Getting behind the wheel of a car has become more affordable — for the most part. New and used car prices are down, while inventory levels are up. Car-related costs like maintenance, repair and gas have all improved over the past year.

The price of used cars and trucks tumbled 10.4% from August 2023 to August 2024, while the price of new cars and trucks dropped 1.2%, according to the latest Consumer Price Index. Electric vehicle prices have fallen even further, a result of carmakers overestimating consumer appetite for the emerging technology.

It’s taken time for the automotive industry to recover from the pandemic-era declines in production, sales and international trade. Now that new car inventory is normalizing, it’s also easing the burden on the used car market that saw skyrocketing prices in the last several years.

With more new vehicles in showrooms, dealers are offering more incentives. Edmunds reported that the average discount for new vehicles climbed to $1,687 in the second quarter of 2024 compared to $611 in the second quarter of 2023.

Buying a new car is the most affordable it’s been in more than three years, according to the Cox Automotive/Moody’s Analytics Vehicle Affordability Index. This is due to a combination of lower prices and interest rates and higher incomes and incentives.

Interest rates on car loans fell slightly in August for the first time in two years. In September, the Federal Reserve dropped its key interest rate a half a percentage point, but it could take some time for the effects of monetary policy to reach the car market. Average car loan rates closely track the five-year Treasury note, which is influenced by the short-term Fed Funds rate. However, auto loans are also influenced by the borrower’s credit history, the type of vehicle, the loan term, and the down payment.

About 73% of consumers say they’ve held off purchasing a new vehicle because of elevated prices, according to a 2024 Edmunds poll. Now falling prices and more favorable financing terms may bring these potential buyers off the sidelines. 

One car-related cost that continues to climb is auto insurance. Over the past year, car insurance prices have accelerated 16.5% — more than any other price category measured by the Consumer Price Index.  

This surge in auto insurance premiums stems from a combination of factors. Up until last year, car insurers have been paying more in auto repair costs, along with the rest of us. While vehicle maintenance and repair inflation has slowed to 4.1% over the past year, it surged 12% from August 2022 to August 2023. There is a lag between when insurers incur extra costs and pass them on to consumers. 

While the Fed was raising interest rates over the past few years in response to overall inflation, borrowing costs increased, causing car demand to drop. Persistent labor shortages sent repair costs surging, increasing insurance prices. Now, excess supply is leading to falling car prices, and lower interest rates should lead to lower borrowing costs.