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4 Keys to Buying a Used Car

This article is adapted from content courtesy of USAA.

Choosing a used car over a new one can save you money, but these days you might have to shop harder to find a real bargain.

A shortage of late-model used cars has pushed prices to historically high levels, says Jesse Toprak, vice president of industry trends for TrueCar.com. He cites several reasons why a good used-car deal is becoming more elusive:

  • Higher demand for reliable, affordable used cars in this tight economy.
  • Slumping new car sales of recent years, which has led to fewer late-model used cars on the lot.
  • March 2011 earthquakes that halted vehicle production in Japan and sent more buyers in search of used Hondas, Toyotas and Nissans.

Prices are especially higher for small, fuel-efficient vehicles. The average wholesale price of used, mid-market compact cars rose nearly 30% in the first half of 2011, according to the National Auto Auction Association.

"Consumers get the best deal if they are educated before they get to a dealer's lot. Understanding their specific car needs and having a working knowledge of current prices and how dealers negotiate on used vehicles is key," says Steve Thompson, assistant vice president of USAA Consumer Lending.

That's not to say you can't still save money by choosing used over new. You can increase your confidence in finding the best deal by using online tools, such as USAA's Car Buying Service, to compare makes and models and find specific cars and check out their histories. You also can follow these four strategies to find and buy a used car that fits your budget and your lifestyle.

1. Mind Your Money Matters

  • Figure out how much you can afford. If you'll be selling an old car, consider its cash value, any additional down payment you'll make and what monthly payment fits comfortably in your budget. Get help with USAA's auto loan calculator.
  • Websites such as Military.com and TrueCar's tool can help you determine the selling price of your old vehicle and how much you can expect to pay for the used car you're eyeing.
  • Receiving a quote for auto insurance before buying also can help you understand the true cost to drive the car you're considering. An added benefit of buying used is that the cost for collision and comprehensive coverage is generally lower compared to new cars of the same style.
  • If you'll be financing the purchase, look into auto loans through USAA or another bank that might offer lower interest rates than a car dealer. Heading into your purchase with preapproved financing also gives you a leg up in the negotiation process.

2. Find the Right Fit

  • When deciding on a make and model, prioritize the list of the features that are most important to you: styling, engine power, gas mileage, seating capacity, cargo space and so on. Be sure to base your list on your everyday realities (read: highway commuting), not your daydream scenario (climbing mountain trails).
  • Be flexible. By remaining open to two or three models that would meet your needs, you'll have an easier time finding a suitable vehicle at a good price. And for a real apples-to-apples comparison of different models, keep in mind that different makes of vehicles in a given class might depreciate at different rates. In other words, give bonus points to a car that tends to hold its value longer, and thus costs you less in the long run. You can research depreciation ratings at ALG.com.
  • Forget driving all over town to wander around used car lots. USAA members can take advantage of USAA's Car Buying Service for help in finding vehicles that come with exclusive member discounts. Dozens of Web sites, such as Cars.com and Autotrader.com, let you narrow down the universe of choices by searching classified ads and dealer inventories in your area.

3. Size Up the Seller

Who's selling the car might give you some indication of the deal you're getting.

  • Private individuals: Newspaper classified ads and automotive Web sites can connect you to thousands of people looking to sell their cars for a fair price. This is typically the path to finding that holy grail of cars only driven to church on Sundays.

    When buying from an individual take extra precautions to protect yourself against theft and fraud. Arrange to test drive used vehicles only during the daytime in public places, and make sure not to carry large amounts of cash with you. Also, before finalizing the deal, double-check the vehicle information, especially the vehicle identification number, to ensure the title matches the seller's name.

    Sites like Craigslist and eBay are also good places to find cars, but be careful to avoid scams involving wire transfers or cashier's checks. Unsuspecting buyers have been duped into paying for cars that are never delivered.
  • New car dealerships: Many big dealers also have used lots, where the cars for sale have often been professionally cleaned and inspected. For a guarantee of quality, Certified Preowned cars put the dealer's or the manufacturer's promise in writing that the vehicle is in trouble-free condition and is backed by a warranty. These services offer you more peace of mind, but come at a steeper price.
  • Independent used car lots: Like at any business, the salesman is looking to cover his overhead and make a profit, which could mean you'll pay a premium for the car. But good deals can be found everywhere, so don't overlook these lots just because they lack the sparkle of a big dealership.
  • Other sources: Sometimes bargains pop up in less traditional outlets. For example, rental car companies often sell their retired fleet vehicles to the public. And auto dealers and other large employers sometimes sell vehicles that were once used as company cars. Repossession auctions, held online or by local brokers, could be another source. Find cars outside your local market on online sites like eBay and Craigslist, or closer to home on your work's bulletin board. Investigate these cars the same way you would when buying from an individual or a dealership.

4. Do Your Due Diligence

  • When you view a used car in person, recheck the vital signs — model year, mileage, tire tread, etc. — to get an idea of how long the car will continue to be maintenance-free. Keep in mind that factory warranties are usually transferrable, so a late-model car could come with the protection of free repairs of covered systems.
  • Test drive any vehicle you're seriously considering, turning on all the bells and whistles, to make sure it performs to your liking. Don't limit your drive to neighborhood roads — hit the highway to properly test the car's acceleration, handling, braking and comfort. Consider taking two spins: one during the day, one at night.
  • Run a background check on the car using a service like Carfax.com, which can help you verify the ownership history, the mileage, and whether the vehicle has had any major repairs. If the report reveals disturbing information that the seller didn't disclose, walk away.
  • If possible, run the car by a trusted mechanic's shop and have them perform an under-the-hood inspection with a trained eye.

Extra: What About Buying New?

While used cars are still less expensive than new ones, the price gap has been narrowing of late. High demand and a shortage of supply has pushed used car resale values higher. At the same time, automakers have been working hard to bring even the most budget-conscious buyers back to the showroom. If the right buying conditions align, a brand new car could be worth a look. Here's why:

  • Low depreciation: Despite the rule of thumb that new cars depreciate by 20% as soon as they leave the lot, some makes and models hold their value much better than that. This alone won't make buying new cheaper than used, but it could narrow the long-term cost difference, especially if you don't plan to drive the car for more than a few years. For example, buying a new Honda Accord, to which ALG.com assigns a five-star (the best) depreciation rating, might be more attractive than paying nearly the same price for a gently used model.
  • Manufacturer and dealer incentives: In the recent tough times for the auto industry, car buyers have gleefully snatched up some deep discounts on new vehicles, and big trucks in particular. Sometimes these rebates are even combined with offers of very low financing rates. A deal like that could make the total cost comparable to a slightly used version with no rebate and standard financing.
  • Warranty: A car that's under warranty is more valuable because it gives you the peace of mind of cost-free repairs.

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