How to Save Money When Buying a Used Car

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Imagine buying a vehicle on a used car lot that seems fine for about a week – then all of a sudden its doors fall off. According to the mobile car repair company, YourMechanic,^[1] this has happened to customers on a few prior occasions. And that’s not all you need to watch out for when trying to save a dime buying used cars.

The best way to save money when buying a car is to purchase a used model instead of a new vehicle or leasing one. New cars depreciate in value the second they leave a dealer’s lot. When you buy a used car, however, the original owner bears the burden of watching the car depreciate in value during its early years. This works out in your favor as you end up paying far less than you would have paid buying the same car new.

Consequently, because you are buying used, the car may require more maintenance. Therefore, it is essential that you choose a vehicle that has a good reliability rating, low maintenance costs, and one that gets good miles-per-gallon on fuel.

Finance wisely

Financing a new car can add up quickly – total auto loans in the U.S. equaled $1.1 trillion in 2017, according to business news publication Quartz,^[2] and the average new car loan hit a record high of $31,455 in 2018, according to Experian.^[3]

But buying a used car can give your savings account a break.

“For most Americans, price and monthly payment are still significant deciding factors, as they are often searching for a vehicle to fit within a certain budget,” says Mike Ouyang of LendingTree’s auto division. “Used cars offer a huge price advantage and are great for those who are less picky about having the most current features. But used cars often have fewer dealer incentives, such as low financing, to capture buyers.”

When you’re financing used cars, there are a few things you need to note…

Step 1: Set your budget

If you don’t have a set budget for your monthly payments, you risk paying more than you can afford – auto loans make up about 9 percent of all U.S. debt, according to Forbes.^[4]

Consumer finance company Bankrate says that a good rule of thumb is to spend no more than 15 percent of your monthly household income on a monthly car payment.^[5]

Before you start looking for the right used car, begin by setting a budget that works for you. It is rare for someone to pay for a car outright in cash, but it does happen when you’re buying used. So, start by seeing how much car you can afford to buy with your savings. Then you can decide if you will need additional financing with an auto loan.

Setting a budget to buy in cash

If you are using savings to buy a car with cash, make sure you are not spending all your savings in one go. Remember to set some money aside for other costs, such as registration, insurance, future maintenance, and keeping a “just-in-case” fund for unexpected mechanical repairs. You also want to leave extra padding in your savings for emergencies, so be practical about the amount of savings you use for your car purchase.

Getting ready for a new auto loan

The more common method of purchasing a car is taking out an auto loan. Getting a car loan can help you avoid spending all your savings and may allow you to buy a more expensive make or model of a car that’s still within your means.

Getting pre-approved for an auto loan can simplify the buying process. You will know exactly how much vehicle you can afford to buy. Additionally, this puts you in a stronger position to negotiate with a dealer or individual seller, as it shows you have not come to beat around the bush. You can refer to Step 4: Direct Lending for more information.

As a rule of thumb, your total monthly auto expenses should not exceed 20 percent of your monthly take-home pay. We recommend using an auto-loan calculator to help with your budgeting. It is common for consumers to put ten percent down and finance the car for 36-72 months.

Keep in mind that choosing a longer-term on a used car can be risky, even though a longer-term will reduce your monthly payments. You may want to replace the vehicle before you pay off the loan. If so, you would be on the hook to repay the remaining balance, which could eat up some of the funds you’d use to purchase a new car.

Step 2: Narrow down the make and model

This is where you can and should get picky. Take time to think about your uses for the car. Making a checklist can aid your search.

• How long do you plan to have the car?
• Will you use the car every day or is it more for leisure or a specific use?
• Will this be a family carpooling car?
• If the car is for work, how many miles per day/week would you be driving it?
• Will you take any longer trips like road trips in the car?
• How many passengers do you need to be able to carry?
• How much trunk or bed space do you need?
• What features are important to you? (Think about everything from sunroof and seat warmers to Bluetooth and safety features)
• What’s the maximum mileage you would want on the car?
• Are you looking for a particular color or are there any colors you don’t want?

Make use of websites that are there to guide you. If safety is your top concern, check the Insurance Institute for High Safety’s website for details on how well cars crash-tested. Then search for makes and models and create a list of at least three cars that seem right for you. Sift through various reviews of the cars you have narrowed down and compare them even further using reliable car review aggregating websites, such as Edmunds reviews.

