How Does the Used Car Market Affect Insurance Rates?

Wonam drinking morning coffee while driving to work

Auto insurers consider several factors when determining your insurance rates, including the value of your vehicle. The used car market is currently red hot due to supply chain issues that have resulted in a shortage of new cars. Because it typically costs more to insure a more expensive vehicle, you may get hit with a double whammy of higher prices and increased insurance premiums if you're planning to buy a used car anytime soon.

The State of the Used Car Market

The pandemic has had a significant impact on the auto industry, disrupting production and the supply chain of new vehicles. As dealerships are suffering from shortages of new vehicles, many car buyers have diverted their focus to used cars that don't require a months-long wait.

That shift has caused used car prices to skyrocket. As of June 2021, the average used car price had risen by more than $7,000, according to Autoweek. That's a 32.7% increase from the same time last year.

In the second quarter of 2019, the average amount financed on a used car was $20,359, according to Experian's state of the automotive finance market report. By Q2 2021, that average had jumped to $23,365.

As a carbuyer, the increase in used car values can be bad enough because a larger monthly payment can put more strain on your budget. But since it costs more to insure a more expensive vehicle, your wallet may take another hit when it's time to apply for an auto insurance policy.

How to Save on Your Auto Insurance Rates

While you can't do anything to change used car market conditions, there are some steps you can take to avoid paying too much for an auto insurance policy on your next vehicle.

Shop Around

It's crucial that you shop around to compare rate quotes, even if you're happy with your existing insurer. This is because while your current insurance company may be a good fit for you right now, another carrier may offer you a lower rate on your next used car.

You can compare quotes, discounts, customer satisfaction and other features by requesting the information directly from insurance companies or through Experian, which can provide you with quotes from multiple insurers at once.

Maximize Your Discounts

Once you've picked an insurer, call and speak with an agent to find out which discounts you might be missing out on. While most companies typically apply discounts during the purchase process, it's possible to miss one if you're doing it on your own.

Increase Your Deductibles

Your collision and comprehensive coverages both cover the cost of repairing or replacing your car if a covered event occurs. As a result, it's these coverages that likely become more expensive as used car prices increase.

While it might not make sense to skip these coverages—they're generally required if you're financing the vehicle—you can increase your deductible, or what you pay out of pocket if you need to file a claim, which will lower the cost of the coverage. Just make sure you can afford the increased deductible amount.

Drop Other Optional Coverages

Many insurance carriers offer optional coverages, such as rental car reimbursement, roadside assistance and more. Take a look at the policy you're considering and think about going without things that you don't want or need. While it may not completely make up for the price increase caused by your vehicle's increased value, it could help make a dent in your monthly premium.

Pay Cash and Avoid Collision and Comprehensive Coverage

If you don't have a loan on your car, you really only need to have the minimum amount of liability and medical coverage in your state. If you can afford to replace your vehicle if it gets totaled, it may make sense to skip collision and comprehensive coverage.

Just keep in mind that while avoiding these coverages can save you money now, it can cost you thousands of dollars if you get in an accident. So make sure you're able to and willing to pay out of pocket if that happens.

Consider Other Features When Buying

The value of your vehicle is an important factor in determining your insurance rates, but it's not the only one. For example, vehicles with safety features and higher safety ratings tend to score lower insurance rates. Also, some cars are more likely to be stolen than others and may carry a higher insurance rate because of that fact.

If you're considering a specific make and model, do some research on how much it costs to insure the vehicle compared to similar makes and models in its class.

Reduce Your Vehicle Costs to Save More

Cutting the cost of your used car purchase likely won't impact your insurance rates. This is because insurance companies used what's called the "actual cash value" of a vehicle to determine how much it costs to insure it, which isn't necessarily tied to the car's sales price.

That said, taking steps to save money can still have a positive impact on your budget and help neutralize the higher insurance costs:

  • Shop around. If you have a specific make and model in mind, check with multiple dealerships and even private parties in your area to compare prices to find the best deal.
  • Try to negotiate. Whether you're working with a dealer or a private party, look for opportunities to negotiate the price of the vehicle. Make sure you know the value of the car, which you can get from Kelley Blue Book or NADA Guides. Also, look for features and defects, such as an oil leak, cosmetic issues or other things that might reduce the value of the vehicle.
  • Go with a different or an older model. If the model you're looking at is outside of your price range now, consider going with an older model or even a cheaper model in the same class.
  • Wait for the market to cool off. New car inventory is steadily improving, so the used car market won't stay hot forever. If you can afford to wait to buy a new car, it may be best to hold off until used car prices go back down to normal again.
  • Make a bigger down payment. A bigger down payment won't cut the value of the vehicle, but it will reduce how much you have to pay each month on an auto loan.

Improving Credit Can Save You Money on Both Sides

Taking time to increase your credit score can help you not only qualify for a lower interest rate on an auto loan but also score lower insurance rates. That's because most auto insurers use a credit-based insurance score to help them calculate premiums.

Check your credit score and credit report to determine whether you stand and if you need to make some adjustments. Then take time to improve your credit before you take any more steps to buy your next vehicle.