Should You Buy a Used Car?

Many cost-conscious consumers believe new cars carry an unjustified premium and so, as a rule, only buy used cars. In my experience this is a mistake.

The used car market is astonishingly efficient. Granted, there are significant nominal discounts in the private-party car market, but these are due to information and selection biases: Sellers know more about their car than you, and they are more likely to want to sell a car that is problematic, has been abused, or is otherwise of reduced value. You have to be an expert to overcome that information bias, and even experts need to spend time with each car to determine its fair value. If you’re a car expert with time on your hands you can make money trading used cars. But otherwise you should not expect to find bargains in the used market, and especially not from used car dealers, since they are among the experts who snap up bargains and know the fair market prices. Internet sales have only made it easier for them to capture “market” rates for used cars because the internet allows them to expand their geographic reach. (And it’s not for nothing that used car dealers have a sleazy reputation: They don’t stay in business by offering bargains. One car maven once told me most used car salesmen would sell their own mothers a piece of junk.)

In fact the used car market is often upside down. I have found new-car dealers selling used cars for more than they’re selling the new equivalents! There are probably two reasons for this: One is the persistent idea that “a new car loses x% of its value the moment it’s driven off the lot,” which is no longer true (if it ever was). The second is that new cars, except new models that are in high demand, can usually be bought for much less than MSRP, and often less than dealer invoice. So people go into dealers asking only about used cars because they assume the price on a new car is something close to MSRP when it really isn’t, or that they’ll capture a “used-car discount” you can only get from a private party.

If you want a bargain on a car you’re more likely to get it on a new one, especially if you’re flexible about when and what you’ll buy. You only have to do a little research to find brands and models with factory incentives and excess inventory in your region. Then just call a few dealers, ask for their internet sales manager, and find out where they’re selling relative to invoice. (Do it over the phone or Email so they don’t have the chance to waste your time with song-and-dance sales tactics, and try to reach their “internet sales” guys because those are the salesmen who know that you know exactly what invoice and current incentives are, and that if you buy you’ll be a “low-touch” customer who will help them move inventory without taking a lot of time.) Note that dealers can make money even selling below “invoice” for a number of reasons, so if you want a new-car bargain you’re not getting a competitive quote unless it’s at or less than dealer invoice.

The only reasons to buy a used car are:

  1. You are mechanically savvy, and you have access or time to inspect at a lot of used cars to find the true bargains.
  2. You don’t have enough money to buy the type of car you want to own new.
  3. You have the opportunity to buy directly from a trusted acquaintance (avoiding the information and transaction “spread” you pay buying from an unrelated party)

4 thoughts on “Should You Buy a Used Car?

  1. Stone Glasgow

    I agree with you, mostly, but the spread on used cars exists in new cars as well; if you’re not a skilled negotiator, you won’t get near the lowest possible price. Additionally, it’s impossible to make a below market-value purchase with a new car; one can never buy a new car and immediately resell it at a profit, but this reality is offset by the risk in used-car buying.

    Another thing to remember is that the price of the car is not its cost; the cost of owning the car includes depreciation, insurance, repairs, etc, and the purchase price affects the cost of ownership but is not the only important number. When comparing the total cost-to-own, most cars end up costing their owner around $700 per month (new or used). I think this is probably a primary reason to avoid used cars for most people; unless you really like an older model or can’t get a bank-loan, you may as well drive a new car because its true cost to own will be the same amount as an older model.

  2. Pingback: How to Lease a Car | EmptorMaven

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