A common question among car buyers is “Why are cars so expensive?” In December 2018, the average transaction price for a new car reached a record $37,577, according to Kelley Blue Book. The average new car auto loan reached $30,977 in the third quarter of 2018, according to the credit reporting agency Experian. Corrected for inflation and accounting for additional equipment, new car prices haven’t gone up as much as many people think, but that doesn’t prevent the sticker shock.
The truth is, everyone from buyers to banks are to blame for higher average car prices. Automakers are asking higher prices as consumers demand more and more features. Regulators have added thousands to the cost of cars with rules covering safety, fuel economy, and emissions. Lenders have made more money available to borrowers, creating a perfect environment for price inflation.
“Transaction prices have gone up,” says Tyson Jominy, Managing Director of Data and Analytic Consulting for J.D. Power. Their data show an annual increase of two percent per year since the recovery from the Great Recession began.
Though average transaction prices have been trending upward for the last decade, consumers were insulated from the increases for several years because of four factors, according to Jominy. Trade-in values were strong, interest rates were low, incentive spending by automakers was high, and lenders were willing to extend loan terms to lower monthly payments.
“Consumers have actually had it pretty good for many years,” he says.
However, that began to change in 2015 as interest rates began a slow upward march, high-quality used cars started to flood the market and depress trade-in values, incentive spending began to decline, and lenders reached a point where they could not extend loan terms any longer. According to data from J.D. Power, average monthly payments between 2014 and 2018 have gone up by $60. Between 2008 and 2013 they went up just $5.
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There are many reasons car prices are going up. We’ll look at the following topics in this article:
- More Features
- Safety Technology
- Great Gas Mileage
- Car Prices vs. Income Growth
- Improving Quality
- Advertising Costs
- Ownership Expenses
A major driver behind the higher sticker prices on today’s cars is the increasing number of features consumers expect on their new vehicles. We're not just talking about features such as power windows and power door locks replacing cranks and plungers; we’re talking about touch-screen infotainment systems replacing basic audio systems and large alloy wheels replacing steel rims with plastic hubcaps. Leather upholstery, once only found in luxury cars, is now a popular option on many mainstream models.
It’s not just luxury car buyers seeking more features. Even subcompact car buyers can expect automatic climate control and keyless entry. Full-size pickups, once the domain of blue-collar workers, have become rivals to luxury cars in both included features and price. Prices for the most popular vehicle in America, the Ford F-150, range from $28,155 to more than $70,000.
Consumers continue to demand higher and higher levels of engine power. We’re not just talking about 2019 Dodge Challenger Redeyes with 797 horsepower; we’re talking about all segments of the market, from minivans to luxury sports cars. The most powerful minivans on the market will shred their front tires with nearly 300 horsepower. The first minivan had an anemic 86 horsepower.
The 1983 Honda Accord sedan had 75 horsepower from a 1.8-liter four-cylinder engine and sold for $8,514. A 2019 Honda Accord will cost you at least $23,720 and comes with a sophisticated 192-horsepower 1.5-liter four-cylinder turbo. It’s important to note, however, that when corrected for inflation, the 1983 Accord would cost $21,871 in today’s dollars and did not have anywhere near the equipment included on the current Accord.
Nearly every car available today comes standard with power windows and door locks – a couple of the only exceptions are the 2019 Nissan Frontier compact pickup and 2019 Nissan Versa subcompact sedan. Most cars come standard with air conditioning, as well, so the only time you have to open the windows is when you’re in the drive-thru.
The list of included power equipment found on most new cars goes well beyond locks and windows, though. More and more SUVs include power liftgates, and most minivans have power sliding side doors. All but the base trims of most vehicles come with power-adjustable seats.
More Than a Radio
In-car entertainment technology has evolved from simple, cheap radios to sophisticated infotainment systems with large display screens and advanced wireless connectivity. Most cars come standard with the ability to receive satellite radio. More sophisticated models have cellular-based data connections that receive real-time traffic, weather, and navigation information.
An increasing number of vehicles include Android Auto and Apple CarPlay, which bring the functions of your smartphone to the car’s dash. Our article on the best cars with Apple CarPlay can help you find a highly ranked model that includes the technology.
Those electronic systems don’t come cheap. Many also require monthly subscriptions, adding to your total cost of ownership.
Bigger Is Better
Fueled by years of low gas prices, consumers aren’t just demanding longer feature lists; they’re wanting bigger vehicles. In the last decade, there has been a dramatic shift from compact and midsize cars to SUVs and crossovers. According to J.D. Power, sales of cars have dropped to just 27 percent of the market, compared to 40 percent in 2014, as sales of SUVs, crossovers, and pickup trucks have surged. Between 2017 and 2018, the number of new cars that sold for less than $20,000 fell by a whopping 19 percent, according to their market data. There are few SUVs available under $20,000.
