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How to Buy a Used Car

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We’re in the market for another vehicle in our family and, though it hasn’t always been the case, it will almost surely be a used one. I confess we’ve bought our share of new vehicles over the years, back when we had more money than time, and before I knew better. And that wasn’t a huge financial blunder for us, because we maintained and drove most of those new cars for many years. However, nowadays used will be our first choice.

The biggest reason for buying a vehicle used is to skip that outsize depreciation in the first year of its life, much of which occurs soon after you sign on the dotted line. Edmunds.com reports that a new car loses 11% of its value the instant you drive it off the lot! So you pay a high price for being the one to pull the stickers off.

Various sources across the web report first-year vehicle depreciation of 20% and more, with subsequent depreciation of 10-20%/year. Absolute depreciation will always be less in later years, because the vehicle’s value will have already dropped substantially.

Another practical reason for buying used is simply that the cash outlay will be smaller. At various stages of life that can be appealing. If you’re younger and it lets you avoid taking out a loan, then you’ll save on financing costs. If you’re older, living on a relatively fixed retirement income, it may let you sidestep selling investments to pay for the transaction. Also if you aren’t sure how long you’ll need a certain vehicle before your lifestyle or needs could change, then buying used is simply a smaller commitment to make. Lastly, if you’re the type who frets about scratched paint and door dings, then going for a previously owned vehicle may get you over that new-car infatuation stage sooner. Though truthfully, most recent-model used vehicles are sold in near mint condition anyway.

I’m no great expert at car-buying. It’s hard to get good at something you do once or twice a decade. But in this post, I’ll try to document everything I know about the process. And perhaps some readers with more experience will share their advice as well….

For starters, where do you locate good used vehicles? I’ll confess, though I’ve sold plenty of cars to individuals, that we’ve bought every single one of our used vehicles so far from dealers, generally small independents — the proverbial “used-car” salesmen. That’s because I put a high value, possibly too high, on convenience and safety. And working with a dealer has provided both so far in my experience. Unfortunately that comes at a pretty high transaction cost.

In some recent price comparisons I’ve done, it looks like you might expect to pay 30% or more at a dealer over what you could expect to get a vehicle for buying direct from the owner. If you’re willing to pay that price, Carsforsale.com is a site I’ve used recently, which does a nice job of aggregating used vehicles available at dealers nationwide. One of its clever features is the quick listing of average prices by year for any make and model you search. That gives you a quick feel for what your budget can buy.

Don’t want to pay that dealer premium and have the time to do your own legwork? Then Craigslist is probably your best bet these days. Just be prepared to sift through a lot of junk, and to move quickly once you spot the right deal.

After you’ve located the vehicle you want, what next? I came up with this checklist from memories of my past deals. If you’re new to the process, this may save you a mistake or two. If you’re an old hand, take a look, and see if I’ve missed anything….

  1. Inspection. The usual advice, if you don’t know much about cars, is to pay a mechanic or take along a friend. So far I haven’t been burned doing my own inspections. I am an engineer and did tune ups and light repairs on my cars, but I’m no mechanic. Start by asking the seller about the vehicle history. Then check some basics like tires, door latches, and window seals for signs of wear. Next inspect the engine: are hoses and belts in good condition? Are the engine oil and transmission fluid clean? (If somebody is selling a car with dirty oil you can bet they haven’t done much else to it.) Crawl underneath and look for leaks, rust, collision damage, and tailpipe residue — evidence of burning oil. Last, take it for a test drive and exercise the steering, brakes, and shifting. Listen for engine noise and vibrations, especially at highway speed. And drive over some good bumps at low speed to exercise the suspension. That should cover most of the bases. At this point, if you aren’t confident in the condition of the vehicle, just move on: there are plenty of others to choose from.

  2. Negotiation. Compare the asking price to NADA Guides. For most private deals, the selling price should be somewhere between the Average Trade-In and Clean Retail. I don’t care for hardball negotiating, especially with private individuals. It’s OK to pay a fair price if you feel good about the deal. But I have learned a few things over the years. At some point I like to set an aggressive but reasonable upper limit and simply tell the seller “this is how much it’s worth to me.” (If you’re younger, you might say “this is how much I have.”) It’s a simple statement of fact, without being judgmental about their property. One cardinal rule is that if you aren’t willing to walk away, at least temporarily, you won’t get the best price. You can always call or come back later to change your offer, but you surely won’t get a good deal if you must have it right now, at any price. If there are any doubts in your mind or, even if not, ask the seller to wait a few minutes and call a spouse or friend, just to buy yourself a little time to think clearly.

