Memorial Day weekend may be a great time to buy a car: 5 things to know before you shop around

by Nia Abby

It will come as no surprise that the automobile market has not been spared from the economic damage caused by the coronavirus lockdown. U.S. car sales hit a 30-year low in April, with sales of new cars and trucks down 53% from the previous year, according to automotive research and information website Edmunds.

That’s undoubtedly trouble for dealers and manufacturers alike, as companies like Nissan (–55%), Toyota (–44%), and Ford (–39%) saw huge declines in sales from March to April. But depressed car market conditions also present an opportunity for consumers, who can take advantage of everything from declining vehicle prices to unusually accommodating financing terms.

Here are some things to know if you happen to be in the market for a new car in the time of COVID-19.

Used car prices have fallen steeply—but could rebound soon

Resale values have taken a dive as the pandemic has led to a slowdown in sales and an increase in inventory sitting on lots. Used car sales fell more than 34% year over year in April, according to wholesale vehicle auction firm Manheim, which reported that its auction inventory was up 40% by mid-April.

That means a corresponding decline in used vehicle prices, with wholesale used car prices falling more than 11% in April, according to Manheim. Wholesale prices rebounded nearly 6% through the first half of May, however, indicating that market conditions could be improving as the U.S. economy gradually restarts.

Still, Edmunds forecasts that retail values for used vehicles will take a hit as the economy presumably remains sluggish over the course of this year. It pointed to a 10% decline in the value of three-year-old vehicles in 2008, during the Great Recession, as a comparison. “Recessions aren’t kind to used [car] values,” notes Ivan Drury, Edmunds’s senior manager of insights.

Used car trade-in values have also taken a hit

Unfortunately, depressed used car prices also mean a corresponding decline in trade-in values. Edmunds notes that car owners looking to trade in their vehicle for a new purchase may be surprised at the offers they receive compared with list values.

In April, a record 44% of new-vehicle sales featuring a trade-in had negative equity on the existing car loan, compared with only 33% in April 2019, according to Edmunds. The amount owed on those “upside-down,” or underwater, loans climbed to an all-time high of $5,571 last month, compared with $5,036 in April of last year.

New-car buyers may find good deals this Memorial Day

New-car values are altogether more resilient than those of their secondhand counterparts, but that doesn’t mean there aren’t good deals to be had. With shelter-in-place orders gradually lifting across the country, dealerships are gearing up with the usual Memorial Day deals—and this year, those deals may be particularly generous.

“We’re seeing far more generous incentives and deals out there than we typically would for Memorial Day weekend,” notes Jessica Caldwell, Edmunds’s executive director of insights.

The best deals will likely be found for trucks and SUVs. On 2019 model year vehicles, Edmunds says it is seeing average discounts of 17% on full-size trucks, 14.4% on midsize SUVs, and 16.3% on subcompact SUVs compared with the manufacturer’s suggested retail price. Discounts are slightly less on 2020 model year vehicles, to the tune of 13.4% on full-size trucks, 11% on midsize SUVs, and 13.5% on subcompact SUVs.

Auto loans are cheaper than ever

Given the auto market’s struggles, lenders are offering historically generous terms in an attempt to draw prospective buyers to the lot. 

Zero-percent auto loan deals hit a record level in April, representing nearly 26% of all financed purchases in the month, according to Edmunds. By comparison, 0% deals accounted for less than 5% of all financed purchases in March. In total, the average APR on new financed vehicles fell to 4.3% in April, compared with 5.8% in March and 6.3% in April 2019.

But the influx in lower-interest loans could be driving some buyers to make riskier purchases financed by longer-term loans. Edmunds notes that the average loan term length hit a record 73 months in April—with 81% of car buyers who financed their purchase agreeing to a term between 67 and 84 months—while the average down payment fell to $3,159, the lowest seen since July 2011. Buyers are also using cheaper financing terms to buy more expensive cars; the average amount financed for a new vehicle climbed to a record high of $37,681 in April.

More lenders are offering forbearance on existing auto loans

For those who have been hit hard by the pandemic and the associated economic lockdown, it’s never been easier to have your outstanding loans put in forbearance for a certain period of time—allowing you to delay payment until circumstances improve.

While the federal government has already moved to put government-backed mortgages and federal student loans into forbearance for up to six months, auto loans unfortunately don’t fall under the CARES Act’s forbearance provisions. Still, many auto lenders have taken steps to alleviate the burden on their borrowers.

Ally Financial, for instance, is among those offering payment deferrals of up to 120 days for those impacted by COVID-19. Though interest will still accrue on the borrower’s balance, Ally will not charge late fees, and won’t count the deferral toward the number of extensions borrowers are allowed in the future.

Automakers are also taking action through their own customer financing arms. GM Financial is waiving late fees on loans incurred between March 1 and April 30; Honda and Acura are offering 60-day payment deferrals and waiving late fees; and Kia is offering payment deferrals for up to 90 days.

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