7/14/2011 5:45 PM ET|
Your dealership wants your car back
Consumer demand is strong for used cars, but supplies are limited. As a result, auto dealers badly need trade-ins and are willing to pay top dollar.
Often the notice comes as a flier in the mail, but you might get a friendly phone call from the salesman who sold you a new car a few years ago.
The dealership is paying top dollar for trade-ins, you're told, and now is the perfect time for you to sell your vehicle. In sum, your new-car dealer really wants your used car.
There are about 260 million cars on America's roads. Why is your 3-, 4- or 5-year-old machine so special? It's because, for the car business, these are unusual times.
The changing car market
According to the U.S. Bureau of Transportation Statistics, 10.6 million new vehicles were sold or leased in the United States in 2009 (the latest year for which the bureau has reports), while 35.5 million used vehicles swapped hands.
That 10.6 million new-car market was a big down year for the industry -- down from 13.5 million units in 2008, 16.5 million in 2007 and more than 17 million in both 2006 and 2005. Used-car sales also dropped between 2005 and 2009, but only about half as much on a percentage basis.
Car sales have recovered somewhat since 2009 (despite the effects of Japan's tsunami, which has restricted availability of some new Hondas and Toyotas). Edmunds.com projects that 2011 new-car sales are likely to come in around 12.9 million units, and, according to the Manheim Auto Auctions, just under 37 million used cars swapped hands last year.
The used-car market has always dwarfed the new-car market in unit sales, and many, if not most, dealers make more money on their used-car sales than they do on new cars. But when new-car sales are down, dealers have fewer used-car trade-ins to sell.
So with 2009 new-vehicle sales representing about 60% of what they were in 2005, up to 40% fewer used cars were being traded in.
Those declines have meant there are a lot fewer of the prime, low-mileage, late-model used cars around to sell in dealer lots. In particular, with gasoline prices higher this year, there aren't a lot of late-model small used cars such as the Honda Civic, Toyota Corolla and Ford Focus around, and demand for them is up.
"Strong consumer demand for small used cars is driving prices up," Jonathan Banks, a senior analyst with the National Automobile Dealers Association Used Car Guide, said in a news release. "The NADA Guide increase in trade-in values for June should come as no surprise because it reflects a shortage of both new and used cars entering the market."
In May, NADA projected trade-in values for small cars to rise 18% during the first half of 2011, compared with the first half of 2010. The differences in value can be startling. Even in one month, values for used small cars have skyrocketed.
For instance, the NADA Used Car Guide had the trade-in value of a 2009 Kia Rio at $6,400 in May and by June had raised that to $7,500. That's a 17% rise in just one month. You're not getting that kind of return on your savings account. Even the value of something as old as the 2005 Subaru Impreza RS is rising, up from $6,650 in May to $7,575 in June.
Values are up so sharply for some cars that it's tempting to trade in a car that's only about a year old. For instance, a new 2010 Honda Civic DX coupe carried a $15,455 sticker price (plus taxes, license and delivery). Today that same car has a NADA trade-in value of $14,075. That's a drop of only $1,380 over a year.
"A lot of lessees and buyers will find they're on the right side of their leases or loans," Banks told MSN Money. "If they trade in their cars, they'll find they have some money for a down payment."
It's all about supply and demand. Dealers want your car because they have buyers for solid late-model used cars lined up, and there simply aren't enough cars for them out there. And they may as well try to get your car now, before it's worth even more next month. Plus, they wouldn't mind selling you, the supercreditworthy person that you are, a new one to replace it.
You are supercreditworthy, aren't you?
As has been well documented, the consumer credit market has become much tighter over the past few years. "Back in 2007, anyone could get a new-car loan," explained Steven Lang, a used-car dealer in the Atlanta area. "Today there are a lot of people out there who are broke. As close as many of them can get to a new car is a 5-year-old PT Cruiser."
If you bought a new car during the past three or four years and haven't fallen victim to a calamitous job loss or worse, you probably still have sterling credit and could qualify for another new-car loan. You're a precious, creditworthy commodity to a new-car dealer. But you're of no value to that dealer at all if he doesn't get you into the market. And he's got plenty of buyers without such blinding shiny credit scores ready to buy a used car. And the subprime credit market has rebounded somewhat.
"It's far easier to get someone into a used car than a new one," Lang said. "And there's more money out there for used cars than new ones."
The used-car market is huge and diverse, running from ancient beaters sold for a few hundred bucks on Craigslist to classics that go for millions at Sotheby's. It's easy to overgeneralize about the heart of the market, but most used cars are sold as transportation to people of moderate incomes who must finance their purchases. Those people don't just want cars, they need cars, or they're unable to fully participate in the U.S. economy. And they're feeling squeezed more than ever.