Step 3: Decide where to buy a used car

Now that you have built a list of cars, move on to finding the right place to buy a used car. Thanks to the power of the internet, there are lots of websites that either sell or list used cars. Here are a few we recommend checking out:

• AutoTrader: AutoTrader is an online vehicle listing service that acts as a portal for sellers and buyers of new and used cars by gathering information from several different car lots in your area.
• AutoList: AutoList is a handy aggregator because it siphons vehicle listings from a wide range of online car buying websites and presents them to you in one convenient location. Additionally, AutoList offers a “Listimate” feature that informs you whether the price of a car is fair or not.
• Carvana: Carvana cuts dealerships out of the process and operates almost entirely online. Therefore, they do not have traditional dealerships or test-driving options. However, you are given the option of returning your purchase seven days after the sale with no questions asked.
• CarMax: CarMax is a car dealer with a no-haggle policy for buying and selling used vehicles, which is intended to simplify the buying process for individuals who want to make their purchase and get out. And unlike Carvana, CarMax has physical lots spread throughout the country, so you can check out vehicles and test-drive before you buy.
• Craigslist: Craigslist has been around for years and is best used for finding low-end cars in your area from individual sellers. However, be cautious of scammers.

Step 4: Determine a fair purchase price

As you begin to narrow down your search, look up the car model in a pricing guide like Kelley Blue Book. You can use the guide to check the market value of the car you have your eye on. And you can customize your search based on factors like mileage, condition, make and model, etc. Once you have determined the fair price for the vehicle you want, you’ll have the information you need to negotiate successfully.

When looking up prices consider the following for trying to narrow down searches:

• Year
• Make & Model
• Options
• Mileage
• Condition

Since most pricing guides will give you various prices, make sure you adjust the price type accordingly in your search. For example: If you are buying from a dealer, make sure to look at the “Dealer Retail” price. And if one of your neighbors happens to be selling a car, you would check the “Private Party” price. Additionally, you will notice that pricing guides often tell you what a trade-in is worth, so make sure to price your current car as well as the car you want to buy if you are planning trade-in at the dealership.

It’s also important to know a vehicle’s history as you shop for used cars. Dealerships will often provide this history upfront, or you can ask for it. Some dealerships also have “certified pre-owned” policies, meaning the car has undergone a rigorous inspection. Just make sure to check what their certified pre-owned policy means, as some dealerships may just use the term to make buyers feel better about a purchase.

If you’re buying from an individual, ask for the VIN of the vehicle and then check for the vehicle history online. Services like CarFax make it easy to find the complete history of a car or truck for free.

Credit Karma also recommends that you negotiate each part of the transaction separately so that dealerships can’t slip hidden fees into the contract. Focus on the big picture instead of monthly pay – a dealer may agree to lower your monthly payment, but this would stretch out the loan’s payback period and make you ultimately pay more in interest, the company says. Carefully revise every decision you make.

And if a dealer isn’t willing to work with you, don’t be afraid to walk away.

Step 5: Find affordable used car financing

When it comes to finding affordable car financing, you have two options to choose from:

1. Direct lending
2. Dealership financing

Direct lending

Direct lending is the process of borrowing money from a bank, financial company, or credit union. With this type of loan, you agree to pay the financed amount along with interest charges that will be paid back over a set time.

Moreover, you are able to apply for pre-approved financing before you begin shopping for a car. This is hugely beneficial to negotiations as you get to know your credit terms in advance, including:

• Annual percentage rate (APR)
• Term (length of the loan)
• The maximum approved amount you can borrow

With a pre-approval, you can identify and negotiate the best deals and financing options because you have something to compare dealership offers to if you’re buying from a dealership.

If you are buying from an individual owner, direct lending will be the only option you have for financing.

Dealership financing

On the other hand, dealership financing is the process of applying for financing through the dealership. Therefore, you are entering into an agreement with the dealership to purchase the car and agree to pay the financed amount plus interest charges over a period of time.

Dealership financing may offer you multiple financing options since the dealer’s relationships with financial companies and banks mean they are able to provide you a wide range of financing options. For example, you may be offered a 0% APR for 36 months on certified pre-owned (CPO) vehicles.

However, note that the dealer almost always makes a profit by offering you financing; hence, they may not have your best interests at heart. Make sure to get the Truth in Lending Act (TILA) disclosure for any dealership offer you get so you can compare the total costs, interest charges, and payments with a direct lending offer.

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Step 6: Making sure you have the right vehicle

The best way to get the full story on a car is to simply ask questions. Start by verifying the information you saw or read in the advertisement.

Here are a few important questions to ask:

• May I see the service records? (CarFax is a great source for vehicle history reports.)
• Do you have the title? Is it clear? (Clear titles show that there are no liens on the car.)
• What factors went into deciding the asking price?
• Are there any important details that might not have been mentioned in the ad that I should know about?
• Can I have the car inspected by a mechanic of my choice?
• How old is the battery? Has the battery been replaced? If yes, how long ago?
• For automatic transmission: When the car is in drive does the transmission clunk into gear?
• For manual transmission: When you depress the clutch does the transmission feel stiff or jerky?

Now that you have a basic idea of some important questions you should ask. It is time to create a checklist for your requirements and any serious mechanical concerns: 

• How safe and reliable is the car? Does the bottom of the engine have any sign of fluid leak?
• When accelerating does the transmission jerk at shifting points?
• Does the underbody have any dents or dented metal?
• Are all the tires the same size and brand?

