Purchasing a used Vehicle

From 3arf

In the market to purchase a used vehicle?

Please answer these two questions.

How well does the vehicle suit your needs?

What is the vehicle's resale value if you sold it within 6 - 12 months?

Many of the frustrated customers that I've encountered in my 18 years of automotive sales would have been much better off if they had paid more attention to these two questions. Buying a car that doesn't suit you very well (i.e. payments are too high, continually breaks down) may cause you to sell or trade-in too early and set you up for huge losses and headaches for years to come. No one wants to be "upside down", whether you are buying a house, car or a garden rake. Buying a car with a poor resale value could mean paying for a car for years only to sell or trade it in and find that you have no equity; or worse yet, still owe more than it's worth ( "upside down").

Think about the car you have now and how well it suited you. Give some thought to what you might want or need that is different. What changes have occurred or will soon occur in your life that may affect your needs in a car? Make sure the car you buy has a higher than average resale value. We know that selling the car that you haven't even bought yet is the furthest thing from your mind; but believe me, that day will come and when it does you'll be in much better shape.

Before You Shop

Before you begin shopping for a new or used car you'll probably want to take a look at your finances. I'm assuming here that you will be financing at least part of your purchase. (If not, I've added a "paying cash section below".)

Let your budget guide your decision on which car you decide buy. It makes more sense than picking a car and then forcing it into your budget. After you figure out what you can spend each month you need to think about how much you can use as a down payment. How you wish to finance your purchase, whether it's through your Local Bank, In-House Financing (be very careful - more about this later in another hub.)

Note. These days it's common not to make a down payment especially with regards to the economy, dealers are poised to bend much more than before. Please don't get used to no money down or just trading-in your vehicle (as a form of down-payment IF you have equity!). Unless you own your trade-in outright or have significant equity in it, you'll want to use at least some cash as a down payment. Any amount is better than nothing. As we will see later, borrowing money is very expensive. A nice down payment will lower your monthly payments, save money on interest and can sometimes earn you better rates on the money that you do borrow (especially true with bank financing).

You should end up with a good idea of what you can afford for monthly payments and down payment. Use anAmortization Scheduleto assist you (and keep dealers honest).

Your Trade In

The value of your trade-in and whatever amount you may still owe on it is one of the most important factors involved with buying a new or used car. Any equity that you have in your trade-in should add to your purchasing leverage however, be warned that a dealer will do their very best to "steal" your trade, paid for or not!

But it is also possible however to have negative equity in a trade-in as we will discuss later. It's easy for car dealers to confuse you when it comes to how your trade-in equity affects the deal, so we need to sort a few things out.

Let's expose a little game most dealers play when it comes to your trade. It's called the 'trade-in allowance' game, and it's important that you know how it works. Take a look at page two, The "Trade-in Illusion" to see how two different dealers might present the same deal: As you'll see, the bottom line is the same. Why do car dealers do this? Two reasons.

First it can disguise the fact that the dealer is buying your car wholesale, which is always the case.

Second, it allows the dealer to tell you what you want to hear. If they sense that you are most interested in a big discount, they'll play it that way. If you seem more interested in what your trade-in is worth, they'll play it that way as well! They can present it to you any way they like, a one thousand dollar discount and a nine thousand dollar trade allowance still leaves you with a ten thousand dollar trade difference. It's easy to become confused and frustrated here. My advice is not to involve your trade in until after you get firm prices from the dealer. In any event two things you'll want to do are understand the value of your trade and always compare apples to apples.

Understanding the Value of Your Trade (wholesale value - not retail) when you trade your car in to a dealer, you're selling it wholesale whether you realize it or not. The wholesale value of your car is approximately what it would bring at a dealer auction, and is hundreds or even thousands less than the going retail price. Now I know what you're thinking, If I sell my car myself, then I'll keep the extra money. You're right, you will and if you can, you should. But you should also keep a few things in mind. You will need to advertise your car field phone calls, make appointments (some of which may not show and some of which you'll wish didn't!) as well as let strangers take your car for test drives and accommodate scheduling appointments with their mechanics, only to have them negotiate the price you wanted for your car in the first place - remember, the prospective buyer is also a consumer and you can expect them to haggle as well. Consider also potential hassles with financing and timing. You may find someone to buy your car, but you may still owe money on it.