  3. Deposit. When dealing with a private individual, you’ll generally give them either a personal check or cash for about 5-10% of the price to get them to hold the vehicle for a day or two so you can line up payment. Typically a personal check would be held by the seller, not cashed. Especially if you give them cash, it would be a very good idea to get a simple handwritten receipt from them describing the terms: “Received $300 refundable deposit from DK for deposit on 2006 Ford. Full payment to be received by…”

  4. Due diligence. Before leaving, copy down the Vehicle Identification Number (VIN). If you’re the careful type, you can then check out that VIN using a service like CARFAX or AutoCheck for $30-$40. (Note: many used car dealers are now providing such reports free of charge to potential buyers.) These reports can possibly identify a whole litany of issues. They may give you some peace of mind regarding past title issues, commercial usage, flood damage, or accidents. Just be realistic about how much a computer can actually know about the history of a given vehicle. There are a lot of bad things that can happen to a car or truck without showing up in these reports.

    Now, before going further, call your insurance company to make sure the rates on that specific vehicle are reasonable, and to ensure you’ll be covered as soon as you take possession. In most cases you can set up the new coverage over the phone so it will be in force or ready to go as soon as you take ownership.

  5. Financing. Now, you need to arrange for payment. This is where I should be offering tips on how to get the best deals on auto loans. Unfortunately I have none. The last time I got an auto loan was about 1993. If you’re on the road to financial independence, then after your first vehicle or two, you should generally be paying cash. If you do need a loan, all I can say is shop around and get a really good interest rate. Given recent economic history and the general zeal among our private and public institutions to stimulate auto purchases, you ought to have banks and other companies bidding madly for your business.

    Once your financing is set, arrange to receive a cashier’s or other official check, made out to the seller, possibly subtracting out the deposit you already made. Most institutions will charge a small fee for this, and will also be happy to overnight you the check, for a little more. I used to think that cashier’s checks were good as gold, but in recent years it’s become far easier to forge them. If you’re a seller, you must be especially cautious. If you’re a buyer, you just need to confirm what your seller wants, and then cooperate. If it’s cash, then you’ll have to get your institution to make the check out to you, and then cash it nearby. Carrying thousands of dollars in cash around to seal a car deal is pretty stressful and unsafe in my opinion. I’d prefer not to do it, but that’s often how these deals are done.

  6. Handover. Now it’s time to meet the seller and close the deal. You want keys and a signed title. The seller wants your money. Make very sure the seller signs over the original title to you: usually they’ll just sign the back and you will fill in the rest at your convenience. Make VERY sure there are no liens on that title! (That would mean a bank really owns the vehicle, not the seller.) Hand over your check or cash to the seller. If your original deposit was a personal check, and that amount is not already included in the deal, then ask for it back and tear it up.

    Note standard advice is to create and both sign a simple Bill of Sale covering the transaction. Some states may require this, and there are some potentially nasty legal situations that could arise if you can’t prove who owns the car. Nevertheless there weren’t Bills of Sale in the majority of my past used car transactions between individuals, and it wasn’t a problem then.

    Get the keys. If possible, bring and mount an old license plate on the vehicle so you don’t get pulled over while driving home. Call your insurance company now, if possible, and tell them you’ve taken ownership. (It seems most policies I’ve had have offered a grace period for driving a new vehicle, but I make no assumptions on an issue as important as vehicle liability.) Now, start her up and go.

  7. Registration. You’ll probably want to get your car or truck registered at the state motor vehicle department as soon as possible. If you delay too long and get pulled over, the outcome could be a hefty ticket or worse. That’s easily prevented via the minor cost and hassle of registration. Note you’ll probably be required to pay sales tax when you go to register, and this can be painful: likely hundreds of dollars, or more. Some people try to state a lower purchase price, in an attempt to reduce the sales tax obligation. Not a good idea, in my opinion.

