How Supply-Chain Issues Affect Buying a Car in 2024 (2024)

All APR figures last updated on 7/14/2023 – please check partner site for latest details. Rate may vary based on credit score, credit history and loan term.

Modern cars are complex and require many microchips, and some cars with advanced tech require thousands. Because of factory closures during the pandemic and other economic pressures, worldwide microchip production slowed down. Port closures and other supply-chain disruptions further reduced the availability of microchips for automakers.

Microchips are created with silicon crystals, which need time to grow. According to the Massachusetts Institute of Technology, microchip assembly requires about 700 steps over a 14-week period. AutoForecast Solutions estimated that over 13 million vehicles were cut from production worldwide between the beginning of 2021 and August 2022 due to the chip shortage.

Even though microchip factories have reopened and ramped up production, there’s still a long time to go until the chip shortage is resolved. Auto manufacturers aren’t the biggest customers of microchip suppliers, so cars are unfortunately taking a back seat to things like 5G technology and consumer electronics.

Some New Vehicles Need Hardware Updates

Facing the chip shortage, manufacturers had two choices: halt delivery until all of the parts were ready, or sell vehicles without certain features. In the second case, buyers would be required to come back to the dealership weeks or months later to have features installed once the chips arrived.

According to the J.D. Power 2022 U.S. Initial Quality Study℠, 2022 models had an 11% increase in problems compared to the prior model year.

In a press release, David Amodeo, director of global automotive at J.D. Power, said, “Supply chain disruption, especially the shortage of microchips, has caused automakers to seek alternative solutions to get new vehicles into purchasers’ and lessees’ hands. In some cases, new vehicles are being shipped without some features installed.”

We’re all used to software updates on our computers and mobile phones. What we’re not used to is hardware updates for vehicles that were delivered without all of the chips installed. Of course, this only applies to chips that provide extra features, not crucial chips for safety or basic functionality.

Between December 2020 and December 2021, average new car prices rose from $41,335 to $47,077, according to Kelley Blue Book. That’s a jump of about 13.9%.

To put this in perspective, prices rose about 6.1% from December 2019 to December 2020 during the first year of the COVID-19 pandemic, which was still a big jump compared to prior years. The average manufacturer’s suggested retail price for a new car rose just 1.7% from December 2018 to December 2019 before the pandemic began.

Used car prices have followed a similar trend. According to the CarGurus Index, average costs rose from $22,718 in December 2020 to $30,445 in December 2021 — an increase of 34%. It was a good time to buy a car in 2020, but it’s not such a good time right now.

New Car Costs Leveled Off in 2022 … Mostly

In the first half of 2022, the increase in the average cost for new vehicles began to level off. Average costs for new cars have fluctuated month-by-month but have remained expensive. Unfortunately, prices crept up again at the end of 2022 as Kelley Blue Book recorded an all-time-high average price of $48,681 for new vehicles in November.

Used Car Costs Fell at the End of the Year

According to the CarGurus Index, used car prices started off 2022 around $30,500 on average. That price stayed between about $30,300 and $30,800 for most of the year. But when autumn came around, prices began to fall. The index shows the average cost dropped in September and dipped below $29,000 in December. If this trend of falling prices continues, 2023 could be a good time to buy a used car.

Not All Vehicles Are the Same

According to Kelley Blue Book’s 2021 report, much of the average cost increase in 2021 came from higher prices for luxury vehicles and a shift toward buying trucks, SUVs and vans over cars. Standard sedans accounted for 22.7% of car sales at the end of 2021, which was down from about 30% at the end of 2018.

Below are several vehicle segments with their average costs in December 2021 and the change from the prior year.

Source: 2021 Kelley Blue Book report

It Might Be a Good Time To Sell or Trade In Your Car

Since costs have risen so much in the car market, you may find that your current vehicle is worth more than it was a few years ago. Car dealers with low inventory may pay you a pretty penny to take your car off your hands. The flipside is that you’ll pay a high sticker price if you want to get a new model right away.

If you began a lease before prices ran up to record highs, it might be a good time to buy out your lease. The car dealership or leasing company set the buyout price when you began the lease, but your car may be worth more now. This means you can pay less than market value for your leased car to purchase it.

In March 2022, the Federal Reserve began increasing the federal funds rate to combat inflation. This is the rate banks pay to borrow money from one another, and it influences other types of loan rates in the marketplace.

As of its December 2022 meeting, the Federal Reserve is targeting a rate range of 4.25% to 4.5%. The previous rate range had been 0% to 0.25% for most of the past two years. Below, you can see how the federal funds effective rate (the median rate banks charge one another) changed between December 2017 and December 2022.

