's nothing fun about delaying a dream or navigating an economy that feels like a roller coaster ride. But since it's your money, you'll want to consider all the angles before parting with your hard-earned cash.

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