Buying Tips

How to Get a Used Car Bargain

Edmunds Editors Philip Reed and John DiPietro recently shopped for the best used family sedan they could buy in the $11,000 to $13,000 range. Their findings were the basis for this three part series.

When you go car shopping, the first question you are likely to run into is this: Should you buy a new or a used car?

New cars are a shock to your budget, but they will probably be trouble-free for several years.

Used cars cost less, but how can you be certain you're not buying someone else's problems?

Here at Edmunds, we spend much of our time dispensing advice on new car buying. But there is a huge used car market. In 2006, for example, an estimated 44 million used cars will be sold as compared to an estimated 17 million new cars. While the average sale price of a used car is estimated at about $13,900, the average price of a new car is estimated at roughly $27,800.

It's often said that there is a steep decline in the car's value in just the first year of the car's life — from 20 to 30 percent. In other words, that car that was worth $21,800 when it was new can be purchased only a year later for as little as $15,260. That's a savings between $4,360 and $6,540. This is proof that the consumer pays dearly for that new car smell.

You might be thinking that all of this sounds good in theory. But what's happening in the real world? Well, we decided to find out.

A Test Case
Edmunds editors Phil Reed and John DiPietro decided they would be guinea pigs in the used car buying process. Phil actually needed a car to replace the one he just sold. So he decided to get the best car he could for between $11,000 and $13,000.

True, there are new cars that could be purchased in this price range. But by buying used, Phil felt he could get "more" car for less money. By purchasing a used car, he would be able to get a loaded mid-size model instead of a new, stripped "econobox." Besides that, buying a used car that was still under factory warranty could offset much of the uncertainty of buying a used car.

In this three-part series, we're not only going to give you a system for buying used cars, we're also going to tell you how the Edmunds editors faired when putting this system to a real market test.

(You may also want to read Edmunds.com's 10 Steps to Buying a Used car)

Step 1: Identifying Your Target Cars
John has coined a term he uses to describe good cars that are often overlooked. These are not the "staples" in a given segment and thus can be bought at bargain prices: Dark Horse Cars. While this is a mixed metaphor, it describes a type of car that bargain hunters should be aware of. Dark horse cars are virtually as good as the well-known cars — most notably Toyota and Honda — but you don't have to pay for the name.

In Phil's case, he would have preferred buying a Honda Accord or a Toyota Camry. But by shopping for a Nissan Altima, a Mazda 626 or a Mitsubishi Galant, he hoped to save about 20 percent, while still getting a well-built and reliable car.

In whatever class of vehicle you are shopping for, whether it is SUVs, pickup trucks or economy cars, there are the leading brands for which you will have to pay a premium price. But if you are willing to consider the competitors, you will save yourself a bundle.

Check the "Edmunds Rating"
As you build a list of cars to consider — the dark horse cars — check the Edmunds Rating bar graphs found on the used car pages. This will show how the car is rated in the categories of safety, reliability, performance, comfort and value. The results are then combined to give an overall rating for each car.

Using this method, you should select a list of three target cars to shop for. Write down the Edmunds.com True Market Value^® prices for each vehicle with the anticipated mileage. Keep in mind that cars typically have accumulated about 12,000 to 15,000 miles per year. Anything over this mileage reduces the value of the car; anything less increases the car's value. Select the option marked "Appraise this Vehicle" to generate the adjusted True Market Value prices.

In Phil's case, his target cars were all 1999 models: the Altima, the Galant and the 626. The prices of a Galant and a 626 with about 30,000 miles were about $12,200; a similarly configured Altima was about $13,300. These were the dealer retail prices listed on the TMV^® pages of the Used Vehicle Appraiser. Phil printed out these pages for John and himself to take with them when they went shopping later in the process.

Step 2: Arranging Financing Before You Shop
If you can pay cash for your car, you can skip this step. If you are like most people and need to borrow money to buy a car, continue reading.

Begin this step by considering what car payment would comfortably fit into your monthly budget. Once you know this figure and how much you can put as a down payment, you will know how much you need to borrow.

1. Take your estimated car payment and multiply it by the length of the loan (we recommend 36 or 48 month loans for used cars). For example, you want to have a $250 monthly payment: $250 X 48 = $12,000.
   
   
2. Add to this, the amount of your down payment. For example, you have a $2,000 down payment. That would be $12,000 + $2,000 = $14,000. This is the amount of the car you can afford before interest, tax and fees.
   
   
3. Now, compare interest rates at lending institutions for the same term loans
   
   
4. Using our payment calculator plug in the estimated price of the car you can afford and the best interest rate you have found. Adjust the vehicle price, until you reach the monthly payment you want. In this example, with a monthly payment of $256, at 8 percent, you could afford to buy a $12,500 car. Keep in mind this figure does not include tax and fees, which will vary from state to state.