Tips on Buying Reliable Used Cars and Trucks for a Fair Price

Presented by the Consumer Affairs Committee of the Antitrust, Trade Regulation, and Consumer Affairs Section of the District of Columbia Bar
Primary Author: Mark Steinbach

Disclaimer

This pamphlet is a public service of the Consumer Affairs Committee of the D.C. Bar. It is not, and shall not be considered legal advice. Consult an attorney if you have any legal questions regarding vehicle purchase, financing, or warranty rights.

 

Table of Contents

1. Before You Visit a Dealer
2. Finding a Reliable Car or Truck
3. Paying a Fair Price for a Used Car or Truck
4. Financing Your Used Vehicle Purchase
5. How to Handle Your Trade-In
6. Your Legal Rights if Things Go Wrong with a Used Car or Truck: A Brief Explanation of Warranties
7. Should You Buy an Extended Service Contract on a Used Car?
8. Should You Buy Credit Life, Disability or "Gap" Insurance?
9. Should You Buy a Low-Mileage "Demonstrator," "Program Car," or "Executive Model"?
10. Safety

Consumers considering the purchase of a used car or truck can increase their chances of getting a good vehicle at a fair price—and avoiding real "lemons"—by following these tips.

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I. Before You Visit a Dealer
Before you begin looking for a car, shop for the money you’ll need to pay for it, from several lenders. Learn how much a bank or credit union will lend you, and at what interest rates. Armed with this information, you will know whether you should accept the financing the dealer offers.

Before you start shopping, figure out how much you can afford to spend. Your lender can tell you what the monthly payment will be to finance different amounts. (Don’t forget to add in the cost of taxes, title, registration, insurance.) Be sure your family budget can really handle the monthly payment involved. Remember, even the best used vehicle may need costly repairs from time to time.

Before you begin, think carefully about what kind of car you need so you are less likely to make an impulsive purchase. Do you need seating for six? The fuel economy of a four-cylinder car? Make a resolution not to buy any car or truck night on the spot: instead, think about any decision overnight, research a fair price for the vehicle using the tips below and make arrangements to have it inspected by a knowledgeable mechanic. Don’t let the sales person pressure you into buying a vehicle by telling you that someone else is interested in it and that the car probably will be gone by tomorrow.

Before you talk with the first salesperson, think about how you will approach negotiations over the price for a used vehicle. Using the tips set out in Sections III and IV below, avoid the Number One Mistake made by both new and used car buyers: Telling the salesperson how much you are willing to spend monthly on your car loan. Instead, negotiate first on the price of the car, and then, once you have a fair price, negotiate over the financing which the dealer will offer.

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II. Finding a Reliable Car or Truck

The more you know about a car before buying it, the better. If you knew a car hadn’t had an oil change in 20,000 miles, or that its frame had been damaged in a serious accident, you would look for another car. By contrast, if you are buying a car from someone with a complete set of service orders on the car, which show that it has been well maintained, you can be cautiously optimistic that it may provide good service in the future.

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III. Paying a Fair Price for a Used Car or Truck
When a salesperson spots you checking out cars on a dealer’s lot, he or she will wander over and offer to help you find a vehicle suitable for your needs. One of the very first questions you will be asked is: "About how much are you looking to you spend a month?"

It seems like a perfectly reasonable question. The salesperson will have a look that says "Hey, I’m just trying to help you out." But if you give away this valuable information, you have just lost a great deal of control over the negotiations.

Why? Because some dealerships want you to focus on only one thing: Can I afford the monthly payment? If that is all you care about, you won’t care whether the amount you borrow is higher than it has to be (because you’ve been charged much more for the car than it’s really worth), or whether the interest rate on your loan is higher than it has to be. (Dealers often make a profit on the financing, too).

The Number One Mistake made by car buyers is telling a dealer how much you are willing to spend a month. Think about it: the dealer is really selling you two separate products. First, there is the car. Second, there is financing for the car. If the dealer gets you to combine the two, by telling how much you are willing to spend a month—you lose a lot of negotiating power. Why? Because the dealer can almost always get you into a car at your monthly payment. It’s just that you’ll be paying for it for an extra year or two!! Telling the dealer up front how much you are willing to spend monthly is the same as opening up your wallet and saying "help yourself."

Instead, you must negotiate carefully over both the sales price of the car, and the financing of the car. These are—or should be—two separate transactions. In this section, we offer tips on figuring out what is a fair price for the car. In Section IV immediately below, we offer tips on how you can get the best interest rates for your car loan.

