When was the last time you saw the price tag of a new car below $20,000? Maybe two, or three years ago? Maybe you saw a budget car but not in the color you like, or it was already sold out. According to Statista, the average selling price of new cars in the U.S has increased by 13% from 2016 to 2020. So, why are cheap cars becoming extinct? Let’s delve into the factors driving such a phenomenon and try to bring some clarity to it.

Why do cheap cars matter?

Before getting to the core of it, let us first understand why we should even worry about this trend. If consumers are ok with buying expensive cars, then where is the issue? The simple answer to this goes back to the reason why cheap cars were produced in the first place.

At the beginning of automobile history, not everyone could afford a car. However, mass production would bring economies of scale and significantly lower the costs of vehicle manufacturing. Therefore, cars needed to sell in volumes and nudge customers of all categories.

This is when Ford introduced the first moving assembly line for automobile mass production. And then Volkswagen came up with the concept of the people’s car. People could finally afford cars and soon, they became loyal to these brands. They would keep buying new cars for themselves and their children, too.

Nowadays, cheap cars may seem not profitable in the short term. However, in the long run, they may bring in additional customers. Small compact cars such as Toyota Corolla or Honda Civic can seem appealing to the youth or first-time car buyers. Who wants to spend a ton of money on their first car?

However, if new drivers end up liking a particular brand, they become regular customers. Thus, cheap cars can bring a way of nudging younger targets, who, when wealthier, will buy into their more expensive vehicles.

Why are cheap cars becoming extinct?

Supply and demand

The economics of producing cheap cars needs large volumes to cover factory fixed costs. This comes with the risk of not being able to sell so many cheap cars in the market.

Usually, budget vehicles are smaller, and consumers in the U.S. prefer more passenger room and cargo space, especially those with big families. This, in turn, can bring the profit margins down for car producers.

Even though automakers may optimize and use parts made for cheap cars in their more expensive models, the opportunities for higher profit are slim.

On the other hand, drivers have shown high demand for bigger vehicles such as SUVs, which now sell at a more affordable price than before. Thus, consumers are still paying above $20,000, but they feel like they are getting a great deal and value for money. They prefer the flexibility SUVs offer, higher ground clearance, bigger space, and overall comfort. This is reflected in the higher willingness to pay for such cars.

Another price premium consumers are willing to pay is related to all car tech features, such as infotainment systems, in-car phone connectivity, or voice recognition, among others. The new generation is highly digitalized. Younger drivers also want their cars to have smart options and would not compromise for a simpler-looking interior, even if the latter would be cheaper.

Regulatory factors

As the country is going towards decarbonization, there are increasing regulatory restrictions regarding the type of cars that one can buy. Thus, vehicles that are highly polluting or older than a certain year are not allowed to be sold. The era of diesel may be coming to an end. Electric vehicles and low-emissions cars are becoming increasingly popular. They also carry a heftier price tag, as they embed technological innovations and car designs improvements.

Financial factors

Last but not least, it has become easy nowadays to get loans and purchase or lease cars, even accounting for inflation. This can make even more expensive cars more accessible for lower-income buyers. Leasing can even be cheaper, allowing one to simply swap cars for new models every couple of years or so.

And if one can utilize these resources and get the car of their dreams, then why compromise for a cheaper and less sophisticated car?

Having all these factors in mind, the cheap car extinction trend makes a bit more sense. If the incentives for expensive cars are there, and consumers use them, then the outlook for cheaper cars is definitely not bright.

What is your stance on this trend? Would you prefer a cheap car, or are you into premium vehicles? Let’s start a conversation.