Automakers are rushing to the market with dozens of new SUV models, ranging from subcompacts such as the 2019 Hyundai Kona to 3-row family haulers like the 2019 Subaru Ascent. Cadillac recently added the subcompact 2019 XT4 to their lineup. Lincoln, Cadillac, and BMW have all-new 3-row luxury crossovers arriving soon.
There’s no doubt that today’s cars are safer than they ever have been. The engineering and technology to make vehicles safer costs money, though. Many of the advances have been driven by regulation, while others have been driven by consumers.
Nearly every aspect of your vehicle's safety systems is subject to scrutiny by the federal government or other regulators. They dictate everything from the distance between a car's daytime running lights and its turn signals to requiring rear view cameras, stability control, and airbags. They set standards for the type and strength of child seat anchors. Regulations about pedestrian safety dictate the front-end design of today’s motor vehicles.
The National Highway Traffic Safety Administration (NHTSA) does not only crash tests vehicles and reports the results to consumers; it also collects information about vehicle defects and works with manufacturers on product recalls.
Complying with the ever-changing landscape of regulations is a significant expense for automakers, and those costs are passed along to consumers in the sticker prices of new cars.
Advanced Driving Assistance and Safety Technology
Toyota pushed the industry as the first mainstream automaker to include a number of advanced driving assistance and safety (ADAS) features as standard equipment on most cars in their lineup. Features such as automatic emergency braking, lane-keeping assist, and adaptive cruise control improve safety by intervening in emergency situations when drivers are distracted or fail to recognize the danger. Many other automakers have followed Toyota’s lead by including the technologies as standard equipment or low-cost options on the majority of their vehicles.
Automatic emergency braking with forward collision warning will be included in nearly every passenger vehicle on the market by the 2022 model year, complying with an agreement between automakers, NHTSA, and the Insurance Institute for Highway Safety (IIHS).
That technology doesn’t come cheap. Beyond the cost of the camera, radar, and sonar systems, there is an enormous amount of engineering and programming to make the systems work reliably. Those additional costs are reflected in higher car prices, even if the items are listed as standard features.
Air Bags Everywhere
In 1998, front air bags for the driver and front-seat passenger became mandatory in new cars. Since then, the number of air bags has grown to include front knee air bags, side impact airbags, and side curtain air bags that protect you from hitting the windows. General Motors has even used a front center-mounted air bag to prevent front seat occupants from hitting each other during a collision.
Several vehicles employ seat-belt-mounted air bags for rear-seat passengers. The seat belt air bags, which are available on the 2019 Ford Explorer and other Ford and Lincoln vehicles, better distribute the force of the belt when it restraints you in an impact.
In addition to adding extra cost and weight to vehicles, air bags also make newer cars more expensive to repair after collisions.
The definition of a “safe” car today is vastly different than it was 25 years ago. Typically, vehicles are crash-tested by two organizations, the NHTSA, which is government funded, and the IIHS, which is funded by insurance companies. The tests have become more stringent through the years, adding evaluations such as rollover, side-impact, and headlight performance to their assessments. Information about NHSTA crash tests is included on most vehicles' window stickers.
Designing vehicles that perform well on all of the tests is an expensive and time-consuming challenge for automakers. Small overlap crash testing, introduced by the IIHS over the last few years, is the newest challenge facing manufacturers. A small overlap crash test simulates a vehicle hitting a narrow obstacle, such as a light pole.
Advanced safety engineering not only protects adult passengers, but also younger passengers and those in child seats. Most vehicles now include LATCH hardware to make correctly installing child seats easy.
Additional features add weight, which is horrible for fuel economy. Engineering to meet ever-increasing safety standards without increasing weight means using different mixes of materials and putting non-safety-related components on a diet. Engineers no longer look at lightening cars by pounds, they look at hundredths of ounces. Save enough ounces, and eventually, they've shaved pounds off vehicle designs. That’s why even the rubber in the windshield wipers is slightly thinner than you’ll find in older cars. All of that testing and weighing and retesting takes engineers’ time, and time is money.
It’s easy to forget about fuel economy during an extended period of low gas prices, but automakers haven’t paused in their pursuit of better gas mileage. Doing so is expensive and complex, requiring advanced powertrain technology, improved aerodynamics, and lightweight materials.
Many of the strides we’ve seen in fuel economy have been driven by government regulation. Fuel economy standards are developed by the NHTSA along with the EPA and the California Air Resources Board (CARB). The EPA and CARB are involved in setting the standards because greenhouse gases are directly tied to fuel consumption.
Though the Trump administration has stated its intention to roll back standards to 2020 levels, or about 42 mpg for passenger cars, they’re still far above where they were 10 years ago.