The price of a used car or truck is negotiable. You need not, and probably should not, agree to pay the price you see marked on the vehicle’s windshield. It is the dealer’s asking price, but consumers often are able to negotiate a lower price.

Before you negotiate over the price of a used vehicle, try to learn what similar cars or trucks are worth. You should look in local newspapers to find the asking prices of similar models. You also can go to the library to look up the vehicle in the NADA Used Car Guide, which will give you some guidelines for determining the value of a car offered by a dealer with a typical 30 day warranty. If you can’t find a price guide in the library, call the consumer loan department of your bank or credit union for this information. You also can look up used vehicle prices on the Internet, at www.kbb.com.

As a last resort, you can ask your salesperson to show you the "Black Book." Salespersons often carry this small book with a black cover in their shirtpockets. The Black Book shows the average wholesale prices of vehicles sold at dealer-only auctions. It tells you what a dealer should expect to pay for the car at an auction, depending on its condition.

You should expect to pay anywhere from $1,000 to $2,000 over the Black Book cost, since the dealer is likely to insist on a reasonable profit (but will be delighted to charge you more, if you agree to pay).

Prices are based on the condition of the car. If a car is in top condition, the dealer probably paid top dollar for it at the auction, but this means that it may have cost thousands of dollars more than a car in average condition, even though they are of the same style and model year. Therefore, as a rough rule of thumb, you generally should not spend more than $500 over the Black Book value for a car in "extra clean" condition, as it will already be at the top price range under the Black Book.

You may find that prices are not written on some of the cars on a dealer’s lot. Be especially careful, because the dealer may be saving these cars for particularly vulnerable buyers (see the "Second Chance Credit Buyers" section). Some cars may not be marked with a price because the dealership intends to sell the car not based on its value, but based on whatever is the maximum amount a finance company is willing to lend a particular buyer. So, be especially careful when you are shown a used car that has no price marked on the windshield, if most other cars on the lot are marked with prices: There may be an increased chance of mechanical problems, and there may be an increased chance of paying far more for the car than it is worth.

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IV. Financing Your Used Vechicle Purchase
If you are not going to pay cash for the car’s full price, you should be sure to investigate financing before you shop for a car. This will help you get the best possible rates. It also will help you learn how much car you can afford.

Although many people do not realize this, dealers often make a profit providing you with financing on a new or used car. If the dealer can borrow money at 8 percent interest and loan it to you at 13 percent interest, the dealer will enjoy a substantial profit on the financing. There’s nothing wrong with that, but for your part, you don’t want to pay more than you have to. Remember, just as the price of a car is negotiable, the interest rate on your car loan is negotiable. If you do not do some investigation on what rates are available from banks or credit unions, and you do not negotiate with the dealer on the rate it is offering, you will pay substantially more than you have to for your car.

To shop for financing, contact your credit union, if you have one, or your bank. Fill out an application for a motor vehicle loan, and discuss with their representative how much money the bank or credit union will loan to you, based on your income and expenses. Once you know how much you can borrow, and the rate at which the lender will provide the loan, you can begin figuring out whether your monthly budget will allow you to borrow the maximum amount the lender is willing to lend. It is not always advisable to borrow as much as a lender is willing to offer, especially if you have little flexibility in your budget.

To get the best possible rates, look in the newspaper for banks or other lenders advertising their rates for car loans (especially the Business Section of the Sunday and Monday Washington Post). Fill out loan applications at several of the most promising banks.

Once you have a solid understanding of what you can afford, and how much it will cost you, you are in a better position to evaluate the financing that the dealer will surely offer you. If the dealer can beat the best rate you have been quoted, take it. If the dealer can not do better than your best rate, you should firmly insist on arranging your own loan. In any event, pay very close attention to the loan agreement which the dealer presents for your signature. Be sure it accurately reflects the purchase price, interest rate and car payment that you have agreed to pay. Make sure the dealer does not slip any "extras" in that you haven’t asked for, such as extended warranties or GAP insurance.

One final note of caution: many people believe there is a three day cooling off period, during which you have a right to cancel your purchase. This is a myth. Unless the sale qualifies as a "door-to-door" sale, you do not have a three day right to cancel. So, before you sign anything, be sure you want the car and that the contract papers are properly prepared.

If you have had previous credit problems, such as a bankruptcy, court judgments against you or just many late payments on your bills, you may have to work harder to get a good deal. But it can be done.