So that’s most everything I know about buying used vehicles, based on my past transactions and some recent research.

Comments

  1. I’ve bought a car private party and sold one the same way. My girlfriend has also done a private-party sale of a car. All of these deals were done over Craigslist. My advice:
    – You can tell a lot about a seller from the ad. Is it in all caps? Is there only one picture? Is it missing critical information/pictures about specific upgrades, flaws, or other deviations from stock? If the answer is “yes” to any of those, look for something else if you want an easier deal. Look for people who have taken the time to compose a detailed, informative Craigslist ad.
    – Make sure the seller has title in hand for an easier purchase. If the vehicle is still financed or has a salvage title, things can get tricky and the chances of the deal working out go down. Some people specialize in buying salvage title vehicles, but it’s definitely a more advanced car-buying skill.
    – When you meet the seller, evaluate them as a car owner. How trustworthy are they? How meticulous? I bought my current car from someone who had a spreadsheet of all gas fillups with tank mileage computed! Ask to see maintenance records. If the seller doesn’t have good records or they’re not well-organized, consider that a strike against them.
    – Don’t show up to “kick the tires” on the car. Before meeting the seller and seeing the car, you should know quite a bit about the specific model of car being sold (look for online forums for good research). Find out about common gripes or mechanical issues with that car. When you see the car, try to identify whether those issues exist on the model, and see if any common owner complaints (e.g. uncomfy seats) are a problem for you.
    – Learn about the rules for buying a vehicle in your state. When you buy from a dealer most of the hard work is taken care of for you, but private party deals can be tricky. For instance, the order in which the title must be signed over versus when plates are issued can mean you have to keep the seller’s plates on the car for a short time, then mail them back so they can cancel their insurance. In my experience it’s more difficult to jump through these hoops as a buyer than a seller, so as a buyer make sure you know what you’ll need to do when. Take charge of this process with the seller, especailly if the seller lives in a different state than you and doesn’t know the rules that apply to you. Try to find ways to make life easier on the seller, like returning the plates immediately and using a place to store the vehicle with no tags while you wait for it to be registered. If you can do this, you might be able to bargain the price down a bit.

    Finally, if you need to finance a vehicle, that vehicle is too expensive for you. Vehicle buyers should be paying with cash or cashier’s check, especially used private party. 04-06 small vehicles can be purchased for $5-6k, which is not that much money and anyone pursuing FI should be able to come up with that amount. If that’s still too much money, look for a late 90s subcompact for $1-2k. A car loan will just make your financial problems worse, and you’re better off driving a crummy car for a few years to beef up your net worth. The most important things are that the engine runs and the car can reach the speed limit.

    • Thanks for the awesome tips Ben! You’ve obviously been there and done it. I especially liked your advice to evaluate the ad and seller, to make it easy on the seller (and perhaps bargain the price), to know your state rules, and to avoid debt! Thanks again for taking the time to get these details written down for the rest of us. Invaluable.

  2. These are awesome tips. If you have no idea how to buy a used car, you can always bring someone with you. A friend or a family member who knows the work and will tell you honestly if it is a good deal or not.

  3. Thanks for such great advice, Darrow. Too many people just show up at a used car lot and pick out something pretty; these tips hopefully will save someone from doing that again!

  4. I’ve bought many new and used cars over the past 40 years. In order to make the best deal, with a dealer, you need to be able to walk away if you dont get the price you want to pay. The best way to do this is to have a least 2 vehicles you are bargaining for and all the better if they are close to the same model, miles and condition. You then use the negotiations on one car as leverage on the other, going back and forth a few times, telling the dealers about each others negotiations. This way they are effectively negotiating, or bidding, against each other. Of course since they are different cars, the dollar amounts probably wont be equal but if a dealer knows you are close to a deal on another one, you are likely to get their best price.
    On New cars, it can work even better because you are comparing apples to apples, with the same or very similar cars.
    Always look at more than one car….and negotiate on them.

  5. Darrow, I like your admission and lack of fear of needing to hide the fact that you will be buying used cars from now. My husband and I have been earning a steady income for a number of years and although we could happily afford a new car we don’t see the point. Why sacrifice spending so much money on a car that will lose a lot of value as soon as your drive it off the lot… let alone a year down the line. With you on the used cars all the way!