Getting the keys to your new car can give you all the feels, whether it’s your first time buying a car or it’s time to upgrade. Unfortunately, since the COVID pandemic back in 2020, the experience of purchasing a new vehicle hasn’t been quite the same.
While some car brands are seeing inventories return to pre-pandemic levels, others are still struggling with supply. These issues, coupled with inflation and high interest rates, have many customers faced with the fact they need to pay over the manufacturer’s suggested retail price (MSRP) to get a new vehicle.
The price increase doesn’t mean you can’t get the car of your dreams, but you’ll have to do a little more research before heading to the car lot. In this article, we’ll make sure you understand MSRP and the potential pitfalls of going above it.
What Is MSRP?
The manufacturer’s suggested retail price (MSRP) represents the price the manufacturer recommends or suggests for selling a new vehicle to consumers. It’s basically the starting point for dealerships, manufacturers, and consumers to price negotiations. While the MSRP provides a suggested price, the actual selling price can vary due to factors like:
- Market demand
- Dealer markups
- Discounts
- Incentives
- Negotiation skills
The Dangers of Paying Over MSRP
While it may make sense for some people to pay above MSRP to get a new vehicle, there could be long-term implications. Please consider the following before spending too much money on your next vehicle.
Depreciation
No matter how much someone is willing to pay for a new car, they will ultimately have to deal with its depreciation. Depreciation is how much value something loses over time.
Although estimates vary, many cars can lose up to 10%- 15% of their value every year. In addition, Ramsey Solutions estimates that a car depreciates by 9% in value as soon as someone drives it off the lot!
Paying above the MSRP does not directly affect depreciation, but the buyer loses the premium that was paid because, in most cases, they simply won’t be able to recoup it when reselling or trading in the vehicle.
Limited Financing Opportunities
Even though you may want to offer more than the MSRP, you may not be able to do that if a lender is involved. Since auto loans use the vehicle as collateral, i.e., something of value the lender can seize if the borrower defaults on the loan, lenders typically only let you borrow up to the vehicle’s market value.
If you find yourself in this situation, one alternative could be to take out an unsecured or non-collateralized personal loan. You can use a personal loan to buy a car or anything else, and unlike auto loans, unsecured personal loans do not require collateral.
Upside Down on Your Loan
If you pay more for a vehicle than it’s worth, you may end up upside down on your loan, and that’s not where you want to be. Being upside down is when a borrower owes more money to a lender than the asset is worth.
Being upside down on a loan is not a place you want to be. If you were in an accident or sold the vehicle, there would be a gap between what you receive from the insurance proceeds or a buyer and what you still owe to the lender.
Insurance Won’t Cover What You Paid
If your vehicle is involved in an accident and is totaled, your insurance carrier may likely only pay you for the car’s current market value. Again, this creates a situation where you owe your lender more than the insurance proceeds provided.
You May Sacrifice Your Other Financial Goals
To pay above MSRP, you’ll have to pull those extra financial resources from somewhere. This could mean reducing retirement contributions or your monthly expenses. You’ll have to ask yourself if those sacrifices are worth paying more just to have the vehicle you want. Make sure this decision aligns with your budget and have other car options in mind, just in case.
The Bottom Line
Amid the current challenges in the car-buying market, where paying over the Manufacturer’s Suggested Retail Price (MSRP) is common due to supply chain disruptions and other factors, it’s important to consider the potential drawbacks. Paying above MSRP doesn’t shield your investment from depreciation, limits financing options, and can lead to an “upside-down” loan.
Source:
https://www.bankrate.com/insurance/car/understanding-car-depreciation/
https://www.ramseysolutions.com/saving/car-depreciation
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of techbullion or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
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