Obviously the new buyer will need to pay you first and then wait while your bank processes paperwork before getting title to their new car (if bank financed). Not everyone is willing to do that. And after going through all the hassles already mentioned, you may need to wait for them to either sell their old car or get approved for financing themselves. Let's assume you finally sell your car. Can you time things such that you can sell your car and buy a new one without an inconvenient gap where you have no car?

Don't get me wrong - If you can sell your car privately, do it. But unless someone is beating down your door with cash in hand you may want to consider trading. So what is your car worth? You'll want to know both the wholesale (Actual Cash Value or ACV) and the retail value. Retail prices can be found in a current edition of theN.A.D.A. Used Car GuideorKelley Blue Bookfor your area. (There are different regional issues) which can be found at the library, bookstore or on the Internet, although these are normally the "consumer " editions where prices between "wholesale" and "retail" vary widely. It is important that it is a current issue since the values can vary by hundreds of dollars from one issue to the next. It is also important that you use these guides properly. (Add or subtract for mileage, trim levels etc.) And remember that the book is a guide, not law (although I have never known a dealer who did NOT use these guides).

The automobile market is as volatile as any market on the planet, and a number of factors can affect the value of your car positively or negatively. Some cars are notoriously 'soft' which means they often bring less than book value while other cars are 'strong' (Honda's, Toyota's to name a few) and usually bring book value or more. If you want to fine tune your figures, try to compare the book value to what similar cars are selling for in your area. Also, the time of year is important, obviously a 4 wheel drive is worth more in the winter months than in the summer months. Once you have calculated the ACV (actual cash value), you need to deduct from it any balance that you may still owe on the car. Call your bank and get an accurate payoff amount (usually termed a "10 day" payoff, principal + interest). The amount left over is your equity in the car. For example:

Cash value of trade in = $10,000

Loan Balance/Payoff = $ 8,000

Your cash equity = $ 2,000

What if you have negative equity? If you find yourself owing more than your car is worth or 'upside-down', don't panic. This is more common than you may think! First consider selling your car private sale and get more for it than its wholesale value. Also use your down payment or any other cash available to you to make up as much of the difference as you can. If you still find yourself upside-down, you may consider keeping your current car a little longer and continue paying it off. If all else fails, you can roll the negative equity into the new car (I strongly urge you not to do this unless it's your last resort). You are in essence financing your negative balance along with the cost of the new car. This is possible by paying full price (probably more) for a car and using any discount you would have gotten to pay off the negative balance on your trade-in.

Even though this happens all the time (most people are just unaware that they are doing it) it should be your last option since it sets you up for being really upside-down next time you trade. Many people continually roll more and more negative equity into new purchases. Eventually this catches up with them because banks limit the amount that they will lend on each car. We have seen people owe over seven thousand dollars more on their car than it is worth. Obviously this is troubling. One option that may help here is leasing and although I advise against leasing for most people, for some of you this may be your only option. Compare apples to apples (a term dealers love using against you).

If you shopped two dealers (I recommend shopping a minimum of three dealers), what might go through your mind? 'I want to get the high (on paper) trade-in value of Dealer #1 and get the discounted price of Dealer #2. That would be a great deal.' Well, that will never happen. And this is the source of much frustration. The important thing here is that you focus on the trade difference figure, that's the most important number. BEFORE you sell your car and buy the new one, how much will it cost me? What's the bottom line? Dealers are going to present the deal to you the way they want to, what you want to do is to look for the best bottom line.

DEALER # 1

M.S.R.P. = $25,000Trade Allowance = $10,000Discount = $0Trade Difference = $15,000

DEALER # 2

M.S.R.P. = $25,000Trade Allowance = $ 10,000Discount = $ 5,000Trade Difference = $15,000

Don't let the dealer "move the numbers!"

"We already have a buyer for your trade-in."

It can be exciting to think that the dealership already has a buyer lined up for your trade-in and as a result will pay you Big Money for your car. Of course you need to trade it in immediately! NOT! The dealer uses this phrase probably more than any other I've ever encountered.

