Depreciation is Depressing

Why should you buy a used car? A new car will depreciate about 10% the moment it leaves the lot and another 20% within its first year. After three years, the average car is worth about 60% of what it was when new. That might be depressing news for the original owner, but it represents a screaming deal for the prudent used-car buyer.

A model that is one to three years older will likely still be under the manufacturer’s warranty, and unless it has been abused, it is likely to offer many more years of good service. Also, consider that the used car marketplace is huge—about 43 million used vehicles change hands each year, dwarfing the 17 million in new car sales.

Key Takeaways

  • Buying a used car can be a confusing, complex, and anxiety-inducing process.
  • Getting a good deal on a used car can be done by conducting thorough research online, checking out cars and test-driving them, and comparing prices.
  • Private parties may be less expensive but come with greater risk, while dealer lots and certified pre-owned vehicles may be more reliable and are backed by lemon laws in most states.

Research First

So, how do you make sure you get a good deal? “Do everything you can before physically going to buy the car,” said Philip Reed, a senior consumer advice editor at automotive review site Edmunds. That means researching what make and model you are interested in and how much they sell for in your area. By researching specific vehicles that have the features and mileage you are looking for, you introduce competition to the car-buying process. A seller might not match the lowest price you find, but it cannot hurt to ask.

Edmunds is a good resource for auto shoppers. It, along with Kelley Blue Book and National Automotive Dealers Association, track new and used car purchases to provide granular pricing information. “We collect tens of thousands of transactions per week from wholesale auctions, dealers both large and small, vehicle registration data, listing data and other sources,” said Alec Gutierrez, a senior analyst for Kelley Blue Book, of his organization’s process. “This data is then cleansed, normalized and run through a statistical modeling process.”

Some of the automotive magazines — particularly the largest, Car and Driver — are also useful for their lengthy backlog of reviews with a slant towards driving enthusiasts.

Check It Out

Once you have determined what you want to buy, and what they sell for, it is time to check out the car, take it for a test drive and make sure everything the seller says about it is true. Get the vehicle history report (Carfax and AutoCheck are two popular choices) to confirm the odometer reading, ownership history and reports of accidents and flood damage. (For more, see: 10 Tips for Buying a Car Online.)

Private Sellers

When shopping, note that dealers usually charge at least 10% more than private sellers. Most people selling cars are not professional salespeople and are not as skilled at haggling. Also, they might be moving, or, having purchased a new car, need to make space in the driveway. Before you hand a private seller your money make sure they have signed the title (also called the pink slip) over to you. You will also need to insure the car before you drive it away. It is a less structured process than buying from a dealer, but if you are looking to save as much as possible, and if you trust the seller, a private party purchase could work. (For more, see: How to Get the Best Deal When Buying or Selling a Car.)

Dealers

Sure, it is a markup, but that dealer’s markup can come with substantial advantages. First off, it is easier to shop a range of cars from a dealer’s lot than schlepping all over town to cross-shop individual sellers. Dealers are also more likely to clean and perform a basic inspection of a car, plus they are governed by Federal Trade Commission rules as well as state and local regulations. “If you buy from an established business, it has a reputation to uphold,” Reed said. “In many instances, they will also offer some sort of warranty — even if it is only for 30 days.” Buyers should ask how warranties will be honored and where any needed repairs will be made, however.

How Much Can You Talk a Dealer Down on a Used Car?

This is the central question that you should be considering when you’re planning to buy a used car and there’s no one-size-fits-all answer. The amount you can knock off the price ultimately depends on what the car is worth, how strong your financing position is and how long the car has been on the lot. Here are some things to keep in mind as you open negotiations. Kelly's Blue Book (KBB) is a free online resource for determining what cars like the one you are interested in sell for. Having a firm idea of the car’s value can help you decide how much you’re willing to pay. If the dealer is asking $18,000, for example, but you believe it’s only worth $15,000 based on your research, you may decide to meet in the middle and offer $16,500. The most important thing to remember is to set your buying max before trying to negotiate. Otherwise, you could end up paying more than you intended for a car.

If you want that used car, but are nervous about reliability, you might want to look into factory-certified offerings. (For more, see: 7 Mistakes to Avoid When Buying a Used Car.)

Certified Pre-owned

Certified pre-owned (CPO) are offered by most luxury brands, such as Lexus, Lincoln, and Mercedes-Benz, but also mainstream makes such as Nissan and Chevrolet. CPO vehicles are thoroughly inspected, any maintenance issues are addressed, and they are cosmetically sound — no shredded interiors, bashed fenders or missing trim. When talking to a dealer (by their nature, certified cars are sold through dealers, not private individuals) about a certified car, have them show you its inspection report, which will list all of the areas checked, whether or not there were any recalls on the model and even details such as tire tread depth and the thickness of the brake pads. CPO cars tend to have less wear and tear. Mercedes, for instance, will only certify cars six years old or less, with fewer than 75,000 miles. The German brand then adds a year and unlimited miles to whatever initial warranty is left, plus 24-hour roadside assistance, trip-interruption protection, and service loan cars. (For more, see: Cars That Depreciate in Value the Most.)

