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Access to Personal Cars Remains Essential Despite Rising Costs
Personal Cars Essential for Middle-Income Households
A recent survey conducted by Santander Bank found that 78% of middle-income households rely on a vehicle to commute to work. These households, which earn between $47,000 to $142,000, are willing to make financial sacrifices to maintain access to cars. For example, 61% would give up dining out, while 48% would pass on vacations and entertainment.
Cost Prioritization When Shopping for Cars
In the face of rising auto payments and ownership costs, 48% of survey respondents prioritize cost over practicality, comfort, and performance when shopping for a new car. This is a significant increase from pre-pandemic years. Factors like maintenance and fuel costs are also being taken into account.
Increasing Cost of Purchasing Cars
The overall cost of purchasing a car is increasing, largely due to rising interest rates. The average rate on a new car loan is at 7.2%, the highest it has been since the Great Recession. Additionally, inventory issues have contributed to the high costs of cars.
Lengthening Car Loan Duration
As a way to cope with the increasing costs of cars, some car shoppers are opting for longer car loans. The average length of car loans has increased from 5 years to 6 or 7 years. While this reduces monthly payments, it also means paying more for the car overall and potentially owing more than the car is worth.
Leasing Cars vs. Buying
In the past, leasing luxury cars was seen as an affordable way to drive a new vehicle. However, the combination of high residual values, lack of discounts, and high interest rates has made leasing less attractive. Consequently, more customers are choosing to finance luxury cars instead, resulting in higher monthly loan payments.
Waiting for Prices to Cool Down
Despite the persistent demand for cars, some customers are choosing to wait for prices to cool down before making a purchase. A Santander survey found that 41% of respondents would put off a vehicle purchase if prices remain elevated. Additionally, there is an uptick in the age of trade-in vehicles, indicating that people are holding onto their cars for longer and waiting for better deals.
Potential Cooling of the Market
Experts suggest that the market for cars could begin to cool later this year, depending on supply and demand. If dealers begin to see excess inventory of older models while new models are arriving, there may be more motivation to clear out the old inventory, potentially leading to better deals for consumers.
Conclusion: A "Hot Take" on the Impact of Rising Costs of Personal Cars for New Businesses
The rising costs of personal cars can have significant implications for new businesses looking to enter the automotive industry or provide related services. While access to personal cars remains essential for middle-income households, the financial sacrifices individuals are willing to make to maintain ownership indicate the importance of affordability in this market.
Opportunities in Affordable Car Solutions
With a growing prioritization of cost over other factors when shopping for cars, there is an opportunity for new businesses to enter the market with affordable car solutions. This could include innovative leasing options, car-sharing platforms, or affordable financing models tailored to the needs of middle-income households. By addressing the rising costs of ownership, these businesses can tap into a significant customer base actively seeking more economically viable options.
Seizing the Shift Away from Leasing
The declining attractiveness of leasing luxury cars due to high residual values, lack of discounts, and interest rates opens up another avenue for new businesses. Luxury car financing options that offer competitive rates and more favorable terms could be an appealing proposition for customers looking to finance their purchases rather than lease. New businesses that can provide these financing solutions could cater to the growing demand for affordable luxury vehicle ownership.
Innovations in Car Trading and Upgrading
As customers are increasingly choosing to wait for prices to cool down and holding onto their cars for longer, new businesses can explore opportunities in the used car market. By providing efficient and trustworthy platforms for car trading and upgrading, these businesses can facilitate the exchange of older models for newer ones. Offering competitive trade-in values and streamlined processes can entice customers to upgrade their vehicles even in a cost-conscious environment.
Anticipating the Cooling of the Market
New businesses that closely monitor market fluctuations and anticipate the potential cooling of the car market can gain a competitive edge. By staying updated on supply and demand trends, these companies can position themselves to take advantage of excess inventory of older models. By offering attractive discounts and promotions, they can attract price-conscious customers looking for better deals and capitalize on the market dynamics.
In conclusion, the rising costs of personal cars present both challenges and opportunities for new businesses entering the automotive industry or providing related services. By understanding the shifting preferences of consumers and developing innovative solutions that address affordability concerns, these businesses can carve out a niche in the market and thrive in the face of rising costs.Article First Published at: https://www.cnbc.com/2023/07/28/what-american-drivers-are-doing-to-make-car-ownership-possible.html