How car prices could change in an economic downturn

An economic downturn affects everyone from automakers to individual buyers. Even if a recession is on the horizon, it doesn't have to be, but there can still be obstacles to overcome.

According to Kelley Blue Book, the average new car price in January of this year was $47,401. That's a 3.5% drop from last year, but many buyers are still put off by the high prices. High interest rates don't help either. Experian's State of the Automotive Finance Market report found that the average interest rate on new cars is 7.18% across all credit scores. The average interest rate on used car loans is a staggering 11.93%.

Whether or not a recession occurs in the coming years, it's good to be prepared – just in case. Here's how car prices could change in an economic downturn, according to industry experts.

Check out: 4 affordable car brands you won't regret buying in 2024

Read more: 7 reasons you need to talk to a financial advisor before spending $10,000 or more

Sales collapse (and so do prices)

Just the thought of a recession is often enough to make people cut back on spending. But the automotive industry, like any other industry, is subject to the law of supply and demand.

“Historically, during a recession, people buy less – especially less big purchases. So that means demand for cars drops pretty significantly,” said Ben Michael, director of autos at Michael & Associates. “And when demand drops, prices drop too.”

Take the Great Recession of 2008 as an example. During that time, new car sales fell by almost 40%.

There was also a decline in sales in 2020, but only in the first few months of the year. Compared to the previous year, sales fell by around 15 percent.

When demand rose again, supply could not quite keep up. This, together with high inflation and gasoline prices at the time, led to higher prices. This temporarily prevented many US consumers from purchasing products.

Next: The 6 Best Used Cars for Retirees Under $10,000 in 2024

There are more incentives

The good news for those with disposable income is that recessions often bring more incentives and other arrangements.

“In a recession, more incentives, rebates and special offers will appear because dealers need to sell cars,” said Lauren Fix, automotive analyst at The Car Coach®. “Sitting on inventory is expensive. Every month, the dealer pays interest on each vehicle that doesn't sell. When vehicles don't sell, they lose cash flow.”

Interest rates could rise

While more stimulus can be a good thing, a looming recession can also have a negative impact on interest rates.

“A recession means higher interest rates and lower car sales,” Fix said.

As Fix pointed out, this can affect both dealers and automakers. Higher interest rates can make it harder to afford a car – even for people less directly affected by the economic downturn. And if inventory starts to drop, prices could stay high.

But those who want to get rid of their inventory to save money by not leaving the vehicles sitting on their property could also see these incentives increase further. At a certain point, these incentives could offset the interest rates – although this depends on the local market, the manufacturer, the dealer and the incentives available.

What people can do to prepare for this change

Anyone who currently owns a vehicle and is interested in selling it should do so carefully – and only if it absolutely makes sense for the customer.

“If your vehicle is still in good condition, you may be able to save money by delaying buying a new car altogether, even if car prices during a recession look like you're getting a bargain,” says Erin Kemp, consumer advocate at Bumper.

Anyone who has signed a leasing contract should consider keeping the car for the longer term.

“If you trade in a leased vehicle, check the value of the vehicle. It may make sense to pay off the lease and keep the car,” advises Fix.

Fix advises those who are currently behind on a car loan, meaning they owe more than the vehicle is worth, against buying another car. Instead, she suggests making additional loan payments if possible or refinancing the loan at a lower interest rate. In either case, keeping the car longer is probably the best option, she says.

Whatever the case, be aware that everyone's situation is different. Make all decisions strategically and based on your needs and not just out of concern about an impending recession.

“Review your budget carefully, taking into account income, expenses and what you can afford in the event of a difficult situation, such as losing your job,” advises Kemp.

More from GOBankingRates

This article originally appeared on GOBankingRates.com: Looming Recession: How Auto Prices Could Change in an Economic Downturn