Due to soaring car prices, insurance rates, and an auto loan interest rate reaching 7%, U.S. consumers are shifting toward compact cars priced in the $20,000 to $30,000 range. This trend reflects how high inflation on vehicles and disrupted supply chains following the COVID-19 pandemic are affecting buyers' choices and financial capacity.
According to a report from automotive information platform Edmunds on the 24th, 48% of new car buyers surveyed expressed a preference for vehicles priced under $35,000, while 14% set their budget limit at only $20,000. Typically, American consumers favor larger family vehicles or pickup trucks, but the current wave of “carflation” is driving them to more affordable, smaller models.
Some consumers are even opting out of buying new cars altogether, turning to used cars instead, as prices in the used car market have somewhat stabilized after spiking during the pandemic. The semiconductor shortage, increasing raw material costs, and production cost hikes for both new and used cars have contributed to the price surge.
Meanwhile, major automakers are reducing production of less-profitable compact sedans and hatchbacks, focusing instead on higher-margin SUVs, pickup trucks, and premium models. According to Fox Business, the average price of a new car this year stands at $47,000, marking a 20% increase compared to pre-2020 prices. Additionally, with an average auto loan rate of 7.1%, new car buyers are facing monthly payments of around $737 over a six-year period. Insurance premiums have also surged by 38% over the past two years, weakening consumer purchasing power further. From the onset of inflation in 2021, insurance rates have risen by 50%.
Fox Business highlighted that consumers are shifting from luxury models to more economical car options due to rising costs of essential living expenses like groceries and rent. This shift has boosted sales of the Chevrolet Trax, a compact SUV priced at around $20,400, making it the best-selling small SUV in the U.S. By September, Trax sales had reached 149,762 units, a 36.9% increase over the total 109,382 units sold in 2022.
The popularity of the Trax is also evident in Canada, where sales through September doubled to 13,234 units compared to 6,469 units for the entire previous year. Mike MacPhee, Chevrolet's sales operations director, reported that Trax sales have doubled year-over-year.
Kevin Roberts, Market Intelligence Director at car shopping site CarGurus, noted, “Sales growth this year has occurred mainly in the affordable segment as economic uncertainties, high vehicle prices, and auto loan rates prompt consumers to be more cautious in car purchases.”
Experts suggest that if the Federal Reserve (FRB) initiates successive interest rate cuts, a reduction in auto loan rates may shift preferences back toward larger vehicles. Charlie Chesbrough, Chief Economist at Cox Automotive, commented, “If auto loan rates begin to fall, we might see consumers returning to larger vehicles.”
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