When you factor in a car payment, registration, insurance, fuel and maintenance, for most families’ vehicles are only behind housing in terms of monthly expenditures. As a consumer, what you have to be careful of is not having your transportation expenses become so great that they interfere with building long term wealth and other financial goals. For that reason, I often recommend to clients that they strongly consider buying used vehicles instead of new. Not only does someone else take the initial depreciation hit there can be substantial savings on insurance and registration costs as well.
Here are some tips as you look for that ‘new to you’ car:
Understand the depreciation curve to find a sweet spot of newness & value. While all used cars lose value, they do it at different rates. Specifically, American made cars, due to rebates and other discounting on new vehicles have the biggest depreciation hit when you drive off the lot; German cars, being more expensive to repair, have a large drop in their value when the warranty runs out; Japanese cars, due to high demand and perceived reliability depreciate at a slower rate. At some point however, the depreciation slows. This usually happens when a car is five to eight years old but varies depending on the vehicle. Your best bet is to look at Kelley Blue Book, available free online at www.KBB.com to get an idea of relative values. Wikipedia is also a good resource for doing this research as you can look up a vehicle model and it will tell you in which years a particular generation or body style was made.
Understand how your state taxes used cars. In Arizona, there is sales tax owed when a used car is bought from a dealer, but no sales tax is paid when bought from a private party. Assuming that you buy a $20,000 vehicle this can save you around $1500 in taxes! It’s also important to note in Arizona that the registration fee is the same whether the car is purchased from a dealer or a private party. Check your state’s Department of Motor Vehicles or Department of Revenue to find out what the provisions are where you live. With this tax break in place, it’s safe to say that I will never buy a car from a dealer again!
Vehicles are lasting longer now than in the past. I remember growing up that the old rule of thumb is that you could get about 100,000 miles out of a car before you needed to get rid of it. Don’t anchor on this old rule – automobiles have had tremendous improvements in quality, design, technology, and fuel economy in the last twenty years. With improved build quality and an owner who’s dedicated to preventative maintenance vehicles can last indefinitely. If you take care of a vehicle, you will get sick of that car before it wears out. Again, check sources such as KBB.com to see if the car you’re interested in has a meaningful drop in value at a certain mileage.
Have a mechanic do an inspection of the vehicle. This is common sense, but I’m including it since a lot of people neglect this step. While a mechanic won’t catch everything, they can spot major issues very quickly! Also, with more and more independent shops specializing in certain makes of vehicles, make an effort to find a mechanic who works exclusively on that brand of car. They will have a much better idea of what that vehicle’s common issues are and if the prior owner has already addressed those common issues. Expect to pay in the neighborhood of $100 for an inspection but it is money well spent if you wind up avoiding a lemon. Sometimes the shop will credit you the inspection fee if you buy the vehicle and have them do the work they identify.
As much as I love the bargains available by buying a used car, some vehicles are better to buy new. The biggest example of a vehicle that I’d want to buy new is a full-size pick-up truck or SUV with a heavy duty tow hitch attached. While the Phoenix and Tucson areas are relatively flat, a lot of Arizona is mountainous. Pulling a boat, RV, or other heavy trailer is hard for both the engine (especially with the air conditioning on) and transmission. I’d also be reluctant to buy vehicles that were in rental fleets, driven by teenage drivers, or have a lot of performance modifications. Conversely, if you can tell pride of ownership by maintenance records, cleanliness/upkeep, and close attention to deferred maintenance it’s probably a good sign.
Make sure to verify the vehicle’s title status. Although Arizona doesn’t typically have weather events such as floods and hailstorms that result in a lot of vehicles being totaled out by insurance companies there was a significant hailstorm in October 2010 that resulted in a lot of cars being turned into four-wheeled golf balls because of all the dimples! Even if the vehicle looks OK a salvage title or any other type of impaired title will cut the vehicle’s value roughly in half and make it very difficult to sell. Yes, you could get a bargain in this type of situation but you take on a significant amount of risk.
Don’t rely too heavily on a Carfax report. While you definitely want to check out a vehicle’s Carfax, recognize that they usually don’t include any accidents or other damage that was never reported to an insurance company. Even if the Carfax comes back clean, have a mechanic check out your prospective vehicle and use plenty of common sense.
Check to see if there’s an online discussion board for your vehicle. While not every make and model of vehicle will have a discussion board, you’d be surprised at what vehicles do. The beauty of looking at these types of sites is that by and large they are populated by actual vehicle owners – not people that have a vested interest in selling you a car! Among other things, I’ve used bulletin boards to get a comparison of different models and trim levels; looked to see what type of service & maintenance issues are common for a car; and to also find specialized vendors and resources for repairs. Some sites even include a ‘for sale’ section as well.
Know where to look for a used car. While Craigslist is now the most common place to buy a used vehicle, my experience is that clean vehicles in good condition and priced fairly will go quickly while the cars that are overpriced and have issues while be posted over and over again. I’ve had good luck buying vehicles from a local auto broker who serves as a middleman for private party sales. Their website is www.theautomatchmaker.com. Other places that I’ve seen good cars for sale include a bulletin board in my mechanic’s waiting area and parking lots of malls/sporting events. In North Scottsdale, the parking lot of the Wal-Mart at Frank Lloyd Wright and the 101 Freeway will have some nicer cars parked with ‘For Sale’ signs on most weekends.
Identify what you want, and be patient for it – the good cars go quick! Unlike new vehicles, where you can typically find what you want, with used cars you will normally have to make some compromises. Flexibility with things like model year, trim packages, and paint color is key. Also, work to understand your local market – in Arizona there are lots of white cars, and few four-wheel drive pick-up trucks for example. If you take your time and are patient you will be able to spot a value when you see one. Where I’ve seen people pay too much is when they need to buy a used car immediately. You are at the mercy of what’s available then and there.
Have you purchased a used vehicle recently? Do you have any tips to add? If you’re in the market, what type of car are you looking for and where do you plan to buy it? Share any experiences or thoughts in the comment section below!