Learn about the Pros and Cons of Buying a Used Vehicle from a Dealership
No matter how much you love your car, and no matter how well you take care of it, at some point, the odds are good you will have to make a difficult choice: Do you keep putting money into an aging vehicle or bite the financial bullet and replace it?
If you need a new car but can’t afford to buy new, don’t despair: There are countless options for buying a used car and financing the purchase with a used car loan, and few would disagree that used cars typically represent a much better value. Let’s take a closer look at the process of buying and financing a used car. In the first part of this series on where to buy used cars, we will discuss purchasing from a dealership (read part two on buying from retailers and private sellers).
Used Cars at New-Car Dealerships
Technically speaking, a car is considered “used” the moment it is registered in an owner’s name. It doesn’t matter whether the car just rolled off the truck and has less than a mile on the odometer or has racked up 100 miles in test drives. It is still “new” right up until that title is put in someone’s name.
You may be surprised to learn that used cars are more profitable to dealers than new vehicles. The suggested prices for new vehicles are set by the manufacturer, and the days when a dealer could make 10% or more on the sale of a new car are long gone. Used cars have lower price tags, but the dealer can choose how much to invest in each unit and how to price it.
Most new-car (a.k.a. “franchise”) dealers sell used cars that are one, two or three years old. Used cars sold at new-car stores typically fall into one of three categories:
- Trade-ins from customers who bought new cars,
- Off-lease units that have been returned to inventory
- Fleet vehicles that have completed their service.
Car buyers pay a premium for used cars at new-car dealerships because there is higher expectation of quality. Dealers spend time and money to inspect and recondition trade-in, off-lease and off-fleet units before they are offered for sale. They also offer the convenience of arranging financing through their in-house finance and insurance (F&I) department and, if the vehicle is no longer covered by a factory warranty, they can also finance the cost of a vehicle service agreement (VSA) to protect your investment.
You might also consider limiting your search to certified pre-owned (CPO) units. These cars and trucks have undergone an inspection mandated by the manufacturer, which sets a very high standard, and many come with factory warranties still in effect. The CPO option brings most of the benefits of a new car with none of the immediate depreciation — on average, new vehicles lose 19% of their value in the first year of ownership, and half of that occurs the moment the ink is dry on the contracts.
Independent and BHPH Dealerships
Another option is to visit your local independent dealers, most of whom sell used vehicles exclusively. You will likely spend less than you would at a new-car dealership, but you lose the backing of the brand name and the quality and security it represents. Some used-car lots are cash-only; others will take checks from banks, credit unions or finance companies.
Many independent dealers offer “buy-here, pay-here” (BHPH) financing, for which payments are made directly to the dealership; however, this form of financing is most attractive to credit-challenged car buyers. BHPH interest rates are among the highest in the industry, and dealers may require the installation of a GPS tracking or starter-interrupt device to ensure they can repossess the vehicle if you don’t make your payments on time.
PART TWO: Where to Buy a Used Car: Retailers and Private Sellers.
If you are a first-time car buyer, read our guide to purchasing your first vehicle.
Do you want to reduce the payment or interest rate on your current car loan? Refinancing your car loan may be right for you.