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Eric's Autos: Buying a Car Post-Coronavirus

Eric Peters on

A tsunami of new car inventory has built up during the past two months of government-decreed lockdown. Dealerships are heavy with cars they haven't been allowed or able to sell -- and are now desperate to move that accumulated inventory.

For two reasons:

First, the money -- not their own money, but the money they owe. Which is piling up just like the cars on their lots -- or, rather, because of the cars on their lots. Dealers take out loans to get their inventory; there is debt outstanding on every car they've got on the lot -- revolving debt that rinses and repeats with each billing cycle. Every billing cycle that goes by without a sale means another payment to the finance company -- which shaves an equal sum off the potential profit the dealer stands to make on each sale.

Which dealers assumed they'd be making, precoronavirus.

They stocked up on cars back in January and February they assumed would be sold in March and April -- which, at the time, was a smart thing to do, because unemployment was at a record low, and people with jobs tend to buy new cars.

And then came the coronavirus. A devastating upper cut, followed by a killer right hook that no one saw coming.

 

Now it's early summer, and dealerships all over the country are overflowing with hundreds of thousands of unsold cars they have to move in order to stay afloat -- and not just to clear accumulating the debt.

These cars -- new cars -- have a limited shelf life, just like an avocado in a supermarket. A 2020 is worth less and less as 2020 rolls along. The 2021 model year is already upon us. The '21s are the new cars now. And that means the 2020s are beginning to show signs of overripeness. By late summer -- not far off now -- the remaining inventory of 2020s will have to be fire-sold to get rid of them before fall and absolutely before the 2020 calendar year ends, when the 2020s become last year's leftovers, heavily discounted (to make space on the lot for the arriving 2021s).

Several manufacturers know the tsunami is coming and -- to ensure they have a place to offload the 2021s some of them are already making -- are doing what they can to help their dealer networks clear their inventory by offering free (zero percent) financing and no-payments-for-months deals.

Essentially, it's a free car for the duration of the deal. Which is going to prove to be a catastrophic deal for the manufacturers offering them out of suicidal desperation. Which is precisely what is going to happen.

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