It’s that time of year again where dealers get all itchy to sell cars. The calendar is about to turn over to 2018 and with many dealers stuck with 2017s on the lot, the last thing they want to do is carry that inventory over another year. This year things are even tougher for dealers because of a shift in the market and a glut of used cars coming to market.
Think back to the pent-up demand that started to let loose during the economic recovery from 2013 to 2015. Car sales, particularly in the luxury space, started to pick up nicely. Low-interest rates and enticing offers put consumers in the driver’s seat. Fast-forward a few years later and now you’ve got a problem. A lot of those inexpensive lease deals are over and now those cars are being given back to dealers. That’s leading to a huge jump in used car inventories and putting pressure on used car prices.
Lower used car prices are not good for dealers looking to get you into a new lease. The lower used car prices mean that residuals on those lease deals are going to be lower. The residual value is the pre-determined price you and the dealer agree your car will be worth at the end of the lease term. The difference in the price of the car and the residual is the amount which you end up financing in a lease. If these residual values drop, it makes leasing more expensive.
According to Edmunds, there’s been a dramatic change in the values of 3-year-old cars in 2017 versus the value of 3-year-old cars in 2014. The average 3-year-old car has lost about 35.6 percent of their value in 2017 while in 2014 that drop was only 31.8 percent. That extra 3.8 percent is going to make a big difference in margins.
To make things worse, finance companies all know that interest rates are beginning to tighten a bit. That means these companies are going to want to charge more interest on these deals. That means less attractive deals for the new car market.
That’s the bad news. The good news is consumers looking for used luxury cars can find some fantastic deals out there. With most major luxury manufacturers offering up great extended warranty programs you can find a worry-free ownership experience in a high-end vehicle.
If you’re in the market for a used car, you’re in for a treat. But if you’re looking to trade-in and trade-up like me, you may want to take a backseat.