US automotive demand dropped significantly during outbreak
New-vehicle sales in the U.S. look to be down around 50% in April 2020 compared to the year before. Considering how the rest of the economy has faired, this is not surprising. In fact, given that almost all dealerships had to completely shut down, it's surprising that the demand held up as well as it did. Airlines, for comparison, saw their demand drop by 75-90% in some markets. That's the bad.
Now the good. Low demand has left dealers with extra cars on their lots that they don't want to hold on to - especially as completed leases get returned - and are willing to offer some great deals.
A few of the big car deals:
Kia is offering 120 days until first payment and 0% financing
<Kia Pandemic Offer>
BMW is offering 90 days until first payment and significant financing savings <BMW Pandemic Offer> .
Ford is offering to cover the first 3 payments and then allow 90 days deferral <Ford Pandemic Offer> .
GM is offering 4 months deferral and 0% financing for well qualified buyers <GM Pandemic Offer> .
There are many other deals out there as well if you're interested, but this is sufficient to prove the point. Auto dealers are looking for ways to move cars quickly. The big question is, should you take advantage of these offers?
Does it make sense to take advantage?
While great financing options and nice deferral options look enticing, they don't deal with the fact that the world is in a state of flux and no one knows what will happen in the next few years. Crisis definitely breeds opportunity though and if you're in the right situation this could be a big money saver for you. To clarify things a bit I'd like to split things into two groups: 1) People who need a car now and 2) People who don't need a car but could upgrade.
1) I need a car now
Being in this category makes things a bit simpler. If you need a car to perform your day to day responsibilities like going to work or taking care of family, the choice becomes which car to buy, rather than whether to buy a car. I won't go into too much detail here as there are many other resources that can help with that (I'm writing something for this and will update soon). The main thing to be aware of is not to let yourself get 'upgraded' to car that is overly expensive.
Edmunds data shows that zero-percent deals made up almost 26 percent of all financed purchases in April. This is up from less than 5 percent in March and less than 4 percent in February. A zero-percent loan that stretches out for seven years might seem like a way to get free money, but it also commits you to nearly a decade of payments on a car that will likely last about that long. Not only does this put you in a position to end up with a more expensive car - beware of dealers only telling you the 'per month' price rather than total price - but it also will likely put you upside-down in your loan for almost the entirety of the loan. That means that if you sell your car next year, you may actually have to pay to get rid of it!
The best way to avoid this is to pick a car or a few cars that are in your price range before you go look at them. Then, take advantage of the offers to get your desired car cheaper than normal rather than buy a more expensive car. My personal opinion is that you should never finance a car such that you're likely to be under-water on it. That means sticking to a 3-4 year loan. With a 0% financing offer that can still save you some serious cash!
2) I don't need a car but could upgrade
Being in this category involves much more personal preference than the previous category. If you currently have a car that works well and isn't in need of an upgrade, it may make more sense to keep your available cash for other necessities and a rainy day fund. As such, you need to take into account your personal financial situation and job stability throughout the pandemic, but these offers could still be a good option in certain cases. Specifically if you have good enough credit to take advantage of the financing, and aren't likely to default on the loan should things continue to be shut down.
Although COVID-19 has severely hampered auto demand, not everyone is reducing their auto loan inquiries in the same manner. Data shows that people with good credit ratings are less interested in starting a new auto loan during the pandemic than people with low credit scores. The CFPB's data shows that people with low credit scores (here defined as deep subprime, or a credit score below 500, and subprime, which is between 500 and 600) saw about a 50 percent drop in inquiries from the first to the last of the month. But people with higher credit scores (a super-prime rating, or over 780) instead saw a 67 percent drop. This data suggests that people in lower credit tiers may be applying for auto loans more than those in higher brackets even though the offers are less attractive for them.
Without the credit score to get 0% financing, many of the offers become more of a deferral option which you still have to pay, just at a later date. This could make it even more difficult to cover the loan once that deferral period is up. As such I would use those very sparingly.
If you do have the credit score to get the best financing offers, this could be a good time to replace your old vehicle if you were already on the edge of doing so. Upgrading now could bring you great pricing options as well as the 0% financing. Depending on the price of the vehicle this could save you thousands over the life of the vehicle. Keep in mind: the same advice from above about keeping the total vehicle cost within your allocated budget applies here. If you follow that advice you could find yourself with a nice new car for a fraction of what it would have cost last year!
EDIT: New data to back my suggestion not to overextend yourself: Negative Equity in Cars is Surging
I hope this helps you in your car journey, and feel free to drop some comments or questions below and I'll be happy to answer them!