3 Reasons to Skip Buying a New Car This Tax Season
While it is always tempting to take that tax return and buy a new car, that may not be a great idea in 2023. When broken down, there are three reasons to skip buying a new car this tax season. Market constraints and economic woes are common problems but should mostly resolve before the end of the year. It may take a bit of patience, but waiting beyond tax season to buy your next car may save you both money and headaches.
1. Interest rates are still high
While higher interest rates have affected home buyers, those seeking auto loans also see a higher price for borrowing money. Interest rates on used cars are exceptionally high right now. That makes buying a new-to-you vehicle a difficult proposition.
Loans with high-interest rates often leave buyers upside down on their auto loans. That is an uncomfortable place to be, especially if something happens to the vehicle. If anything goes wrong, owing more on the loan than the car is worth is a recipe for big financial problems. Until interest rates return to normal, it’s probably best to skip buying a new car this tax season.
2. Used car prices are falling but still elevated
While the used car market cooled slightly in January, prices are again trending upward. Worse yet, buying a used car with inflated value isn’t just bad for today. When used car values fall, they’ll take the value of your recently purchased car with them. That means accelerated depreciation, increasing the difficulty of trading or selling the vehicle unless the loan term is nearly finished.
For example, consider buying a used car that is worth $20,000 right now. In six months, the market has cooled, you’ve added some miles, and that car is now only worth $13,000.
With a five-year loan at 7% interest, you would still owe $19,800 of the principal on a vehicle worth considerably less. In fact, even if depreciation bottomed out at that $13,000, it would still take nearly three years for the payoff amount and vehicle value to equalize.
Combine the elevated car values with high-interest rates, and it’s clear that the smart move is to skip buying a new car this tax season.
3. Low new car inventory means less opportunity for discounts when buying a car this tax season
While used car values grab most of the headlines, skipping buying a brand-new car this tax season is also beneficial. New car inventory is improving but still limited compared to pre-pandemic years. That means fewer discounts and special pricing opportunities, so there is little incentive to purchase new cars during tax season.
If a new car is on your horizon anyway, put your tax return in a safe savings account for now. Waiting for year-end deals to get a new car at a better price may be beneficial. Even better, both interest rates and used car prices are projected to fall until then, according to NerdWallet. That means a better car market for everyone, and better deals on both new and used cars.
Wait for a cooler market and skip buying a new car this tax season
Whether you’re waiting for interest rates to fall or car prices to return to normal, it may be prudent to skip buying a new car this tax season. As the year rolls on, both borrowing rate and car values should decrease, improving the auto buying market. For many, waiting beyond tax season and into the latter part of 2023 may be a wiser move than buying a new car immediately.