Part II - Process of buying a Used Car

This article aims to give you basic knowledge about how to inspect a used car and can possibly help you toHappy Used Car avoid used cars with potential problems i.e. avoiding lemons. To begin with let me make one thing very clear: "buying a used car requires tons of patience in addition to a lot of research effort".


1] Shortlisting:

a) Browsing online:
Look for used cars listings on www.craigslist.com. You would find cars listed by both dealers and private sellers. More often than not craigslist would suffice, but incase you want to look for more options you can check out other sites such as UsedCars.com, Cars.com, CarsDirect.com, etc.

b) Verifying by VIN:
Once you like a car, the next step is to look for its VIN no. VIN stands for Vehicle Identification Number and each car has one such unique number. In Oprah speak, its similar to a SSN. Every VIN# Tells A Story. One can peek into the cars history by using this 17 digit VIN#. By car history I mean the foll:
- the no of previous owners ???
- the type of owners ???
- Any accidents, engine, transmission repair ???
- Has the car passed last Emission Test ???

However, knowing the VIN no won't help in getting the above info. You would want to purchase an account with www.CARFAX.com to get all the car history using the VIN#. A carfax account for 1 month of unlimited usage would cost around $30. Buying a carfax account and filtering cars based on its VIN# is the first and most important step in this whole process.
2] Inspecting a used car:

Once you are satisfied with your research with the car's VIN#, proceed towards setting up an appointment with the car's owner.

a) Questions to ask to Seller:

Ask the seller to point out all known defects, problems, issues, etc. with the car. If there are any subsystems, alarms, or computer indicators that are not functioning, have them point it out to you. Ask the seller when the brake pads were last replaced. Ask if there is an extended warranty with the vehicle, and if it is transferable to you. Verify this with the warranty company. Ask to bring the car to your mechanic to check it out. If they say no, you have to wonder what they are hiding.

b) Inspecting Externals of the car:
Following is an excellent webpage that teaches how to inspect the car body: http://www.samarins.com/check/bodycond.html

c) Inspecting Internals of the car:
Following is an excellent webpage that teaches how to inspect internals of the car:
http://www.samarins.com/check/checklist.html

However, this information cannot substitute for detailed mechanical inspection performed by a professional. To protect yourself, take a car to a mechanic of your choice for detailed mechanical inspection prior purchase. I did a checkup at pepboys. I did a 120 point checkup for $70/80 + an engine checkup for $40. However, spend your money for a professional checkup only after a test drive and price negotiation, i.e. when you are absolutely sure of buying the car.

d) And finally the Test Drive:
Drive with the radio on and off. Test the speakers to see if they are cracked. Make sure the CD player works. Take the car on a highway, main streets, and side streets, see if the car loses alignment, or bears to the left or right. See how good the car brakes, drive sharply around some corners, and your companion is writing everything down. Make sure all the seat belts work, that electric seats work, look for missing or burned out bulbs inside and out. If the car has retractable headlights, make sure they pop up and turn on. Make sure the brake lights, reverse lights and directional lights work.

3] Deciding the Price:
To decide whether the price quoted by the seller is reasonable or not, you can do the following: Go to Kelly Blue Book, http://www.kbb.com/. There you can find the car price according to all variables like car make, year, model, mileage, etc. Lastly, it would ask you to select from the following 3 options:
- Trade-in Value
- Private Party Value
- Suggested Retail Value

If your seller is a private seller, than the price quoted by him/her should be less than the KBB's price for a Private Party Value. And if your seller is a dealer, than the price quoted by him/her should be less than the KBB's price for a Suggested Retail Value.

4] Essentials after buying a car:

Jumper Cables:
If the car does not have jumper cables, go buy some on the way home, without delay. You never want to be without jumper cables.

Battery/Alternator:
Ask the seller for receipts for the battery or alternator. Many auto parts stores have lifetime warranties on alternators, or will prorate a failed battery only if you have the original receipt.

This is what I learnt when I bought my car. I would be more than happy to know any glitches in the above process or any worthwhile improvements that I missed out on.

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Part I - Economics of buying a Used Car

I bought my car last year in October after a couple of months research. And the views expressed in thisHappy Used Car article are solely mine that I developed while going through the process of buying my car. I had most of this article prepared by the time I got my car keys, but somehow it never made its way here.

For most of us, the family home is the biggest purchase we will ever make, and the car is often the second biggest, which are known as big ticket purchases. Not surprisingly, this is where the most money can be saved or wasted.

I believe in rational consumption decisions, and those who know me will not be surprised to learn that I have strong opinions on these issues. I believe that buying a new car is a big purchase but a bad investment. So let me explain why.


