Avoiding depreciation. It’s common knowledge that once a new car drives off the lot, its value depreciates immediately. In the first two years of ownership, a new car can lose about 30% of its original value. And if you decide to sell your new car a few years after you buy it, you’re going to lose a lot more money in the re-sale than if you had bought it used.
Price. If depreciation is your enemy when buying new, it’s definitely your best bud when you buy a used car. There isn’t much difference between a brand new car and a two-year-old car. By buying a car brand new, you’re basically paying 30% more than you need to. That’s a big mark-up for that new car smell.
You can save even more money if you decide to buy older cars that have more miles on them. A buddy of mine back in college bought an ’86 Honda Accord hatchback for a couple hundred dollars. It was super ugly, but it drove just fine and lasted him a few years.
Bigger selection. Because used cars are cheaper than brand new cars, you effectively widen the selection of cars you can purchase. Instead of being merely a dream, luxury and sports cars enter the realm of possibility. I remember back in high school when my dad and I were shopping around for a used car, I found a late model (this was back in the 90s) Mercedes Benz for about $5,000. I couldn’t believe it! Something had to be wrong with it. So, we took it for a test drive and to a mechanic. It was in tip-top shape and drove like a dream. I ended up not buying the Benz. I was too punk rock for that. Instead I went with a 1992 Smurf Blue Chevy Cavalier. Now that’s punk rock. However, the experience did open my eyes to the fact that if you look hard enough, you can find some awesome cars for super cheap when you buy used.
Save money on insurance. If you buy a considerably older used car, you can save money on car insurance by only getting the state mandated minimum coverage. If your car is worth less than 10 times the premium on your insurance, it’s probably not worth getting comprehensive coverage.
Buy a Used Car from a Private Owner or a Dealership?
When you buy a used car, you have two possible sellers: a private owner or a dealership. Each has its advantages and disadvantages.
- Great deals. When you buy from a person who put an ad in the paper or on Autotrader.com, you can often find some really good deals. The best deals I’ve seen are at estate sales. You can find an older car with low mileage because the little old lady who owned the car only drove it to church and the grocery store. The car might smell like mothballs, but you’ll enjoy the sweet scent of saved cash.
- Less intimidating negotiations. Negotiations can also be less intimidating because you’re working with an average Joe and not some highly trained salesman who has to take your offer to a mysterious backroom boss to get it approved. Moreover, dealerships often try to throw in unneeded extras when you’re buying from them — extra floor mats, XM Radio, etc. When you buy from an owner, they’re just selling you the car and nothing more. Makes the experience less irritating and cheaper.
- Complicated and annoying negotiations. Owners tend to be more attached to their cars than dealerships. To them, they’re not just selling a product, they’re selling a memory. These sorts of owners can be difficult to work with. They’ll bust your balls in negotiation over a piece of crap Buick simply because it was their grandfather’s beloved car, and they hate to see it get in the hands of the “wrong person.”
- No consumer protections. Private sales aren’t generally covered by many states’ implied warranty laws. Implied warranties are unspoken and unwritten warranties that hold sellers responsible if the product they sold doesn’t meet reasonable quality standards. When you buy from an owner, you’re buying the car “as is,” meaning if the car has a problem (known or unknown by the seller), once you buy it, it becomes your problem and the seller doesn’t have to do anything to fix it. Moreover, private sales generally aren’t covered by the FTC Used Car Rule which requires dealers to post a Buyer’s Guide in used cars for sale.
- Certified Pre-Owned Program. A CPO vehicle undergoes rigorous mechanical and cosmetic inspection before it’s put on sale. Moreover, CPO cars are often covered by a warranty beyond the original factory warranty which includes items like roadside assistance. Buying a CPO vehicle can give you the piece of mind that the car you’re buying is in great condition and not a piece of crap. Even if you don’t buy a certified pre-owned car, when you buy from a dealer, you’re likely protected by your state’s consumer protection laws such as implied warranties or warranties of merchantability.
- Extra services. Dealers will often throw in extra services for free that a private seller can’t. For example, when Kate and I bought our last car, before we drove it off the lot, the dealer cleaned and detailed it, performed a free oil change, and gave us a discount on our first service visit with them.
- Trade-ins. Dealers also take trade-ins which lowers the amount you have to pay in cash. Personal finance guru Dave Ramsey has a system set up that uses trade-ins on used cars to allow him to upgrade his vehicles every year or two without having to take out a loan on his car. Check it out. It’s pretty brilliant, if you ask me.
- Better negotiation experience (possibly). The negotiation experience can be a bit more even keeled with dealerships. It’s just a business transaction for them. You can avoid some of the emotional baggage you often find when negotiating with owners.
- Financing. If you don’t have all the scratch on hand to buy a used car, a dealership can often provide financing to help you make the purchase. And with the crum-dum economy, car manufacturers and dealerships are providing some pretty good deals if you decide to finance a used car. Things like cash-back or zero interest can make financing a used car a reasonable thing to do.
- Higher list prices. List prices at dealerships tend to be more expensive than when buying from an owner. However, you can usually negotiate this down easily.
- High-pressure negotiation. Negotiations with car salesmen can be more high-pressured than when buying from owners. Selling is what these guys do for a living. They know every trick in the book and will unleash them on you without hesitation. When you step foot on the dealer’s lot, gird up your loins, and prepare to play hardball.
- Up-sales. Dealers will try to up-sale you until your eyes bleed. They’ll tell you that you need to add the extended warranty or that you need the new stereo. If you’re not careful, you can drive out with a used car that cost you $1,000 more than the original value simply because you let the add-ons creep in. However, you can turn the up-sale to your advantage by simply using it as leverages in negotiating. If the salesman presses for an extended bumper to bumper warranty, tell him you’ll take it only if he lowers the price of the car a few hundred dollars.
- Financing. Financing is both an advantage and disadvantage. When you finance a used car, you can end up paying thousands of dollars more for your car than if you had paid in cash. Dealers that finance to buyers directly want this extra cash, so they’ll often pressure car buyers to finance their new car. Save your money. Pay in cash.