Don't Get Stuck With a Clunker

When you're car shopping on a budget, buying used is one of the smartest moves you can make. Because cars lose most of their value in the first few years, buying used allows you to drive a vehicle you probably couldn't afford brand new. In fact, cars lose as much as 20% of their value in their first year, and after three years only retain about 55% of their original cost, giving used-car buyers the opportunity to save some serious cash.

Recent used models -- those that are less than five years old -- can be a real value because you get a nearly-new car still in fine working order for a fraction of the new-car price. And you'll pay less for collision insurance and taxes too.

The trade-off, of course, is that you don't know if a pre-owned car has any hidden problems that will come back to bite you in the wallet down the road. Finding a used car isn't tough -- they're in plentiful supply these days at dealers and from private parties. You can search for cars from both at Autotrader.com and Cars.com, and find a wealth of information; from how many miles the car has on it to how it's equipped. Still, buying used often feels like a gamble. How do you know you're getting a good deal? How do you avoid ending up with a lemon?

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Below are five tips on how to buy smart. Then check out our SLIDE SHOW of the ten best deals in used cars on the market today.

1. Do your homework. Research models you're interested in online to narrow down your options. Edmunds.com has forums where owners report problems they've had and a warranty and service section where you'll find recall data and technical service bulletins (one step below recall, according to Philip Reed, consumer advice editor at Edmunds.com). If there are a lot of problems, you might reconsider your choice. Also check the complete list of safety recalls at the Web site for the National Highway Traffic Safety Administration.

2. Get a Carfax report. Many dealers offer one for free online and at the lot or you can purchase directly from Carfax.com. An individual report costs $25, but $30 will get you unlimited reports for a month -- worth it if you're shopping a lot of models.

The report gives the estimated mileage, ownership history, title and accident history and service and repair information reported for that car. If there are no DMV-reported incidents (such as a flood, fire, salvage or manufacturer buyback), the car qualifies for Carfax's Buyback Guarantee. If one of those incidents comes to light after you buy and it wasn't on the report, Carfax will buy the car back from you for up to 110% of the Kelley Blue Book value.

3. Kick the tires. Whether you're buying in person or online, make sure it gets a physical check-up. That includes a test drive -- use Kiplinger's Test-Drive Scorecard for guidance -- and an inspection by a mechanic, which will cost $60 to $100. If you're considering a vehicle far from home, you can hire a certified inspector through Carfax.com or eBayMotors.com to check and test-drive the car for about $100.

Don't balk at putting money in before the purchase, says Chris Basso of Carfax. "It's money well spent that can save you thousands -- as well as multiple headaches." In addition, the mechanic may uncover something you can use as a bargaining chip to knock the price down, says Reed. For example, if the car shows significant brake wear, you could offer to split the cost of replacing the brakes.

4. Consider certified cars. Sales of certified used cars have been on the rise for the last several years and they offer many of the perks of a new car. Typically off-lease or corporate fleet vehicles, they're not only "young in age and have low mileage, but have been meticulously maintained," says Basso.

Stick with a certification program backed by the manufacturer, rather than by a dealer. The manufacturer's certification includes a rigorous inspection of the car, extends the warranty if the car isn't still under the original warranty and reconditions the car. Typically manufacturer programs specify that candidates for certification be less than five years old with fewer than 75,000 miles. Dealer programs are often an extended warranty in disguise.

Peace of mind comes at a price, however. You'll pay an average of $1,000 more for a certified vehicle (the premium on luxury models can be up to $3,000).

5. Know what it's worth. You also need all the facts about the car's value. In addition to the standard pricing guide of Kelley Blue Book, which notes that their retail values are the starting point for negotiations between a consumer and dealer, check used car values at NADA Guides and Edmunds.com. The True Market Values given on Edmunds.com are based on actual transaction prices and by using its Used Car Appraiser, you can input the specifics of your potential buy and get a more accurate price.

Figuring a fair price for a used car is just one piece of the pricing pie. Be prepared to haggle with a private party or a dealer, and know that dealerships tend to put their best salespeople in the used car department. (Learn how to negotiate your way to a good deal.) If you want to skip the pressure, check out CarMax, which offers "no-haggle prices" based on Kelley Blue Book values. (Learn more about no-hassle car buying.)

If you finance through a bank or credit union, make sure to get pre-approved for a loan before you start shopping and find out what price guide it uses. Your loan amount could be limited to the average retail value in the price guide, which could be less than the asking price. Find out what your car payments will be with our calculator.

SLIDE SHOW: 10 Used Car Best Bets Under $20,000

Photo credits: iStockphoto