Getting the car inspected

While you can ask the questions above and check the car out yourself, you want to make sure it is really in good working condition by taking it to a mechanic. Private party sellers will usually be fairly lax regarding an inspection, whereas some dealers may push back arguing “the car has already been inspected.” But we urge you to insist on having a trusted mechanic check on the car’s condition should you have any doubts.

Now for a little clarification on the meaning of “certified.” On independent used car lots, this means nothing about the condition or reliability of the car. It is a ploy to draw in gullible customers. On new car lots, however, “certified” refers to the car being in a certified pre-owned (CPO) program. This has become a popular method for making used car shopping easier as a whole. Therefore, there should be no need to have a mechanic look at the car.

Test driving the car

Even though you may not be an expert mechanic, you can still give the car a thorough inspection of your own by taking the car for a test drive. If possible, try test driving the car through various routes and a stretch of highway. And make sure you drive the car without the radio on so you can pay attention to the following:

• Listen for any unusual noises that may indicate faulty mechanical conditions.
• Check to see if there are any blind spots.
• Are the car’s steering and acceleration to your liking?
• Most importantly, make sure the breaks work properly.

Now that the test drive is over, go ahead and be vain. Check the legroom, cargo capacity, and various added options. And lastly, go ahead and turn that radio on or connect your Bluetooth and blast the sound system to make sure it is, again, to your liking.

Step 7: Negotiate the best price

And now we get down to the nitty-gritty: negotiating. For some people, this can be stressful as they do not wish to haggle. But with a little research you can get the average market price of the car, which you can use as your pricing guide. The seller is almost always going to ask for more than the market average so they can turn as much of a profit as possible.

Say, for example, Honda is asking you for $15,000 on a used 2016 Honda Civic, but your research has shown you that the car is worth $12,000. From there, begin by pointing to any concerns you may have to try and bring the price down, then strike them down with the book value of the car. E.g.: “The car drives well, but I’m a little concerned about the fact it’s had some electrical issues with the dashboard, and the fact that the value of the car is $12,000. Given that, I think $10,500 would be a fair price for it.”

Now it is left up to the seller to either accept your offer or make you a counteroffer — so on and so forth until you strike a deal, or you walk away. Also, keep in mind that salespeople know all the tricks of the trade and will be able to see through your strategy so stick to your guns. Lastly, make sure you know if the dealer is giving you the “out-the-door” price, which includes all taxes and fees, or if they are merely giving you the sale price of the car.

Here are a few tips to help you get the best deal on a car lot:

Take your time while negotiating. Start with a low offer but stay in a reasonable ballpark. Otherwise, the dealer may see this as lowballing and no longer take you seriously. Instead, try making a low offer that remains enticing. If the deal is not enticing enough for the dealer, improve your offer in $300 increments.

If you are pre-approved for a loan, then you are essentially like a cash buyer. So, negotiate the price of the car and not the size of the monthly payments. Commonly, sellers will try to convince consumers to buy a car by showing them the low-level monthly costs instead of the overall cost of the car.

Should the salesperson walk away to “speak with their boss,” get up and roam the showroom or get a cookie or coffee. This way you keep the salesperson on their toes, which will aid your negotiations.

Make sure you get a breakdown of all the taxes and fees before you say yes to a deal. Sometimes dealers will include filing fees or other fees in order to make as much of a profit from what they may have lost during negotiations.

You are the buyer; therefore, you have the most power. Always be ready to walk if you are not making any progress in negotiating a deal, or simply for the fact you do not like how you are being treated. An Irish goodbye will suffice.

Step 8: Last steps as you buy a used car

Finally, after having taken your dream car for a test drive and committing to the purchase, there are still a few more tasks to take care of before the fun begins. To help finalize your budget, add up the cost of insurance, titling, registration, and any necessary final repairs.

You should also take these steps:

Transfer the title and register the car

To transfer the title of the car and the bill of sale, or dealership invoice, you may be required to visit your local county tax office with the seller to transfer ownership. Once you have finalized your registration information, make sure to keep it in your glove box sans vehicle title. Keep the title locked in a safe place at home that you can easily find later.

Insure the car

If possible, get your insurance figured out before you drive off the lot. If you have the vehicle’s VIN, you can provide it to your insurer so you can have proper coverage. Dealerships will often not allow you to drive off the lot without proof of insurance. Besides, choosing your insurance plan ahead of time will aid in your budgeting plan. Always make sure to include insurance in your budget from the get-go.

Read the owner’s manual

Although tedious, it is important that you read the owner’s manual. Not only will it give you a clear idea of the car’s maintenance schedule, but it will also teach you about the ideal gas grade, tire pressure, and tips and tricks on how to use the various car tools at your disposal.

Consult for any outstanding repairs

It is in best practice to have a pre-purchase inspection done prior to purchasing a car. However, it is also a good idea to have the filters, fluids, brakes, and tires checked again post-purchase. Keep in mind, though, when searching for a mechanic that certain mechanics specialize in maintenance while others specialize in repair.