Used Car Prices Hit $27,239 as Affordable Options Vanish

The average price of a used car in America has reached $27,239, a figure close to the peak prices observed during the pandemic. This surge in prices is accompanied by a significant reduction in the availability of affordable used cars. In 2019, over half of used cars sold for under $20,000, a proportion that has now fallen to less than a third. This trend has led to the collapse of major used car dealerships and a rise in car repossessions to levels not seen since the 2009 financial crash.

The Disappearance of Affordable Used Cars

The current used car market presents a stark contrast to pre-pandemic conditions. In 2019, $10,000-$15,000 could buy a 4-5-year-old car with under 60,000 miles. Today, the same amount secures an 8.7-year-old vehicle with nearly 100,000 miles. This shift is not solely due to inflation but a confluence of factors that have fundamentally altered the used car ecosystem.

The "Mouse Trap" of the Used Car Market

The journey of a car from new to used can be likened to a marble in a game of Mouse Trap, gradually depreciating in value with age, mileage, and ownership changes. However, this system was significantly disrupted during the pandemic, leading to the current unaffordability crisis.

The Decline of Leasing

A substantial portion of "newer" used cars traditionally entered the market through leasing agreements. Leases, essentially 3-year rentals from automakers, provided a steady supply of clean, low-mileage vehicles. This model benefited consumers with lower monthly payments and automakers by ensuring a continuous cycle of new car sales.

Before the pandemic, approximately 30% of new cars were leased. By 2022, this figure dropped to 18%, representing a 40% reduction in leases. Consequently, the number of cars returning off lease each year plummeted from about 5.2 million to 2.4 million, drastically reducing the supply of relatively new used cars.

The Semiconductor Crisis and its Aftermath

The global semiconductor crisis between 2020 and 2023 further exacerbated the situation. Modern cars, heavily reliant on thousands of chips, faced production constraints. Automakers prioritized building more profitable models like trucks and SUVs, which require more chips and are less frequently leased due to mileage caps and wear charges. This strategy resulted in fewer new cars being produced and a further decline in leasing.

Reduced Incentive Spending

Another critical factor is the significant reduction in automaker incentive spending. In 2019, incentive spend (cashback, cheap financing, subsidized leases) was 11.12% of a car's total value. This dropped to a low of 2% during the 2022 shortage and currently averages around 6.5%. This means a $50,000 car that once received a $5,560 discount now only gets about $3,250 off. Automakers, having experienced higher margins with reduced sales during the pandemic, have less incentive to offer discounts or promote leasing.

The Ripple Effect: Wave Two of Unaffordability

The impact of these changes is not immediate but unfolds in cycles. The initial surge in used car prices during 2021-2022 (Wave One) was due to a direct shortage. We are now experiencing "Wave Two," where the decline in leases from 2021-2023 is hitting the market three years later, precisely when those cars would have entered the used market.

Furthermore, approximately 8 million vehicles that would have been produced for U.S. buyers during the pandemic years were never made. While new car sales are recovering, they remain below the 2016 record of 17.55 million vehicles, indicating a persistent deficit in the overall car supply.

Older Cars Rising Fastest

Paradoxically, the oldest and cheapest cars are experiencing the fastest price increases. Cars 15+ years old saw a 13.9% rise in a year, compared to a 3% rise for cars 5 years old or newer. This is because the shortage "rolls downhill": those who would have bought nearly new cars now buy older ones, and those who would have bought older cars are forced into very old vehicles. People are also holding onto their cars longer, with the average car on U.S. roads now 12.8 years old, further reducing the supply of older used cars.

The Burden of Financing

The scarcity and high prices of used cars have pushed buyers towards longer and larger financing options. The average amount financed for a new vehicle is $44,664 over 70 months, with over a quarter of new-car buyers financing for 84 months or longer.

Used cars present an even more challenging picture: - Average financed amount: $30,703 - Average term: 70 months - Average down payment: $3,865 - Average APR: 10.6% (compared to 7% for new cars)

This translates to approximately $40,970 repaid on a $30,703 loan. A concerning 6.5% of used-vehicle buyers now face monthly payments exceeding $1,000.

Negative Equity and Repossessions

Many buyers who financed at peak prices in 2022 are now returning to trade in their vehicles with significant outstanding debt. This "negative equity" means the old loan is rolled into the new one, creating a larger financial burden.

Delinquency rates are particularly high among subprime borrowers (6.9% for 60+ days delinquent), who face even steeper interest rates (averaging 19.4% to 21.7%). This has led to a surge in repossessions, with 1.73 million cars repossessed in 2024, the highest since 2009.

Dealerships Under Pressure

The challenges extend to dealerships, particularly those serving subprime buyers. Many "buy-here-pay-here" dealerships, which act as lenders for those with poor or no credit, are collapsing. Tricolor, for instance, went into liquidation owing $900 million, and America's Car-Mart closed 60 of its 154 stores, reporting substantial doubt about its ability to continue. As a result, banks are pulling back from lending to this sector, further limiting options for subprime used-car buyers.

A New Normal?

The current situation appears to be more than a temporary ripple effect from the pandemic. Experts suggest it's becoming a "new normal," with supply not expected to significantly improve over the next three to four years. The fundamental shift in how automakers produce, lease, and discount cars means that the steady flow of affordable used cars into the market has been disrupted, forcing consumers to pay more or settle for older vehicles.