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2 important points to begin with:

1) Difference between big ticket and small ticket purchases:
By contrast, consumption decisions about items purchased frequently via simple transactions (e.g., cereal) are easier to make on a trial-and-error basis and can be easily improved. Because these decisions are routine and relatively inexpensive, they exert a much smaller influence on the life of the consumer.

2) Difference between buying a house and a car:
Unlike a house, the car is a depreciating asset, and is virtually a black hole for throwing money into.

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Advantages of buying a used car:

1] Finance:
The period during which one has highest capital available at his disposal is perhaps the first couple of years of starting a job life. This is the period when one is single, and most probably sharing his apartment with fellow roomies, thus being able to save a significant portion on his monthly rentals. Hence, if one goes for a used car he can save almost atleast half the amount he might be thinking of spending on a new car. This capital saved could have been put to better use in some wise investments. Furthermore, there are other hidden expenses that come along with buying a new car. New car mean higher insurance rates. In addition, a new car probably implies that a loan was taken since students who have just started their job life usually do not have strong credit history and hence they have to shell more mullah in paying higher loan interest rates. Also, the amount one has to pay for tax increases with the car's base price. Lets work out the finances by taking an example of a buying a new car vs a used car.

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(a) New Car :

Base Price = 20,000
Tax (5%) = 1,000
Insurance Premiums = more
Loan Interest (7% APR for 5 yrs) = 5,000
Total = 26,000+

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(b) Used Car :

Base Price = 10,000
Tax (5%) = 500
Insurance Premiums = less
Loan Interest (7% APR for 5 yrs) = 0 (since no loan was taken)
Total = 10,500+

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2] Flexibility:
The value of a new car depreciates much faster as compared to a used car. The moment you take your new car out of the showroom, its value depreciates by 20%. When coupled to the average yearly depreciation of 7% to 12%, your first year’s loss is anywhere from 25% to 35%. That translates to a first year $6,000 to $8,000 loss on a $22,500 new vehicle, or a $10,000 to $15,000 loss on a $40,000 one. And that’s for a vehicle only driven the average 13,500 miles. If you drive more than that, your depreciation will be greater (35% to 50% for the first year). Hence, you need to stick to your new car for atleast 3 minimum years before selling it off, if you need to get some decent value back. However, thats not the case with used cars. After the initial 3 to 4 year period, cars undergo a steady depreciation of around 10%. Therefore you are always free to sell off the used car that you bought as and when you feel like.

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3] More Value for same price:
It is so obvious but often underlooked. You can buy a used car with much more features than a new car with no features with the same amount. For example take a brand new 2007 Honda civic which costs around $15,000. Now thats a very basic model, the Honda Civic DX. With the same amount, one can easily get a used 2004 Honda Accord. Not only that but an EX V6 Honda Accord, with not more than 40K/50K miles on it.

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And now some myths that a lot of people believe in:

Myths:

1] Used cars carry high maintenace costs:
Its quite normal for one to have that feeling, but with Honda's , Toyota's around, one can safely assume zero maintenance costs. Japanese cars are very well known to be highly durable and efficient with their mileage. Their safety equipment is up to date, and comparable to new cars. Manufacturer's warranty is still in effect. Most new cars have 36 month general warranties, many have 48 months, and a few have 60 months all transferable to new owners. Many used car dealers certify almost-new used cars with comprehensive inspections and guarantees. Today, most modern cars are built to such high standards that second-hand no longer means second-rate.

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2] Driving a new car has its own experience:
I think its very subjective. But if you opt for a decent used car, say a 2004/2005 model which has been maintained well, you won't feel the difference. Furthermore even if there is such a thing as driving a new car, than I think it doesn't last too long beyong initial couple of months.

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Conclusion:
Cars are terrible investments. In their most basic form, they are merely a tool to get us from A to B. In their most elaborate form they can be a “shiny” tool that gets us from A to B, but with more luxuries. But either way, they are not likely to be much of a financial benefit. Add on maintenance, repairs, interest on the loan, and insurance and you can quickly see that automobiles can have quite a large negative effect on our finances.

I have always heard (and I agree) that a two year old car is a good age to buy, because you are still getting a fairly new car that is likely to have some amount of manufacturer warranty remaining, but yet a huge chunk of depreciation is knocked off.

By buying used, you let a car's first driver deal with that big depreciation nosedive. You get the car you want without the financial strain or the hassle of being several thousand dollars upside down on your loan.

And last but not the least, its more wise to go in for brands such as mazda or nissan who are as good as Honda's or Toyota's and whose resale values are not blown up as is the case with Honda's and Toyota's.

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