PAYING CASH

If you can pay cash for a new or used car, Fantastic. But do yourself a favor, don't ask for a special deal, you may end up paying more than you think. The fact is that dealers make money when you finance through them and they *depise* cash deals. When you announce that 'This will be a cash sale,' all it will do is compel the sales manager to try to make more money on the sale since they won't make any on the 'backend'. Keep this information to yourself until after you've agreed on a price.

BUY IT TODAY!

The dealer knows his or her best chance to make the sale is when you are there. Statistics have shown that if you leave the dealership without buying, chances are you won't be back. They will go to great lengths to give you the impression that you must buy today or else you will lose the car or the deal. Their job is to create a sense of urgency! Playing on your emotions! With each purchase you may make, no matter what the item, chances are you are buying on emotion. This of course is ok as long as you keep your emotions in check.

Stretching the term

You want your payments under $200 per month? Think about it, any amount financed for long enough will become $200 a month! Keep an eye on the term of the loan.I have always instructed people to finance 36 months or less.

The 'switch' close

'Well Mrs. Smith maybe this car is just too expensive for you. Let's look at our cheapest car over here.' This relies on your ego to prove them wrong and to buy immediately. In other words, they'll "give it" to you and then "take it away". Another dealer trick designed to establish control.

The fear of loss close

'You know Mrs. Smith, I have others looking at this car too, and this is the last one.' Like there will never be another car like it!

Please! when this line is stated to you (it will be, don't worry) just smile and tell the salesperson that you will take your chances.

Value package discounts

'You see the manufacturer already discounted the price right here on the window sticker so I don't have any room to move.' A TOTAL FABRICATION!

Devalue your trade-in

"We would give you more for your car but it needs X which cost $650, and Y which cost $500 and a Z, that's $200.'"

The dealer will use anything he/she can find to put a big price on repairing your trade and use it to negotiate down it's value. Remember, this tactic works both ways. You can and should nit-pick the dealers used vehicle as well!

Writing in code

Dealers write numbers they don't want you to know (your ACV, profit on your deal, cost, etc.) in a simple code. Instead of using numbers, the first ten letters of the alphabet are used. A=1, B=2, etc., J=0. Thus if you see 'CJJJ' written on a trade-in appraisal sheet, you just got a $3,000 ACV (actual cash value) for your trade-in.This is one area where dealers will really underestimate you. They will use this in plain sight on paperwork that they use, and may even hand to you to review. You'll be amazed at what you can easily find out now that you know their code. Another "code" is the word "BLACKHORSE". B=1, L=2, A=3 and so on.

Trade-in Tips

1. Make sure your car is clean in and out.

2. Trade before your odometer turns the next ten thousand mile increment (79,000 is better than 80,000)

3. Depending on your equity situation, you may want to repair or replace damaged or worn items that are highly visible (cracked windshield, worn tires, etc.). But don't bother with things you can't easily see like a tune-up, shocks, brakes etc. You won't get any more money from a car dealer for things that cannot be seen.

After the Car Deal

Car dealers make lots of money on the 'back-end,' meaning financing, insurance, extended warranties, and other add-ons. This is often called the F&I (Finance & Insurance) department and the salespeople here are called 'Business Managers.' In most cases the Business Manager is the real salesperson since dealerships often make more money here than on the sale of the car. Be careful not to let your guard down, they are counting on the euphoria of your taking ownership of your new car overriding your common sense (remember, buying a car is an emotional experience). After purchasing their new car, many people often go into 'yes' mode and tend to stay there for awhile.

Remember to:

More Trade-in tips

The most profitable thing you can do with your used vehicle is to sell it yourself and use the money for a down payment. If you opt to simplify the process by trading it in, established its value before you walk into a dealership. You should know the Blue Book value of your car, including its options, and research what your make is selling for in the classifieds and on the lots.

Your trade-in should be impeccably clean before you have it assessed. Wash and wax it; clean the windows, mirrors, upholstery, dash, floor mats, and carpet; and remove all trash. Make any minor repairs such as new pedal covers or mirror replacements. Clean the engine, change the oil and oil filter, top all fluid levels and, if needed, get a lube job.

After you have come to a mutually agreed upon price for your trade-in, get the quote in writing to prevent misunderstandings when negotiating for your new car. You should negotiate the price of your trade-in, the purchase of your new car and financing separately. Mixing these will impact you negatively. Good luck and remember, the power is in your hands now.

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