Used Car and EV Affordability Improves as New Cars Move Further Out of Reach

Highlights:

• Over the past year used cars have become 5.8 percent more affordable as prices fell and median household income rose

• New and used electric vehicles are rapidly improving in affordability, with prices down 10 percent for new EVs and 20 percent for used EVs

• 23 Used car models have become affordable since October 2022, including the Chevrolet Blazer, Honda Pilot, and Tesla Model 3

• New cars became less affordable due to higher prices and higher interest rates increasing their monthly payments by 11.3 percent

• 6 New cars have become unaffordable since October of 2022, including the Ford Bronco, Hyundai Tucson Hybrid, and Toyota Prius Prime

• Consumers now need to take a 90-month loan to make the average new car affordable, but that loan term adds almost $14,000, or 28 percent, to the total cost of a car

After years of dramatic price increases, used car and electric vehicle affordability actually improved over the past 11 months. Despite a substantial increase in interest rates since October 2022, household income increased by 3.7 percent and used car prices fell by 5.4 percent. Electric vehicle prices dropped even more, with used EVs down nearly 20 percent and new EVs down by 10 percent. The result is improved overall used car and electric vehicle affordability. 

Unfortunately, the same cannot be said for new cars, which have seen continued price hikes over the past 11 months. Combined with higher interest rates, these increases have made new cars less affordable over the past year, as measured by a 6.8 percentage drop in the iSeeCars Affordability Index for new cars.

“With the unprecedented rise in interest rates over the past year we didn’t expect vehicle affordability to improve for any segment,” said iSeeCars Executive Analyst Karl Brauer. “But used car prices have finally come off their highs and are starting to moderate after years of increasing. Electric vehicle prices have simply tumbled over the past year, improving affordability on both new and used models. This shift, plus the rise in median household income, has improved the situation for buyers and added 23 models to the used car affordability list compared to last October.”

iSeeCars analyzed new and used car affordability over time by calculating its Car Affordability Index, which compares median household income to an idealized income for financing a car. An index value of 100 suggests household income is exactly equal to the idealized income for a car purchase. Values above 100 indicate household income is above the idealized income and therefore cars are increasingly affordable; similarly, values below 100 suggest actual income is less than the idealized income, meaning cars are unaffordable. For example, an index value of 125 means household income is 25 percent more than the idealized income, and an index of 75 means household income is 25 percent less. The idealized income is based on typical car loan rates and terms for 60 months and 48 months for new and used car loans respectively, with down payments of 10 percent for new and 20 percent for used cars, and annual car payments no more than 10 percent of a household’s annual income. 

Used car affordability

iSeeCars analyzed the affordability of 3-year-old used cars over the past 12 months. The iSeeCars Car Affordability Index was at 98.36 in October 2022, then peaked in December at 103 before falling below 99 in May 2023. But it’s been improving every month since May, reaching 104.03 in September 2023. 

“A 3.7 percent increase in median household income, from $75,515 to $78,335 over the past year, coincided with a drop in average used car prices from $33,912 to $32,801,” said Brauer. “These factors were enough to overcome the bump in interest rates, making the average used car more affordable.”

Used EV affordability

Used EV affordability made the biggest jump over the past year, with the iSeeCars Affordability Index rising from 72.48 to 90.10 since October 2022. Most of that shift comes from a 19.5 percent drop in the average used EV price, from $46,020 to $37,040. This translates to a 16.6 percent – or $144 – drop in monthly payments for used EVs.

“While the average used EV remains beyond the reach of today’s used car buyer, they are much closer to being affordable than they were 11 months ago,” said Brauer. “Their lower prices are a reflection of falling new EV prices.”

21 More used cars are affordable this year

Using the interest rate and household income data from October 2022 and September 2023, iSeeCars calculated the 3-year-old used car price that would have an Affordability Index value of 100 in these two periods. Based on these affordability pricing thresholds, there were 137 affordable used cars priced below the threshold in October 2022, but by September 2023 that number increased to 158. There were actually two used cars that became unaffordable over the past year, the Mercedes-Benz CLA and the Ford Explorer, but these two were offset by 23 models that became affordable over the past 11 months, for a net gain of 21 more affordable cars in September 2023 compared to October 2022.

“The list of newly affordable used cars includes a healthy mix of luxury and mainstream brands, with nearly every vehicle type represented,” said Brauer. “Family buyers seeking a three-row SUV, performance enthusiasts searching for a sporty coupe, and fans of hybrid or electric vehicles looking to cut fuel costs and CO2 emissions can all find a car on this list.”

New car affordability

Using its Car Affordability Index, iSeeCars calculated the price threshold for affordable new cars and confirmed a 6.8 percent downward shift in affordability between October 2022 and September 2023, with the index moving from 78.51 to 73.17. Most of that drop occurred before June 2023, with new car affordability somewhat stabilizing in recent months but not improving to any meaningful degree. The drop coincides with an increase in monthly payments by 11.3 percent, from $802 to $892, or an extra $1,088 a year.

“With the average new car price rising from $46,551 to $49,499, plus the big interest rate hikes we’ve seen over the past year, new cars are less affordable for consumers today compared to last year,” said Brauer. “The same increase in median household income that made used cars more affordable was not enough to counter these factors, as the growing gap between qualifying household income and median household income confirms.”

New EV affordability

Electric vehicles have never represented an affordable option for new car buyers, but a drop in prices of more than 10 percent over the past year, from $64,092 to $57,412, has them moving in the right direction. In October of 2022 new EVs were at 57.02 on the iSeeCars New Car Affordability Index. In September of 2023 they were at 63.08. This translates to a $69 drop in monthly payments, 6.2 percent lower than last year.

“New electric vehicles remain much more expensive than the average new car, but unlike the increasing cost of traditional new cars, average new EV prices have fallen as a direct result of Tesla’s price cuts,” said Brauer. “Tesla remains the dominant force in the electric car market, and when Tesla’s prices fall it’s reflected in overall EV pricing.”