Why Are Cars So Expensive?

Dustin Hawley | Feb 28, 2021

Nowadays, if you find yourself in the market for a new car, you may be experiencing some sticker shock. 

why are cars so expensive

You may even be thinking to yourself, “have new cars always been this expensive?” While the question is multi-layered in many ways, the simple answer is no. According to Kelley Blue Book’s last published results, the average price for a new car had risen to an all-time high of $38,948 in December of 2019.

We have also witnessed a meteoric rise in auto loans in recent years. According to Experian, the average auto loan in the second quarter of 2019 was $32,119, representing a year-over-year increase of $1,161. While some of this price increase is driven by inflation and higher equipment costs, those factors alone don’t fully explain why a new car costs more today than the yearly salary of the average American.

So why are cars so expensive? To answer this question with any sense of depth, we must consider several overlapping factors. Let’s look at each of them and get to the bottom of why cars are so expensive these days.

Why Are New Cars So Expensive? - Find the best car deals!

The same central factor is the driving force behind many of the reasons for high car costs: cars themselves are more expensive to produce than ever before. In order to remain profitable, manufacturers have raised their prices accordingly with their advancements in technology and production.

Here are some of the primary drivers of this increased production expense.

Better Structural Design

Modern vehicles are both simultaneously stronger and lighter than their older counterparts. This is possible thanks to the use of high-strength steel, which incorporates other alloys to make the frame stronger. Its light weight also provides for a superior fuel economy, making it one of the many reasons high-strength steel is quickly becoming the norm. This increased quality is reflected in higher cost. 

Better Engineering

Over the past couple of decades, manufacturers have made quantum leaps in engineering technology. For instance, Ford’s current F-150 EcoBoost powertrain produces more horsepower, provides more torque, and offers more towing capacity than the one manufactured in the year 2000. Oh, and it provides better fuel efficiency, to boot.

But advanced power and efficiency come at a cost, as every fraction of horsepower gained is the result of thousands of hours of work by skilled engineers. Those efforts (and those engineers’ salaries) are passed on to the consumer in the form of increased prices.

Larger Vehicles

Cars haven’t just been getting better; they’ve also been getting bigger

To use the Ford Explorer as an example, the 1991 edition had a length of 184.3 inches, a width of 70.2 inches, and a curb weight of 3,841 pounds. Fast forward to today, and the 2020 Ford Explorer is 198.8 inches long, 78.9 inches wide, and has a curb weight of 4,345 pounds. That’s a pretty sizable difference (no pun intended).

Common sense would allude to the idea that the larger the vehicle, the more steel, aluminum, glass, and other materials are required to construct the vehicle. The sheer quantity of raw material makes today’s larger vehicles more expensive than those of yesteryear.

Regulatory Compliance

Automotive manufacturers need to comply with an overlapping assortment of state and federal regulations. These contingencies include everything from fuel efficiency standards to brake performance and emissions. Even the factory itself needs to be kept to a certain standard.

When these regulations change, either at the state or the federal level, companies need to invest money in equipment upgrades or design changes in order to maintain compliance. Much like some of the other expenses outlined above, this too is passed on to the consumer.

Regulation standards also vary between countries, which can create additional hurdles. For instance, if a car needs to be modified to meet emissions standards in Germany, the manufacturer may have to produce two different versions of the vehicle, leading to an increased sticker price.

Quality of Life Features

A few decades ago, a car was considered well-equipped if it came with power windows and air conditioning. Nowadays, customers expect features like heated seats & steering wheels, powered mirrors, and zoned climate control. Obviously, none of these things are free.

In addition, vehicle entertainment systems have also become more complex over time. These days, it’s not unusual to see a car with dual LCD displays on the back headrests of a car’s front seats. Combine that with surround sound, built-in GPS navigation systems, and hands-free controls, and the result is a car that’s highly sophisticated, requiring a large number of electronic components. The development and implementation of these features don’t come cheap, and hence, the cost is reflected in the vehicle’s MSRP.

Self-Driving Features

While Tesla’s mad genius Elon Musk has yet to give us a truly self-driving vehicle, we’re getting closer and closer with each passing day. Most manufacturers today offer some kind of parking assist, often including lane assist and other advanced technology. Other “smart” options include pedestrian identification, collision avoidance, and emergency braking.

These gadgets require an array of cameras, sensors, and radar, along with advanced artificial intelligence software. Even a couple of driving assistance features can raise the price of a vehicle by thousands of dollars.

Why Are Used Cars So Expensive? - Find the best car deals!

The above listed factors can effectively detail why it costs so much to drive a new car off the lot these days. But what about used cars? While they may not induce the same sticker shock as a new car does, they are still quite expensive. So why are used cars so pricey as well?

It’s a somewhat complex theory to wrap your mind around, but new car prices affect used car prices in a few tangible ways. First, all used cars were new cars at some point, which should be obvious. But over time, as new cars have gotten more expensive, used car prices have trended upwards in tandem.

Used car dealers rely on turnover from vehicle owners in order to keep their lots full. Consumers sell their existing vehicles and purchase a new one, leases run out and the cars are sold, and rental companies sell many of their vehicles as part of normal fleet turnover.

The used vehicle business is unusual in that it doesn’t have its own dedicated supply line. When people aren’t buying new cars, they’re not selling their old ones, which means the supply of used cars is lower than it usually is.

The COVID-19 pandemic has thrown this system into chaos. Supply chain disruptions and lockdowns have put a crimp in vehicle production, creating a shortage of new cars. At the same time, economic uncertainty has caused many people to hold on to their existing cars for at least another year. 

These are some of the many factors that have led to increased prices in new cars. Add to this that as the technology in cars continues to advance to new and astounding heights, depreciation is less dramatic. So while a car may still lose a great deal of its value over it’s lifespan, with new cars being as expensive as they are, even used cars will then carry an elevated sticker price in comparison to the past.

Summary - Find the best car deals!

Today’s often outrageous car prices may send some consumers reeling, having to strongly consider whether or not a new car purchase is worth it in the long run. But as we have outlined throughout this guide, increased size, technological advancements, and regulatory compliance have driven the price of cars into a whole new stratosphere. Luckily for consumers, this increased price does come with additional perks, as drivers have more tools and luxuries at their disposal than ever before. So rest assured that as prices likely continue to climb, so will the capabilities of these modern marvels of transportation.

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