The used-car market is still struggling in the wake of the coronavirus pandemic outbreak, with a few factors contributing. A surge in lease cars turned in early or following the lease end resulted from a glut of former commuters forced to work from home. Suddenly, the need for reliable transportation evaporated, and these newer cars became so plentiful that some dealers ran out of space to store them.
As the financial uncertainty wore on, other drivers who had been in the market for a new car decided to keep their ride and forgo the payments and higher insurance premiums on a new vehicle. This had the effect of limiting older used-car availability since the pre-owned automotive pipeline relies on trade-ins to replenish the supply.
Wholesale auctions, the primary way in which the used-car market remains liquid, became virtual venues. Unfortunately, there are many drawbacks to dealing this way, including missing out on the nuances that contribute to the value of a used-car, like detecting smells and performance issues along with relying on video feeds for physical evaluations.
Finally, the cadence of a live auction often helps hype a vehicle’s sale price, so some sellers are reluctant to list their vehicles at a time like this, holding back the best inventory for improved social conditions.
Wholesale prices have climbed steadily while retail prices have dropped, narrowing the margin of profit. New-car dealers will now frequently offer top dollar for a trade-in to sweeten the deal and move new car inventory, but that high price has to be recovered when that same used car is sold again and those costs are passed on down the line.
Another consequence of the pandemic that has influenced the used-car market is the ripple effect of the travel industry.
Airliners have been parked in record numbers as movement around the globe has ground to a halt, and the hurt hasn’t been lost on Hertz, which, along with the Avis Budget Group, focuses the bulk of their rental car business at airports where travel restrictions have hit them particularly hard.
Hertz, which also owns Dollar and Thrifty car rental brands, has racked up $24 billion in debt as their fleet of nearly 700,000 cars has been idled and has driven them to file for Chapter 11 bankruptcy protection. Restructuring includes canceling huge new car orders, which isn’t helping automakers as they reel from their own economic and logistical crises.
Hertz began in 1918, when a former salesman for Ford Motor Co. purchased a few Model T’s and created the first car-rental agency, appropriately called “Rent-a-Car.” After a few years and an expansion to about 600 cars, the company was purchased by John Hertz, a Yellow Cab company owner who eponymously renamed the nascent business.
The coronavirus wasn’t the beginning of the problems at Hertz, but it has played a critical role in their recent downturn. Car-rental companies in general have suffered a near meltdown in business, leaving a huge number of their fleets parked, often in populated areas and airports where space is already limited. Combine that with the catastrophic drop in income, and it has turned car-rental agencies into used-car dealers.
Selling off cars as the fleet is rotated is nothing new to rental car companies. Enterprise, which also owns Alamo and National, sells around a million cars a year worldwide. But now, with so much excess inventory and reduced income, selling cars has become an avenue for survival. Inventory selloffs at below market prices, often including free delivery and convenient online shopping, adds to the benefit.
Though not always treated well by their temporary drivers, the upside of purchasing a former rental car includes a selection of recent, if not very exciting, models; newer vehicles that are reasonably maintained with average miles; and generally decent physical and working condition.
Downsides exist as well. You’re dealing with a huge company where only a portion of their business includes selling their primary assets while they still have value. Recourse or resolving an issue with your purchase may lack the immediate response and convenience of patronizing a local used-car dealer or a nearby private party.
And while maintenance is typically up to date, future repairs may be looming closer than anticipated.
Remember, the strategy for the seller is to unload the vehicle before the cost of service becomes prohibitive.
Still, as society stabilizes and the need for a decent used car exists, purchasing from a rental agency as it turns inventory into working capital is another possibility to consider.
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