To move down the highway, a vehicle has to punch a rather large hole in the air. It takes a tremendous amount of power (and, in turn, fuel) to do so. The better the car's aerodynamics, the easier that hole is to punch. New car designs are optimized to reduce wind resistance, while still providing enough cooling air to the engine and a pedestrian-safe front profile. Automakers put tremendous computer-aided design resources into finding the right shape and then validating their computer modeling with hundreds of hours of expensive wind-tunnel testing.
Automakers are also using lighter-weight, more expensive materials in the construction of their vehicles. Lightweight composites (plastics), high-strength steel, and aluminum are stronger, but lighter, than the materials they replace. Of course, you could build a vehicle entirely out of ultra-light materials, but then it would not pass crash tests.
Some high-performance vehicles and electric vehicles employ ultra-strong, ultra-lightweight carbon fiber to greatly reduce vehicle weight. While the extensive use of carbon fiber in cars such as the 2019 BMW i3 certainly reduces weight, it’s too expensive to use in mainstream models.
Another fuel-saving tool in automakers’ toolboxes is advanced powertrain technology that allows even powerful engines to sip fuel. As Ford has demonstrated with their EcoBoost family of engines, large V8 and V6 engines can be replaced with smaller turbocharged V6, four-cylinder, and even three-cylinder power plants. Nearly every manufacturer has now embraced turbo-downsizing by swapping non-turbo V6 engines with turbo-fours.
Other powertrain technologies include cylinder deactivation, which turns off parts of the engine when high power isn’t required; automatic stop-start, which turns the engine off when a vehicle is stopped and quickly restarts it when needed; and direct injection, which precisely optimizes how much fuel is put in each combustion chamber.
Transmissions are gaining more gears so the vehicle’s engine can remain at its optimal rpm. Some automakers have thrown gears out altogether, opting for continuously variable automatic transmissions (CVTs). Those transmissions are great for efficiency, but their sophisticated designs are expensive to produce and expensive to repair if they have issues.
Beyond using traditional gasoline and diesel internal combustion engines, automakers have developed sophisticated gasoline/electric hybrid vehicles, plug-in hybrids, and pure battery-electric models. While still a small fraction of car sales, alternative-fuel vehicles save tremendous amounts of fuel. The cost difference between alternative-fuel and traditional cars is coming down, but there’s still a price premium to be paid for most alternative-fuel models.
All of this advanced engine technology is expensive to engineer, build, and maintain. Those costs are, naturally, passed on to buyers. Read our article on the 25 cars with the best fuel economy and our ranking of the best hybrid and electric cars to learn more.
Tailpipe emissions are one of the most regulated parts of a vehicle. Modern cars carry one or more catalytic converters, have tightly controlled engine temperatures for optimal fuel burn, and use numerous other emission control systems to minimize greenhouse gases and other pollutants. Diesel vehicles typically use urea injection systems to lower the particulate matter that comes out of their exhaust pipes. These systems add significant weight to the vehicles and are costly to install, maintain, and repair.
Not all of the reasons we’re seeing higher average car prices are due to the vehicle’s themselves. External economic factors also have roles in the car affordability squeeze.
Car Prices Are Outpacing Income Growth
Wage growth in the United States is struggling to keep up with increases in the prices of cars and other goods. Though the economy has been strong in many ways, its growth has not translated to wages that outpace inflation, at least for the majority of Americans.
According to a Pew Research Center study, real wage growth hasn’t translated to increased purchasing power in four decades. Most of the wage gains have been enjoyed by the highest tier of employees, according to their research.
Your Financing Costs More … in the Long Run
As vehicle prices have gone up and wages haven’t kept pace, lenders have felt pressure to extend auto loans to make up the difference. According to Experian, the average length of a new car loan is more than 68 months. Because many Americans buy new and used cars based solely on the monthly payment, they don't realize that these long-term loans have them paying thousands of dollars in extra interest. Those additional interest payments are an expense that does not buy you any equity. It's just money down the drain.
A long loan can also put you in financial distress if it is so long that the car's warranty coverage ends before you finish paying off the car. You can be in a spot where you have to pay for expensive repairs while still making car payments.
If you decide to buy a new car before you pay off your current loan, that can put you in a debt spiral that is hard to climb out of, as you'll never have positive equity in your car.
Lenders contend that long loans are necessary with today’s high car prices. If buyers could not borrow as much money, they would be limited to cars they could more reasonably afford.
As a consumer, there are two things you can do. The first is to avoid focusing solely on the monthly payment. Focus on the total cost of the car, including the cost of your loan and the cost of ownership. Then, you can paint a more realistic picture of what you can afford. The car you end up with may not be what you expected to buy initially, but it’ll be within your financial comfort zone, and you’ll thank yourself in the long run. Our article on how much to spend on your car is a good place to start.
