Bargains in Used Cars

published 28 May 2010

If you're in the market for a used car this year, you'll have to work a little harder to drive home a deal. It's the economy: As car buyers headed to the used side of the dealer's lot to save money, the supply tightened and prices rose. And as new-car sales suffered, the number of trade-ins dwindled, making the pickings even slimmer. In fact, last year produced roughly three million fewer trade-ins than in pre-recession years. "It might seem counterintuitive that prices are so high when the economy is bad," says Mark Scott, of AutoTrader.com. "But a lot of new-car buyers became used-car buyers because of the economy, and those who had been used-car buyers all along stayed in the market." Transaction prices are up 7% from 2009, reports Edmunds.com.

Fewer new-car sales and the associated cutback in trade-ins will continue to affect the used-car market until 2012, predicts Tom Kontos, chief economist for Adesa, a vehicle-auction company. But even with supply tight, you can find a bargain -- especially compared with buying new. After three years, most cars depreciate 50% or more. So even when you factor in generous new-car incentives, buying a used car is almost always cheaper. Our strategies will help you create competition to get the best price on the vehicle you want. If buying sans warranty makes you nervous, consider a certified used car, which has been inspected by the manufacturer and comes with an additional warranty. If you don't want to do the legwork, you can hire a pro to do it for you (see Hassle-Free Buying: Leave the Haggling to Someone Else).

And don't underestimate the value of getting creative. Dan Nainan, a comedian who splits his time between New York City and Los Angeles, needed a ride to get around L.A. He was leaning toward a Volvo C70 convertible but decided he wasn't quite ready to splurge. Nainan found a dealer on Craigslist that sells cars previously used on movie sets. Because such vehicles usually appear only in street-scene backgrounds, they typically don't get much use. He bought a 2004 Volvo S80 T6 for $8,000-$4,500 below the Kelley Blue Book value.

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Finding your car

While no area of the market stands out as ripe for deals, some segments are softer than others. Compact cars were hot in the second half of 2008, when gas prices surged to $4 a gallon. Manufacturers responded by building more. But then pump prices fell, and so did sales. A lot of small vehicles found their way to used-car lots, so you have more room to bargain on one. Likewise, lackluster demand for midsize family cars has left a glut of inventory, so you may be able to snag a deal if you're a tough negotiator. But it will take some searching to find a low price on a big truck or SUV. Those vehicles were dumped quickly in the wake of gas-price spikes, but that was followed by a double whammy -- manufacturers cut production and demand picked up as fuel prices went down. Joe Spina, used-car analyst at Edmunds.com, says prices are "among the highest we've seen in years." For example, he notes that prices on pickup trucks have jumped 21% from the same time last year.

You'll save time and money by starting your search online. Used-car listings at AutoTrader.com and Cars.com can help you pinpoint the vehicle you want and what it will cost. In addition to pictures and prices, online listings include options, mileage and the vehicle identification number, which you'll need to check the vehicle history.

Before you visit a dealer, log on to Edmunds.com and click the used-car appraisal tool to see current transaction prices. You'll have to include the trim level and options to get the best estimate. The dealer retail price is the average of what consumers are paying at dealerships, and the private-party price tracks deals between individuals. There's also an average certified-used price. Finding out what people are actually paying is more important than ever now that used-car prices are edging up. Dealers may be tempted to ask for more, knowing that supply is tight.

Check prices at Kelley Blue Book and NADA Guides, too. If you're financing through a bank or credit union, the lender may limit your loan amount to the car's listing price in one of these guides. But be aware that the number is only a suggested retail price -- a starting point for negotiation.

Once you have a target price in mind, circle back to the listing sites to look for cars available in your area. The fewer constraints you put on your search, the more results you'll get. A search for a 2007 BMW 328i sedan in the Washington, D.C., area yielded 81 results, but adding a filter for cars with 30,000 miles or fewer (the average is about 12,000 miles per year) brought the tally to 33. The best deal is the one with the lowest mileage and price but the most options.

Our results ranged from $20,995 for a model with 21,585 miles from an independent dealer to $29,987 for a certified model with 26,245 miles from a BMW dealer. According to the Edmunds.com appraisal tool, the average transaction price for the cheaper vehicle when we checked was $22,721 -- $1,726 more than the dealer was asking -- so the price looked attractive. The average transaction price on the certified model was $24,543-$5,444 below what the dealer was asking -- so it's safe to assume that the price was too high.

After you've picked several vehicles that look promising, arrange test drives. Haggling is de rigueur, but the best way to score a lower price is to introduce competition -- assuming that a nearly identical vehicle is available nearby for less.

Expanding your search from your area to a few hundred or even a few thousand miles can give you many more choices and include regions where the type of vehicle you're looking for may be more plentiful (think convertibles in Southern California or four-wheel-drives in Colorado).

You can save $2,000 to $10,000, depending on the car, even after delivery charges, which typically run $800 to $1,200. Hopping on a plane to pick up the car yourself may cut costs and relieve the uncertainty of a long-distance transaction. Regardless, you should hire a certified inspector (it costs as little as $100) to determine a vehicle's condition before you commit. Go to Carfax.com or eBayMotors.com to find one. Escrow.com can securely transfer the funds and title, for about $200. Find reputable shipping companies on TransportReviews.com.

Buy certified?

Certified preowned vehicles are your best bet if you're looking for a new-car experience at a used-car price.

And certified vehicles are more plentiful today than they've ever been. Dealers look for late-model, low-mileage cars, subject them to rigorous inspections and extend the warranty. For example, Volkswagen, which was voted the top nonluxury certified program by IntelliChoice, has a 112-point inspection and extends the warranty for 24 months or 24,000 miles beyond the new-car warranty. Volvo, the winner for luxury certified program, has a 130-point inspection and extends its warranty for 24 months or 50,000 miles past the new-car warranty.

By buying certified, you can skip the two safeguards that are a used-car buyer's best friend: a Carfax report and an inspection by a mechanic. The premium for a certified vehicle can run $500 to $1,500 for a nonluxury car and up to $3,000 on a luxury vehicle. Many makes soften the blow of the higher price by offering special financing on some models. Infiniti recently offered 3.5% for 60 months on G, FX and M models, and General Motors was offering 3.9% for 60 months on the Pontiac G6 and Chevrolet Malibu (through June 1) and Cadillac CTS (through June 30). Be sure to buy through a factory-certified dealers' used program and not a dealer program -- offers are usually extended warranties in disguise. For more details on certified-used programs, go to www.intellichoice.com.

Anderson has been with Kiplinger since January 2004, when she joined the staff as a reporter. Since then, she's covered the gamut of personal finance issues—from mortgages and credit to spending wisely—and she heads up Kiplinger's annual automotive rankings. She holds a BA in journalism and mass communication from the University of North Carolina at Chapel Hill. She was the 2012 president of the Washington Automotive Press Association and serves on its board of directors. In 2014, she was selected for the North American Car and Truck Of the Year jury. The awards, presented at the Detroit Auto Show, have come to be regarded as the most prestigious of their kind in the U.S. because they involve no commercial tie-ins. The jury is composed of nationally recognized journalists from across the U.S. and Canada, who are selected on the basis of audience reach, experience, expertise, product knowledge, and reputation in the automotive community.