How New Car Prices Affect the Economy


New Car Prices Affect

Buying a new car is an important milestone for many young people and families. Not only is it a marker of financial success and a status symbol, buying a new car is also an important decision because it changes the choices available to the owner. A person with a car can apply to more jobs and see more things that a person without one, and new cars have more features and more reliability than used ones. That means that the price level of new cars available to consumers has a big impact on the national economy.

New cars are more expensive than older ones. There is a big difference between a new car that a consumer has never used and that same car right after a consumer drives it off the lot. The instant the label “used” can be applied to a car, it can lose up to half of its resale value. There are a lot of economic reasons for this, but the important thing is that it creates a fractured market for cars. The market for new cars and used cars is very different. A car is only new once. That props up the price of new cars and sets them apart from others. Part of it is the prestige- there is additional status associated with having a new car.

The price of getting a new car is a cost that many households never pay directly – they use financing. A car loan can bring a car into reach for families or individuals that might otherwise be too expensive if they had to pay cash. However, that car loan can be a significant drain on the finances of the buyer. Car loans cause difficulties because the borrower is borrowing money to pay off the full cost of the car, plus interest. However, the car immediately drops in value and that value will never go up again. This is different from, for example, a house. It is theoretically possible to resell a house later on and use the money from the sale to pay off the remainder of the mortgage. The practicality of this depends on the local housing marketing, of course, but it is certainly possible. There are essentially no cars that work this way – a car loan means paying off a loan on an asset that can’t be sold to cover the debt. So new car prices are so high that they tend to place a lot of households into debt, and the households will be stuck with that debt for several years. On the other hand, there are other, larger sources of long-term debt in the modern economy, like a college degree and a house, so a car loan is not going to have the same budget impact as those other financial decisions.

The positive news is that there are quite a wide range of cars available, and that has not changed. There is a healthy market for new cars on the entire spectrum from economy to luxury car. That makes the new car accessible for a wide range of potential buyers. This is particularly good news for first-time buyers who are likely to have less money to spend on cars than older buyers. The opportunity means that the first car a person or family gets does not necessarily have to be a used one, as long as they are careful about any financing they take on.

The bottom line is that new cars fulfill an important role in the economy, and having a range of new cars available is an indicator of a healthy economy — even though it is easy for buyers to accidentally take on more debt than they can handle when they buy a new car as opposed to a used car. It is important to be careful when buying a new car and be realistic about the budget available.

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