Used-Car Prices Are Falling, but Buying Is Still a Challenge

Our main advice for buyers in this still tricky market is to act quickly and negotiate from an informed perspective. That can make the difference between getting a fair deal or paying too much. Also, it’s never been more important to make sure your credit is in good shape. Interest rates are up, but the most competitive rates are reserved for those with strong credit ratings.

Here are some other ways to make the best of a challenging market.

Consider buying a new car. If you’re looking at newer used cars—models in the 1- to 3-year-old range—you may find that prices are still relatively close to what they sold for new. If you have to borrow money to buy the car, it may be better to find a new car that can qualify you for a lower interest rate, to say nothing of the benefit of a fresh factory warranty. Many manufacturers subsidize financing and may offer interest rates that are much lower than normal to qualified buyers. Check dealer incentives in your area and see what’s being offered. New-car availability is improving, which is a definite plus.

Look at older models. Everything is more expensive, so your budget may preclude used cars on the newer end of the spectrum. Also, prices on older cars have dropped the fastest. If you go the older car route, Consumer Reports recommends looking at models known for reliability. You’re likely to be out of factory warranty territory with an older car, and although you can purchase an extended warranty or service plan, it’s better to save cash for those future expenses if you can. In any case, older used cars will provide better value than more recent models that can be closer in price to new cars. The downside is that if you have to finance the purchase, interest rates tend to be higher on loans for older cars.

Prearrange financing. If you need to finance a used car, be careful. Keep in mind that higher interest rates are going to make it more expensive than it already is. Figure out your budget and get financing based on what you can afford to pay monthly and as a down payment. It’s always a good idea to get financing set up through your bank or credit union before going to a dealership to look at cars. That gives you a baseline against which you can compare the terms of dealer financing, which may or may not be a good deal.

As always, getting financing secured for a private-party sale is a little more difficult. You’ll need to have the funds secured and ready to pay out so that you’re able to buy a car quickly if you find one that’s reliable, fuel-efficient, and meets your other needs.

Cast a wide net. Prices outside your area may be better. You can find a good variety of used models on websites like TrueCar and through CR’s Used Car Marketplace. Expand your geographic search if you need to. Be cautious about casting your net too wide, though. You want to be able to go see the car and test-drive it before signing a sales or leasing contract, especially for used cars. And with the market being as tricky as it is right now, the car you’re looking at might not be there if you have to travel too far to get to it.

Do your research. Whether buying new or used, consult Consumer Reports’ road tests and ratings, looking at reliability, owner satisfaction, and safety.

You want a short list of contenders to test-drive, and even more than before you want a good understanding of the various trim versions and features because you might not find your dream configuration at a dealership. Print material from CR.org and manufacturer websites so that you have it with you.

Buy something reliable. If you can’t get a deal on a used car or are forced to pay a high price to finance one, you may find yourself looking at older models that you wouldn’t otherwise have considered. CR recommends taking any used car to a reputable mechanic to have it inspected. (If the owner or dealer balks at this request, you may be better off looking elsewhere.) You can also consult CR’s predicted reliability scores to make sure you buy something reliable that won’t give you problems later.

Compromise to a degree. If you have to buy an older car or something other than what you originally wanted, some of the features you seek may have been more scarce or unavailable when the car was originally manufactured. Decide which features are absolute must-haves, but be flexible. As always, you’re more likely to find deals among less sought-after models like small sedans and front-wheel-drive SUVs, while larger SUVs and pickups are likely to be more expensive and quicker to sell.

Don’t borrow too much. Put as much money into a down payment as you can afford. That will reduce the amount you have to pay in interest and reduce the chance that you’ll be left hanging as your aging car’s value sinks over the years, particularly with used-car prices still relatively high.

For example, if you have to borrow $15,000 for a used SUV that will be worth less than $10,000 in a year or two, you may end up owing more than the car is worth, an unenviable position known as being “underwater.” If you crash the car or it’s stolen, you’ll still have payments but no car. Cars are depreciating assets in the best of times, but they’re likely to depreciate much more quickly if and when prices come back down to “normal” levels.

Buy back your lease. If you’re coming to the end of your lease, consider buying it back. If you signed your lease before used-car prices began going crazy early in 2021, the contract details—and all the number-crunching to figure out the car’s future value at the end of the lease—will have put the buy-back price well below the current market value. In other words, you can buy your own car for less than you would have if you had to buy it from a dealer.

The results of a nationally representative car-buying survey conducted by Consumer Reports in the spring of 2022 indicate that higher new- and used-car prices have changed people’s buying habits significantly. Fewer people are looking for used cars, more are looking for new cars than in 2019, and more are considering buying a car in a higher price range.

“Consumers realize that used cars are not the great deal they once were, particularly as higher interest rates can actually make them more expensive for those who have to finance them,” says Jake Fisher, senior director of CR’s Auto Test Center.

If you follow news about the used-car business, you may have noticed that wholesale prices—the price a dealer pays—have fallen markedly since midyear. But those decreases have yet to materialize on used-car retail lots, where consumers are seeing a much slower decline, says Alain Nana-Sinkam, senior vice president for business development at TrueCar, a firm that tracks the automotive industry, and a CR partner. The long and the short of it, he says, is that the prices you’re seeing used-car dealers charge now are based on the wholesale prices they paid for them, often a month or more ago.

Pat Ryan, CEO of CoPilot, an app that helps car buyers keep track of prices and find the best deals, says that despite lower prices, used cars are no more affordable now than they were at the peak of the price hikes because of higher interest rates. But with prices falling more rapidly on older models, you’re more likely to find a deal on one than you would on a 1- to 3-year-old car. Demand for used vehicles on the newer end of the spectrum has increased in recent months, he says.

“Given that used-car prices still have a long way to fall in nominal terms, our best advice—whether you’re taking out a loan, trading in, or buying with cash—is to continue to hold off on buying a used car if you can,” he says.