You pay extra for CPO cars, however. “There is usually a $1,000 premium,” Reed said. “But you are getting the cream of the (used car) crop. It turns used-car buying into a new-car-buying experience.”

Like new cars, CPO vehicles are best purchased at the end of the month, when dealers are looking to make quotas and are more receptive to haggling. However, a used car sale is not generally cyclical this way, though timing can still be employed.

For instance, if you live in an area that gets a lot of snow, you’ll likely get a better deal on a convertible in the fall and winter months. Conversely, there is usually an uptick in all sales around April, when people blow their tax refunds, so avoid shopping then, if possible. (For more, see: 5 Tips for Dealing with Car Dealers.)

The Discontinued Model

Buying a car that’s been discontinued or slow-selling is another good option. Dealers have a finite amount of space and will heavily discount these vehicles to make way for new models. I bought my 2006 PT Cruiser convertible in 2007 at slightly over half the $30,000 list price. It only had 12 miles on the odometer and was a used car in name only, but after months languishing on the dealer’s lot, he was ready to make a deal.

Negotiation Tactics

Knowledge is your best resource for getting the best deal. Knowing what other cars like the one you are bargaining over sell for is key to talking down a price. But what else? Here’s where your bargaining skills come into play. Simply accepting the dealer’s sticker price as the lowest price possible is a good way to give yourself a case of buyer’s remorse. Unlike a new car, which may have never been driven past the dealer’s lot, a used car has been on the road and as a result, it’s already lost some of its value. (See: Cars That Depreciate the Least.)

Consider this example. According to data from Edmunds, an average midsize sedan with a sale price of $27,660 loses $7,419 in value in the very first year. In its second year, that same car loses just $1,114 in value. Between the second and fourth years of its life cycle, it depreciates by $5,976, which is less than the total amount of depreciation incurred in the first year. The takeaway? When you buy a car that’s already a year or two old, it’s likely to have experienced its biggest value drop already. That gives you as the buyer some leverage in terms of getting the dealer to cut you a better deal on price.

Be Strategic

When a lower purchase price is the goal, you don’t want to go in with the wrong approach. Come off as too demanding and the dealer may not be willing to make any concessions in your favor. Go in too soft and they may see you as a pushover.

When you sit down with the salesperson and present your offer, be firm but polite. Let them know that you’ve done your homework and you have an idea of what the car is worth. Don’t let him or her try to steer the conversation off-course; stay focused on the issue at hand. A salesperson may try to distract you by discussing financing, insurance or extras like a maintenance plan; this is a trap you should be prepared to avoid.

Take the opportunity to clearly make your case as to why the dealer should accept a lower price. For example, if you’ve seen the same car sitting on the lot for weeks, remind the salesperson that cutting you a deal would help to free up space for another vehicle. If your inspection turned up something minor you’ll need to have repaired, be sure to point that out. The goal here is to get the dealer to acknowledge anything that might justify accepting your offer.

If the salesperson tells you the dealer can’t take anything less than sticker price, be ready to walk away. At this point, two things can happen: The salesperson will suddenly suggest that the two of you can reach an agreement on price or he or she will shake your hand and tell you to come back if you change your mind.

If the salesman chooses the former, be ready to make a counteroffer to any price that's suggested. The counteroffer may not be much lower than the sticker price but it’s an opening to further negotiations. At this point, you can increase your own offer slightly, but remember to keep your absolute ceiling in sight. It may take some back and forth but eventually, you may be able to compromise on a price that’s acceptable to both sides. 

Be Persistent

Negotiating is a fine art and sometimes, the salesperson simply may not want to hear what you have to say. One ploy is to adopt hardball tactics to try and you wear you down. This is where the true test of your negotiating skills comes in.

If your offer is refused point-blank, don’t wear out your welcome. Thank the salesperson for their time and say you’ll be looking elsewhere for a vehicle.Hand over your phone number and say that if they change their mind about making a sale, to give you a call. Then wait and see what happens.

It’s possible that in a day or two, the dealer may call you to tell you they’ve reconsidered your offer. If not, that’s a sign to move on to the next used car lot and begin the negotiations process again. It can be time-consuming and tedious but at the end of the day, you’ll thank yourself if your negotiation efforts allow you to purchase the right car at the right price.

The Bottom Line

If you know what you want and what it should cost, you are halfway there. Check NADA, Kelley Blue Book or Edmunds for pricing information. Both dealers and private sellers have their advantages and disadvantages, but thoroughly inspect and test drive any car prior to purchase, and get their vehicle history report. For a nearly new used car, CPO programs and leftover models are worth a look.