You should still shop for financing. Sometimes, by obtaining a cosigner or purchasing the car jointly with a friend or family member who has good credit, you can obtain a loan at conventional, low rates. Putting down a significant cash downpayment also can help.

Even if your credit is sufficiently bad that you are going to be charged the highest allowable interest rate, you still have a significant degree of bargaining power, which you can and should use to get a fair deal.

To do this, you will need to focus especially carefully on the price you pay for a particular model. Some dealers mark up the cost of a used vehicle, beyond the normal asking price, just because a buyer has poor credit. Those who do may feel that such buyers have few choices, and are more likely to agree to pay an inflated price because they know they have credit problems, and believe they have few options. But just because you have credit problems does not mean you have no power. If the dealer refuses to sell you a car at a fair price, just say no. Tell the dealer that unless the price comes down into a range of what is reasonable, you will take your business elsewhere. Make it clear that if you leave, you are not coming back, and one of his competitors will get the sale. If the dealer still will not budge, get up and leave. Some dealers will stop you before you’re out the door, and be more reasonable; others may call you the next day and talk about working something out. But remember, the car business is extremely competitive, especially in Washington, DC and its suburbs. Someone definitely will want your business.

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V. How to Handle Your Trade-In
If you have a car to trade-in, you have additional work to do before you are in a position to make a fair deal.

The most important thing to recognize is that your current car has definite value. Your want to make the most of it. Find out how much it is worth by looking in the papers at the asking price for similar cars, and in the NADA and Black Books, as described in Section IV above. Again, do your homework before you see any dealer, so you are prepared.

If you are going to trade this car in as part of the transaction, avoid the Number Two Mistake made by consumers: failing to keep negotiations about the value of their trade-in separate from the negotiations over the price they are going to pay for the newer vehicle. If you do not keep these negotiations separate, you may find all of your equity in the car disappears into the monthly payment, and you will have nothing to show for it.

When the contract papers are written up, be sure they show that you are receiving a fair, agreed upon price for your current car.

If you still owe money on the car you are trading in, the car has a negative value, so it will cost you to trade it in. You will have to pay off the amount still due, as part of the transaction. This is done, usually, by adding the amount of your loan pay-off to the cost of the newer car you are acquiring.

Instead of trading your current car in to a dealer, you can sell it yourself. You may be able to obtain a better price from a private buyer than a dealer is willing to give you in trade. Some people feel it is not worth the hassle, expense and potential problems of advertising it in the paper and then having to deal with total strangers who answer your ad. It’s up to you.

In any event, after you have negotiated a fair price for the car, for your trade-in and arranged a loan at a fair interest rate, what should you do when the dealer recommends that you buy other products, like extended warranties, and various kinds of insurance?

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VI. Your Legal Rights If Things Go Wrong With a Used Car or Truck: A Brief Explanation of Warranties
Consumers get different warranty rights with new and used cars. Someone buying a new car typically receives a detailed, written warranty by which the manufacturer agrees to take care of most problems during the terms of warranty, which now is often for three years or more.

Used car and truck buyers need to be more cautious. If you are buying a low mileage vehicle, check whether the manufacturer’s warranty (or an extended service contract, as described in Section VII below) can be transferred to you.

If no manufacturer’s warranty coverage is available, you will have to look primarily toward your immediate seller for help with repairs.

Nearly all sales by private owners are "as is" (which means no warranty of any kind is provided), while most dealers will provide some form of warranty. If a dealer refuses to provide any warranty, be extra cautious: when a dealer won’t offer you any warranty protection, it implies he or she has no confidence in the car (and neither should you). Carefully read the terms of any warranty which the dealer does provide.

When You Buy From a Dealer
Many local dealer warranties are only for 30 days, 1,000 miles, and cover only major items like the engine and transmission. With such an express, limited warranty, any problem not specifically mentioned would not be covered. So, for example, if your air conditioning compressor or brakes fail on your way home from the lot, the dealer may refuse to cover the repair.

Few consumers try to negotiate for a better warranty than a dealer initially offers, but like the purchase price, warranty coverage is negotiable. After all, if you are paying several thousand dollars or more for a vehicle—and it’s going to take you two to four years to pay the car off—it would be comforting to know the dealer is willing to stand behind it for more than 30 days, and to cover all major expenses for a reasonable period of time.

