By Theo Thimou, clarkhoward.com
When you’re considering new vs. used cars, you need to think about the bigger picture of car ownership costs. It’s more than just the sticker price and the expense of gas. AAA reports that the true annual cost of owning and operating a car is $8,558.
Ouch! That painful figure takes into account somewhat hidden costs such as depreciation, insurance, maintenance, interest on a car note and other factors.
With a used car, however, somebody else has already taken a hit on the depreciation, which is really just a fancy way of saying that new cars lose a ton of value the minute they drive off the dealer lot. That’s what we call depreciation. When you buy used, you let some other poor soul absorb that loss upfront.
Buying used, however, can be fraught with danger. With used car purchases, you buy “as is” — no matter what condition the car is in. The vehicle and all its warts become your problem. If it comes with any warranty, it’s usually very limited. Yet if you know how to buy safely, you can really get a deal!
Check a car’s repair record before buying
Buying a used car involves more risk than buying a new car because you never know how the previous owner treated that vehicle. One way to minimize that risk is to buy used car models that have proven to be reliable.
The best place to get that information is in Consumer Reports. The magazine publishes its Annual Auto Issue every April, containing a rundown of all its top picks for the new model year. But near the back of the April issue, you’ll also find detailed information on used cars.
The Auto Issue lays out Consumer Reports’ top used car picks by price category. There are also detailed reliability ratings for the past six model years on every possible nameplate, which are compiled from reports about 17 common trouble spots in more than a million cars on the road. This latter feature gives you a great vantage point on long-term reliability.
If you stick to Consumer Reports’ list of recommended used vehicles, odds are good that you won’t have any major problems. And that means you shouldn’t have to buy an extended warranty. Visit ConsumerReports.org to purchase one-time access or read the April issue for free at your local library.
Vet out problem cars online
In the aftermath of flooding like we’ve seen recently in Louisiana, you have to be wary about flood cars entering the used car market. Vehicles can be rebuilt and have their titles “washed.” This is a recurring problem that happens anytime we have a major hurricane season or flooding.
Dishonest people take flooded vehicles into certain states where they can easily wash the titles. That action removes any evidence that the vehicle was ever in a flood. Cars with washed titles can then be sold to any dealership across the country that either doesn’t know or doesn’t care that they’re buying a flood vehicle.
These cars often end up in the hands of “curb stoners,” which are illegal dealers who run ads in the paper. They pretend they’re selling their sister’s car or their mother’s car and they hope you don’t know what they know.
To the naked eye, there’s no telling that anything is amiss with these cars. But you’ll know you’ve got a flood car when you encounter failed electrical systems throughout the vehicle. A lot of people will run the vehicle identification number (VIN) and check for any title problems, liens, odometer rollback, salvage history and more at CarFax.com. That’s a good idea. But you want to be doubly sure and also run the VIN through a free database operated by the National Insurance Crime Bureau at NICB.org.
Have a certified mechanic inspect a used car before purchase
Used cars are sold “as is,” whether by a private seller or a licensed dealer — unless they come with a written warranty. Worse yet, the seller is not required by law to be honest about the condition of the vehicle.
Here’s Clark’s key rule of used car buying: Have the car inspected by a certified diagnostic mechanic of your choosing as a condition of purchase. You can leave a deposit if you wish, but specify in writing that the money must be returned to you if the car doesn’t check out. You can eliminate nine out of 10 used car buying disasters this way.
You want an ASE-certified (Automotive Service Excellence) mechanic. Garages that participate in the Blue Seal program typically feature the most highly trained ASE-certified mechanics. Visit ASE.com to find one near you.
Pre-arrange your auto loan financing
You may have spent hours researching a potential car purchase thoroughly, but did you do the same when it came to getting your loan? One of the biggest mistakes people make when buying a car is to not arrange financing before they walk into a car dealership.
Dealers are entitled to make money on a loan if you don’t do your homework and get pre-qualified elsewhere. Credit unions offer interest rates on car loans that can be 1% to 3% lower than other lenders. You may also want to check online lenders. Even your auto insurer may be able to give you a competitive interest rate.
The real money in car dealerships is made in the F&I (finance and insurance) department, where the F&I man (or woman) sells extended warranties and writes car loans. When you do a credit application at a dealership, the dealer goes out to wholesale the money for you. They might get money at 4%, but they could write the loan at up to 7% or even higher — especially if they con you into thinking you have bad credit. The younger you are, the likelier it is that you’ll be conned into thinking you weren’t good for the money and they were heroes to get a loan for you!
By pre-qualifying elsewhere, it will change the whole equation at the dealership. You can then go in and tell them the interest rate you’ve pre-qualified for. If the F&I department can beat the deal you have, fine, give them a chance to make some money when they originate the loan. But don’t let them make money by gouging you on the markup of a loan.
Never trade in a car you still owe money on
Picture this scenario: You have a car and you’re still paying off the note. You decide to trade it in and get a slightly newer vehicle, taking out a new loan in the process. Several months later, you are contacted by the lender on your last car about missed payments. What happened? The dealership never paid off your loan when you traded your car in…and you don’t have the vehicle anymore.
Unfortunately, you are still responsible for payments on the car that you no longer own. Your credit is dinged because of the missed payments and your new car may be repossessed if you can’t meet both loans!
This was happening all over America during the Great Recession. The car dealerships that took trade-ins and did this were not intentionally trying to cheat customers. But when they hit hard times and went insolvent, they weren’t worrying about paying off your note.
There’s actually a real double whammy here. If someone had the misfortune of buying the car you traded in, that person could have it repossessed from them because your original loan is outstanding. And they would still have the obligation on the loan they took out! Talk about a train wreck.
Be sure you’re not buying a used car with an outstanding note on it by doing a free title search at CarFax.com or checking with your local Department of Motor Vehicles. Until state legislatures pass bonding laws to protect consumers, we’ll continue having this problem.
So the takeaway is this: Do not trade in a car you still owe money on — period. Pay it off before dumping it.