Since I opened up my Instagram Stories and IGTV to financial questions, I recently got asked, “Is now a good time to buy a vehicle, with dealerships offering 0% financing due to the coronavirus pandemic?”
This is a logical question, because several automakers like General Motors, Ford, and Fiat Chrysler Automobiles (FCA) have launched long-term 0% financing offers. Other automakers are offering payment deferral programs, so that buyers don’t have to start making car payments until several months after taking delivery.
While this may seem like a simple question, the answer is complex. As you’ll see, there are four major factors you’ll need to consider. Let’s dive into the details below.
Coronavirus and Cars
The coronavirus pandemic is continuing to escalate, with the U.S. now leading the world in both case count and death count. On a global basis, Johns Hopkins University reports there are 1,970,879 confirmed cases and 125,678 deaths.
The pandemic has also created an economic recession, sent the stock market on a roller coaster and plunged Bitcoin prices off a cliff.
Furthermore, Americans in at least 42 states are being ordered to stay home and 22 million Americans have filed for unemployment since President Trump declared a national emergency in March. 5.2 million of those claims were submitted over the last week. The pandemic has also led to the bipartisan approval of an unprecedented $2.2 trillion stimulus bill.
With all of this this confusion, many people are wondering, can you buy a car and should you?
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Factor #1: Is there a need?
First of all, you’ll need to consider if your desire for a new car is being driven by need or by greed.
Meaning, do you actually have a need for a new vehicle? Or, are you getting lured in by the offer for zero percent financing and dealership incentives?
Before taking any action, ask yourself, do I have a genuine need for a new vehicle? Or, am I being influenced by persuasive marketing campaigns?
As an example, if I offered you great terms on a potato gun with zero percent financing, would you run out and buy one? The answer is likely ‘no’, because you don’t have a need for one.
In short, never let financing or terms lure you into a large financial purchase. Make sure you have a need.
Factor #: Is the Vehicle an Asset or a Liability?
Next, you have to identify whether buying a car during the coronavirus would be an asset or a liability for you.
For most of us, our vehicles are liabilities, because purchasing, operating and maintaining them takes money out of our pockets.
That’s the definition of a liability. A liability takes money away from you.
In contrast, the definition of an asset is that it puts money in your pocket. It brings money in.
To determine whether a vehicle will be a liability or an asset for you, you’ll need to consider your situation and which way your cash is flowing.
An example where a vehicle could be an asset would be if you need it to get to work or to produce income. This might be the case if you have an older or unreliable vehicle.
Or, if you have a landscaping company, then acquiring a truck might allow you to secure more—or potentially higher end—landscaping jobs. If so, then the vehicle might be an asset. In this case, the question would be, could you bring in more money from using the truck than you would have to outlay to purchase, operate and maintain it?
If so, it would be an asset. If not, it’d be a liability.
For most of us, vehicles are liabilities, but as noted, there are a few exceptions.
Factor #3: Time Decay (Depreciation)
The third factor you’ll need to consider is time decay, also known as “depreciation.”
Depending on the value of your vehicle, it is going to decay in value every single month and every single year.
For example, if you had to choose between two vehicles with the same mileage, but one was constructed in the year 2000 and the other in the year 2020, which would you want? Of course, the answer is obvious. You’d want the much newer 2020 vehicle.
Also, newer and more expensive cars will depreciate more rapidly in value, because they have further to fall. Meaning, there is more room for depreciation with a vehicle valued at $30,000 than there is with a vehicle valued at $5,000.
Typically, most cars depreciate in value by a few hundred dollars per month or a few thousand dollars per year.
Thus, if there is going to be a period of months where you won’t be leaving the house much due to coronavirus lockdowns, then you’ll want to take time decay into account when deciding whether or not to pull the trigger on a new or new-to-you vehicle.
Factor #4: New vs. Used Cars
Finally, there is big a difference between the used vehicle and the new vehicle markets right now.
The used markets is going to be where you will find the greatest opportunities over the next 12 to 24 months.
The reason for this is that there is a going to be a glut of supply in the used car market over the next 6 to 12 months.
Factors driving this are…
- To cut costs during a recession, families with 3 vehicles are going to sell one of them on the used car market.
- With most adults now working remotely from home, families with two adults drivers may also sell a vehicle.
- Families facing financial hardship will liquidate used vehicles for cash.
- Because the public has stopped travelling, rental car companies are offloading tens of thousands of vehicles onto the used car market.
- With thousands of companies going out of business or facing financial hardship, company owned vehicles are being dumped onto the used car market.
In short, the used car market is going to experience a glut of supply at the same time that buyer demand falls off a cliff.
In contrast, when it comes to the new car market, the market forces are more complex.
This is because China is the world’s largest manufacturer of car and automotive parts. Due to factory shutdowns in China during Q1 2020, it is estimated up to one million units of automotive production will not come out of China due to the coronavirus.
Thus, we are going to have lower inventory in the new car market, but of course, there will be lower demand for these vehicles as a result of the sudden economic recession.
Simply put, people won’t want to push tens of thousands of dollars out the door to buy new cars.
Even if people were to finance cars for a few thousand dollars down and a run cost of a few hundred dollars per month, they’d be acquiring a liability. Remember, the definition of a liability is it takes money out of your pocket.
People are not going to want to do that during a market recession.
While we are going to see how the variables within the new car market shake out, it is clear that there will be price suppression and generous room for price negotiation within the used vehicle market.
Things to Ask Yourself Before Buying a Car During Coronavirus
In short, the questions you should be asking yourself about buying a car during the coronavirus are:
- Do I have a need for the vehicle?
- Would it be an asset or liability?
- What is my time decay factor (depreciation)?
- Do I want a new or a used car?
Put simply, for the right people, now might be a good time to buy, but 6 to 12 months from now will likely be better. By this time, you’ll probably be out from the stay-at-home orders and the price of used cars will be further suppressed.
I hope these market insights are helpful and good luck in making your decision!
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