In the District of Columbia and in Maryland (but typically not in Virginia), consumers who purchase vehicles from a dealer also usually receive protection through an "implied warranty of merchantability." This warranty, imposed by law regardless of a dealer’s wishes, means that the car must be reasonably fit for its intended purpose, as of the date of your purchase. In other words, even a used vehicle must provide you with reasonably safe, reliable transportation, for a reasonable time, taking into consideration the price you paid for car, and its mileage and condition on the date of sale. Thus, even if a 30 day or other written warranty has expired, you may be entitled to have a dealer repair items that go bad fairly soon after the written warranty is up. In Maryland, dealers may be able to avoid responsibility for the implied warranty if the car is more than 6 years old, or has more than 60,000 miles, by having the consumer sign a special form waiving these rights.

In the District of Columbia and Maryland, some dealers attempt to limit their responsibility to 50 percent of parts and labor needed for repair. However, this may not be allowed by law. If the dealer will not honor its implied warranty responsibilities and you have to take your claims to Small Claims Court, ask the judge to apply D.C. Code Section 28:2-316.1 or Section 2-316.1 of Maryland’s Commercial Law article, respectively, so that you are covered for 100 percent of repairs within the scope of an implied warranty.

Federal law requires that every dealer selling used cars post a "Buyer’s Guide" on the windshield, giving you basic information about any warranty being offered. If the dealer does not have such a notice on the car you are looking at, you should wonder whether the dealer is complying with other basic requirements of law; consider moving on to another dealer who does comply.

When You Buy From a Private Seller
Typically, cars sold by private sellers do not come with an implied warranty of merchantability. If a private seller writes the words "as is" or words to that effect on your receipt or sales contract, you may have no warranty protection at all. All repairs will be at your own expense. However, if the seller misled you about important facts (for example, that the car had never been in an accident, but it was), and you relied on these representations in deciding to purchase the car, you may have a claim against the private seller for fraud. Also, where a seller does not specifically tell you the car is sold "as is," in certain limited circumstances, another implied warranty may apply: if you tell a private seller some special purpose for which you need the vehicle, and that you are relying on the seller to furnish a vehicle suitable for that purpose, the law may impose an "implied warranty of fitness for particular purpose." So, if the car does not meet your particular purpose which the seller knew about, you may be able to insist that the seller correct the problem without expense to you.

Before you give a private seller any money, make sure you see the title to the car, and that the Vehicle Identification Number for the car (which you will find standing outside the car and looking through the windshield to the top of the dashboard on the left side of the car) matches the number on the title.

"Secret Warranties"
A brief, general word about "secret warranties." From time to time, a manufacturer may become aware that many of its cars of a certain model are having the same problem, which they should not have. In recognition that consumers may become upset with manufacturers who do not stand behind their products, some manufacturers may offer special "adjustments" for these repairs. Instead of providing direct notification to consumers, the manufacturers may give discretion to their dealers or zone officials to pay for repairs for those customers who complain the loudest. Consumer groups have criticized this practice as the issuance of "secret warranties." However, even if you are the second or third purchaser of a car, if you experience a problem covered by one of the "policy adjustment" or "secret warranties," you should consider asking the manufacturer to cover your repair. Even if there is no formal or informal "policy" for certain repairs, some persistent consumers are able to have the manufacturer pick up all or a part of the cost of some repairs, even when they are not the original purchasers of the vehicle.

Due to space constraints, it is impossible to describe all of your warranty rights in this brochure. If you have further questions, contact your local consumer affairs office or an attorney.

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VII. Should You Buy an Extended Service Contact on a Used Car?
Consumers usually are offered the chance to purchase what is often called an "extended warranty" on the car. Technically, what you are offered is not a true warranty, but a promise that a third party will administer a service contract that will take care of certain covered repairs, for a certain number of months or miles.

Although dealers often present these extended warranties at a fixed price, the price is negotiable. Dealer costs for extended warranties typically are less than one half to one third of the asking price.

In the past, some consumers have been denied benefits under these contracts when the warranty company has gone out of business. Insist that the company providing the benefits is a solid one.

Whether you should buy an extended service contract depends on a variety of factors, including your ability to afford the service contract cost up front. Will you be able to afford the cost of repairs later on, if you have no contract? How reliable is the model you purchased; how confident are you in its future performance?

In any event, carefully review the terms of any service contract you are offered. Typically, the extended service contracts available on used vehicles are not bumper-to-bumper. They cover only listed parts. Often, these contracts do not cover a number of important components, which, if they fail, may represent a financial hardship. Ask to review several different contracts so that you can compare them to obtain the best coverage for the price.

