BUYING GUIDE.
This week, Ford Motor (F: 10.00, +0.01, +0.10%) reported its first profitable quarter in North America in more than four years, and new monthly sales suggest the firm is not only benefiting from cost cutting but also a pickup in demand for its cars and trucks. The auto maker said October sales rose 3% over the year-ago period.The most optimistic interpretation of Ford’s results is that the beleaguered auto industry has finally found its way. But the scope of the rebound remains to be seen. Ford, which posted a third-quarter profit of $997 million, is the only auto maker of the Big Three that didn’t file for bankruptcy protection this year, and its turnaround plan has shown more signs of success than those of Chrysler and General Motors.
One thing is certain: The auto industry is changing, and those changes will have a real effect on the decisions consumers make when buying a car. For example, if Ford’s sales continue to rise, the company could end up raising its prices, as well, says Efraim Levy, an equity analyst who covers Ford at Standard & Poor’s.
More broadly, the retail car market has grown less consumer-friendly in the past few months. The cash for clunkers program helped remove excess inventory from dealers, and financing remains tricky as credit is still tight.
Still, savvy consumers have some options. Here are five tips to get the best deal on a car right now.
Wait until December
Unless you’re in a rush to buy a car, you’re better off waiting until the last month of the year, when dealerships will try to unload their old inventory with new incentives.
Right now, dealers have some breathing room because the government’s cash for clunkers program boosted sales and reduced inventory. Auto makers also scaled back production by almost 50% during the first half of the year as consumers stopped buying cars, says Sophia Koropeckyj, a managing director at Moody’s Economy who follows the auto industry. (They are now increasing their inventory again, albeit slowly.)
The upshot for consumers: Dealerships are now offering fewer incentives, like discounting and cash back. (One of the factors that lifted Ford’s third-quarter earnings was that the company relied less on incentives, which erode profits, says Koropeckyj.)
By December, dealerships will be under more pressure to make room on their lots for new models, so they’ll be more likely to offer incentives to push out the old ones.
Improve your credit score
To get approved for the most affordable car loan, borrowers will need a FICO credit score of at least 750, says Koropeckyj.
Of those with near prime credit – a FICO score between 620 and 750 – around 70% will be approved for a car loan. But just 20% of consumers with a FICO score lower than 620 will qualify. Consumers who have less than prime credit are typically required to make a larger down payment and end up with a higher interest rate on their loan.
Car loans were hardest to get at the end of 2008, when the credit crunch was in full effect, says Koropeckyj. Since the summer, loans are starting to become more accessible as the credit market has loosened a bit. JPMorgan Chase (JPM: 41.67, +0.14, +0.33%) auto originations rose 30% in the third quarter from the second quarter and 82% from the year-ago period.
Don’t rely on used cars for value
We typically associate used cars with cheap prices, but many used cars for sale are appreciating in value. That’s because used car inventory isn’t rising; consumers are holding on to their cars for a longer time. (On average, consumers keep their cars 10 months longer than they did in 2002, says Lonnie Miller, the director of car industry analysis at R.L. Polk & Co., an automotive research company tracks vehicle ownership trends.)
Demand for used cars is also rising, as fewer consumers can afford to buy new ones. With reduced supply, prices are rising. From December 2008 through September 2009, used car prices are up around 21%, according to Manheim Consulting, which tracks used car data.
Consider which models are gaining popularity
In 2004, trucks (including SUVs and minivans) dominated the market, making up about 58% of new vehicle sales. But recent concerns over fuel costs have helped spark interest in smaller cars. Today, around 52% of new vehicles sold in the retail market are passenger cars, including sedans and subcompacts.
The dip in truck sales follows volatile gas prices and declining demand from construction companies and small businesses that were hit by the recession.
Crossovers, vehicles that look like SUVs but have a car platform, have seen the biggest jump in sales so far this year; through September, they’re up 21.6%, Koropeckyj says. Subcompacts were a close second; sales are up 20.8% for the same period.
Buyers should keep in mind that as a particular model becomes more popular, dealers may have less motivation to offer competitive pricing.
Of course, demand for specific models will vary depending on the location. For example, in Texas and Wyoming, a heavy truck market still exists, Miller says.
Compare buying vs. leasing
Consumers who are choosing between leasing and purchasing a new car should check the vehicle’s residual value, or what the car will be worth when the leasing period ends or the loan is paid in full.
With a purchase, the key is to have a loan balance below the value of the car you’re driving. And unless you plan to drive the car until it gives out, consider its future resale value, taking into account roughly the number of miles you’ll drive it every year.
Those who lease should confirm their monthly payment isn’t inflated to cover losses the dealership risks incurring on the resale value of the car. Also, make sure you’re purchasing the right amount of miles upfront; leases typically last three years and cover a fixed number of miles. Drivers who surpass their limit will pay extra.
One advantage to leasing is that the car will require fewer repairs during its first three years on the road, and standard maintenance, like oil changes and tire rotation at the dealership, doesn’t come at an additional cost, Miller says.
However, leasing offers are harder to come by than they were last year. In 2008, leasing accounted for approximately 21% of new vehicle sales in the U.S., according to Moody’s Economy.com. So far, leasing accounts for just 15% of 2009 sales. Much of the leasing volume was driven by Chrysler and General Motors, but their lending arms (Chrysler Financial and GMAC Financial Services) stopped offering new leases when the companies filed for bankruptcy protection.
Now, leasing options are most popular for luxury vehicles, in part because they retain their value after the leasing period has expired; that means dealerships have a lower risk of losing money, Koropeckyj says.
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