Another great idea is to get a preapproved financing offer before you start your car shopping. Not only does it give you the time to shop around without the pressure of the car dealership, but it gives dealers a benchmark they have to beat to get your business. U.S. News partner myAutoLoan can get you up to four financing offers with one simple online application. Our guide to financing a car walks you through the process of getting a car loan.
Consumers Are Buying Extras … and Financing Them
Many car buyers artificially inflate vehicle prices for new and used cars by buying expensive add-ons at dealerships. They often compound the mistake by financing those purchases and paying interest on the costs for years. Products such as extended warranties, gap insurance, and protection packages can be purchased outside of the dealership. Before you decide to buy, you should research the product, the company that is behind it, and the cost you should pay.
Read our article on things you should never buy at the dealership to learn more about this topic.
Because We’re Willing to Pay the High Prices
This may sound obvious, but one of the reasons automakers can command high prices for new car sales is that people will pay them, whether they can truly afford them or not. If people weren’t buying the high-priced models, automakers could not support their price tags. Consumers have all but abandoned the sedan market for SUVs that come with higher MSRPs upfront plus higher fuel, maintenance, and insurance costs.
A decade ago, the idea of light-duty full-size pickup trucks selling for more than $50,000 would have been ludicrous. Today, luxury-trim pickups represent the most significant growth in the truck segment. Exceeding $70,000 with a fully-equipped truck is easy.
The extreme high-end of car sales is booming, with strong global supercar sales and companies such as Rolls-Royce rolling out SUVs priced above $300,000. Mercedes-Benz can’t build their over-the-top G-Class SUV fast enough to meet demand.
Cars today are built better than they ever have been, with the J.D. Power Initial Quality Survey reaching its highest level ever in 2018.
“There’s no question that most automakers are doing a great job of listening to consumers and are producing vehicle quality of the highest caliber,” says Dave Sargent, Vice President of Global Automotive at J.D. Power.
Consumers can now expect their vehicles to last for hundreds of thousands of miles. That’s great for your pocketbook if you drive your cars until they wear out. However, that increased reliability comes at a price, especially if you get a new car every few years.
Building cars with better reliability requires more durable, proven, and expensive components. Automakers know that warranty repairs and recalls are expensive, in terms of both repair costs and damage to the brand’s reputation. That’s why they are doing more comprehensive testing of every component that goes into a vehicle. They’re demanding the same quality assurance testing from their suppliers, and analysis to ensure that parts from different sources don’t have compatibility issues. As vehicles have become more complex, so has the testing and parts certification process.
Who pays for all of that testing? Buyers do, of course, in the price of their car.
Car advertising and marketing used to be much simpler. Carmakers and dealers only had to advertise on a few television stations, maybe some radio stations, local newspapers, and a handful of magazines.
Today there are hundreds of broadcast and cable television channels, national newspapers, social media channels, and the entire internet. Each of those media types takes a different approach, with advertising design and messaging designed for each channel.
Launching a new vehicle is also very expensive. In addition to a costly auto show or private media debut, automakers are expected to host opulent drive events where they fly the world's automotive media in for technical presentations and test drives. In other words, it’s very expensive to market and advertise a new car, and car buyers pay for it.
Note that U.S. News and World Report does not accept travel or expensive gifts from automakers.
The effect of tariffs on new car prices has yet to be felt, but most experts agree that they will hit car buyers hard. Even cars built in the U.S. will see significant price increases because many of their components and raw materials come from overseas.
Tariffs can affect prices of domestic raw materials as well. When tariffs hit imported steel, U.S. steel companies were free to raise the prices they charge automakers – and they have.
How much car prices will go up because of tariffs on imported cars and parts is uncertain. What is certain, however, is that those costs will be passed along to car buyers. Somewhat offsetting the tariff costs are recent corporate tax breaks, which provided a windfall for domestic automakers. However, automakers have investors to please, so not all of those tax savings end up in consumers’ pockets.
Many of the tariff costs will be felt in dealership service departments. It’s not just new car parts that are affected; replacement parts, such as brake pads, are expected to become significantly more expensive.
Today's cars aren't just more expensive to buy – in many ways they are more costly to own.
Because sales and excise taxes in most states are based off the price you pay, you can expect to pay more when you purchase and register a pricey new car. Many auto insurance policies are based in part on the value of the vehicle and predicted repair costs, meaning you’ll generally pay more to insure your new ride. Cars that are constructed of expensive materials, such as the aluminum-extensive Ford F-150 pickup, likely see those potential costs included in higher insurance rates.
As cars, trucks, and SUVs have become more complex, so have the procedures to maintain and repair them. On the bright side, maintenance intervals for most common repairs have gotten significantly longer. When you do need maintenance, though, you can expect to pay more.
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It’s critical that you have a preapproved financing plan in place before you start your car shopping. U.S. News partner myAutoLoan can provide up to four car loan offers with just one online application.