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VIII. Should Your Buy Credit Life, Disability, or "GAP" Insurance?
Many dealers urge consumers to purchase insurance which will pay off the loan in the event of the consumer’s death (credit life insurance), or in the event of the consumer’s disabling injury or illness (credit disability insurance). Consumer advocates caution that this insurance is very expensive for the protection you get. They generally recommend against its purchase. If you do want the protection these policies give, you can and should negotiate for a more reasonable cost. Some dealers may deny that the price is negotiable; however, it is. Dealers can always waive a portion of their commission. If you refuse to buy it unless it is available at a lower cost, the dealer may well agree to significantly reduce the price. You can always purchase this insurance from an insurance agent of your own choosing, so do not feel pressured to buy it from the dealer.

Increasingly, dealers are promoting "GAP" insurance. Typically, "GAP" insurance is designed to pay off your loan in the event your car is stolen and not recovered, or the car is totaled in an accident, even if the car is worth less than the amount still due on your loan. Again, this insurance may be offered to you at prices up to $500, but the dealer cost is far, far less. Negotiate hard on the price, if you want this insurance, but think carefully about whether it is a wise investment.

Some dealers may say that to get a car loan, you must purchase some or all of these insurance policies or an extended warranty. However, it is extremely unusual for a lender to require that you purchase these items as a condition for receiving a loan. If you do not want these items, check with the lender yourself to confirm whether the loan depends on their purchase. If a lender really does insist that you buy one or more of these items as a condition for receiving a loan, the cost of these items should show up as part of the finance charge on your loan agreement. You may well be able to find another lender who does not insist on their purchase.

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IX. Should You Buy a Low-Mileage "Demonstrator," a "Program" Car, or "Executive" Model?
Some dealers promote used cars, often with relatively low mileage, as especially desirable because they have been used as demonstrators, or because they were driven by manufacturer representatives and therefore are "program cars" or "executive models."

Carefully examine any such vehicle as you would any other for signs of accident damage, and learn what you can about its prior repair history, too.

Demonstrators
"Demonstrators" are used to provide test drives to prospective new car customers. Chances are pretty good the car has been maintained as the factory recommends. However, people who take test drives in these cars, particularly drives unaccompanied by a salesman, may drive it hard to see how quickly it accelerates, or how quickly it can be stopped by slamming on the brakes. Repeatedly pushing a brand new car to its limits may not be an ideal method for breaking it in. You may want to check the Owner’s Manual to review break-in recommendations, and be cautious about buying a demonstrator where the factory urges gentle driving techniques for the first few thousand miles. Consider whether any price break is really worth it.

Program Cars and Executive Models
The terms "executive models" or "program cars" can mean different things to different people. Be sure you know exactly how the selling dealer is using them. Some dealers use the term "program car" to imply that it has been driven by a manufacturer’s representative for his or her personal use.

However, some vehicles called "program cars" are really cars that have come back into the market after use in the fleets of short-term rental companies. These cars may have received hard use or been damaged in accidents; they also may have been well maintained. If you are interested in a car that comes from a rental company, be sure to ask for the full service and repair history on the car.

If you are interested in a demo, program or executive car, be sure you understand whether any of the original factory warranty comes with the car, and for what period of time and mileage.

Lemon Laundering
One further cautionary note about used cars with relatively low mileage: beware of "lemon laundering." A car bought back by a manufacturer under one state’s lemon law due to unrepaired defects can be resold in another state without disclosure that the car was a "lemon." Depending on state law, this may or may not be unlawful. Even when manufacturers provide appropriate disclosures, these may disappear (or be "laundered") as the car is wholesaled several times, or is processed through auctions. Recycled lemons often have relatively low mileage. Be cautious. If a dealer presents the car as a "reacquired car" or "program car," be especially inquisitive about its prior history.

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X. Safety
Before or after you buy a car, take it to a dealership that handles the same brand of new cars. For example, if you are considering or just bought a used Ford Taurus, take it to a dealership that sells and services new Ford automobiles. Ask the service manager to see whether any safety recalls have been issued for the car, and whether the recall work has been performed. Just give the service manager the car’s year, make, model and Vehicle Identification Number. Recall work generally is free, even if you are not the original owner. Dealerships are generally very cooperative in checking for safety recall information. If a dealer will not cooperate, call the manufacturer or importer with the same request.