Federal interest rates are out of your control. The Federal Reserve announces interest rate hikes or pullbacks from time to time, so you can use that information to decide if it’s a good time to buy a car or if you should wait a few months to see how rates pan out in 2023.

Beyond wider economic conditions, it may or may not be a good time for car buying depending on your situation. As you shop around, consider the following factors to decide if it’s a good time to buy a car.

Average Vehicle Costs

One of the first things to consider when deciding if it’s a good time to buy a car is average vehicle costs. You can search for industry reports like the ones we’ve used above. You can also use car value estimators from resources like Kelley Blue Book or Edmunds.

With this option, look up your desired car model and compare the value online to the prices you see from dealerships. If you notice a large markup, it’s probably not a good time to buy a car.

Average Loan Rates

If you want to take out a loan to pay for a new or used vehicle, be aware of how average loan rates have been moving. Your rate will influence your payment and how much car you can afford overall.

According to Experian’s Q3 2022 State of the Automotive Finance Market report, the average rate for a new-car loan was 5.16% in the third quarter, up from 4.09% at the same time in 2021. The average used-car rate rose from 8.12% to 9.34% during the same period.

Your Credit Score

Your credit score has a huge impact on the interest rates and loan options lenders offer you. If your score is 661 or above, you’ll be able to work with most lenders and find reasonable terms. If you have a score from 501 to 660, it will cost more to borrow money, and not all lenders will work with you. With a score below 501, you may need to find lenders that specialize in bad-credit auto loans or make a larger down payment to get more favorable terms.

Average Loan Rates by Credit Score

While auto loan rates are influenced by the market, they vary widely depending on a borrower’s credit score, as you can see below.

Source: Experian Q3 2022 State of the Automotive Finance Market report

What To Absolutely Avoid

Sometimes you need a vehicle right away, even if you don’t have good credit. You can likely find some sort of loan agreement no matter your situation. This is because an auto loan uses the vehicle as collateral in case you don’t repay the loan. However, there are some situations you should try to avoid if you want to save money.

Buy-Here, Pay-Here Dealerships

Many dealerships — known as buy-here, pay-here dealers — offer in-house financing for bad-credit borrowers. These loans are often expensive and not the best options for your finances. Part of this is because this pool of borrowers has a higher rate of default, the lender compensates for that with higher interest rates.

Very High Interest Rates

In general, it’s a good idea to avoid interest rates above 10% for new cars and 15% for used cars. A $10,000 loan with a 10% APR over 60 months would cost you $2,748.23 in interest, while the same loan with a 15% rate would cost you $4,273.96.

Loan Terms Beyond 72 Months

Even with decent monthly payments, you should avoid auto loans that last beyond 72 months. The longer your loan term, the more you’ll have to pay back. You may even become upside down on the loan (owing more than your car is worth). This can make it harder to sell your car. It can also cause a headache if you total the vehicle and don’t have gap insurance, which pays the difference between your loan balance and your insurance payout.

Considering vehicle prices are still inflated and loan rates may be on the rise, it’s not the best time to buy a car. However, auto prices may continue to level off during the rest of the year, which would be a good sign for car buyers. Our advice is to wait while you keep your eye out for car deals that may come up.

Our Recommendations for Auto Loans

If you’re in the market for a new or used vehicle, we recommend comparing auto loan options. Comparison sites like myAutoloan and Autopay give you access to multiple loan offers so you can find the best car loan rate available. And getting prequalified online is useful for negotiation if you plan to get financing through a dealer.

MyAutoloan: Best Low-Rate Option

MyAutoloan works with a network of lenders to provide auto purchase and refinance auto loans along with lease-buyout loans. The provider can connect you with up to four lenders with one application.

Keep reading: myAutoloan review

Autopay: Most Well-Rounded

Autopay is another auto loan comparison website with low rates, especially for borrowers with the best credit. But if your credit isn’t perfect, that’s OK too. Autopay has a varied network of lenders, so it can work with people who have poor or no credit.

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.

Here are the factors our ratings take into account:

• Reputation: Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
• Rates: Auto loan providers with low APRs and high loan amounts scored highest in this category.
• Availability: Companies that cover a variety of circ*mstances are more likely to meet consumer needs.
• Customer experience: This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness, friendliness and helpfulness of each warranty company’s customer service team based on our shopper analysis.

Our credentials:

• 300+ hours researched
• 25 companies reviewed
• 2,000+ consumers surveyed

*Data accurate at time of publication.