That, more than anything else, is why your dealer wants your car.
Change is coming
Like every market, the market for used and new vehicles is dynamic. How the car business values your used vehicle right now isn't how it's going to value it next week, next month or next year.
For the immediate future, it looks as if used-car values will stay high, as new-car manufacturers have adjusted production to reflect market demand. "Prices have likely peaked," said NADA's Banks. "But it's a strong market with strong fundamentals."
Ford, General Motors and Chrysler aren't pumping out cars to keep their factories busy and then dumping them into rental fleets or pushing them with supercheap leases, as they were able to in years past. As a result, there aren't likely to be as many new cars becoming used ones over the next few years. And used cars remain a good value relative to new cars.
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Well, I got a letter in the mail yesterday from my dealer wanting to buy back the 2009 chevy silverado they sold me. But they would only take it as a trade in for a new chevy.
The reality is, over x number of years, demand for new cars is largely inelastic, meaning it responds very little to market price. There are two reasons for this:
1. a new car is a durable good. It lasts a number of years and yields utlilty to the consumer over the course of the car's life.
2. a new car is also a luxury good, given that there is a cheaper substitute in the marketplace that will yield more or less the same amount of utility to the consumer. (the main difference is durability)
When cash for clunkers was implemented, it increased the amount of utility per unit cost of a new car. This, for many consumers, made it more worthwhile to buy a new car now than in the future, as well as more worthwhile to buy a new car now instead of a used car now (given increased utility from increased durability)
However, since new cars are a durable good, those who bought a new car during the cash for clunkers program are still enjoying most of the utility from the use of their new car. People who ordinarily would be buying cars right now decided it was in their best interests to buy a car during the cash for clunkers program. This is why there is a current decline in demand for new cars.
The main thing the cash for clunkers program did was to rob demand from the future to increase demand at present, all at the expense of the U.S. taxpayer. We are currently feeling the effects of the demand that was robbed from the new car markets 2 years ago.
For the posters talking about not paying a lot for vehicles it is really relative to your income and you can use that logic with any major purchase such as a house as well. My advice has typically been to pay no more than half your income in terms of the value of the car (new) putting 10%-20% of the total purchase down and financing the rest for 4 years. If you can do that your car will cost no more than 11.5% of your income.
While I agree the need factor for a new car may not be a great argument, I prefer to have a car that if something goes wrong with it I can go to the dealership and make them fix it under warranty. I also like the fact that it has the latest safety standards like side impact air bags that you will not find on cars from the 80's.
For most the problem becomes buying more car(s) than you can afford, but we already know this has been a problem with purchases in general for the American public as we learned with the housing crisis. If you learn to live below your means you will find that one day you have more money than you need, no longer need credit, and can buy your toys with cash.
This maybe good if you have the right model, but not *all * used cars will give you back money.
I have a 2002 Mercury Sable SL with more than 130,000 miles on it. I know for sure I will *not* be getting a lot of money if I trade it in, especially given it's not fuel efficiant (23 mpg). Give the prices of new cars, I might as well keep it for a few more years to see whether the price of a good EV will go down for me to afford one.
It is about dealer performance - and EVERYONE knows (or should know) that you will get 10-30% LESS for your vehicle as a trade-in than you would selling it yourself.
Do your homework and don't get scammed into a new vehicle (which will cost you much more over its lifetime in interest, insurance and taxes) than a vehicle you likely already own or nearly own.
DEFINITELY DO YOUR HOMEWORK!!!
We just sold our '08 Infinity G37s - 45K miles to CAR MAX for almost $3K MORE than the original dealer was offering.
We had one more payment and it was better to get out of it early due to the overage of miles...acquisition fees, needed tires, etc...as the dealer was not willing to even match it...figuring they could certify it (being serviced there / 39 months) and we were looking to lease another one...
So we passed and went with an Audi A5....
Does anyone really have to wonder why they spent millions buying that exemption from your members of Congress who always have their hands out for bribes ("campaign contributions")? Surely anyone who has ever been in an auto dealership knows the answer. Is there such a thing as an auto sale, new or used, at a dealership that isn't at least on some level fraudulent? I don't know but have read books on the subject by authors who do and it seems that the answer is a resounding "NO"! Personally, I will never buy a new car. My current vehicle is 14 years old, was the highest rated by Consumer Reports (the only publication about such products that I trust) for safety (IIHS, I ignore the gov't. crash data) and best frequency of repair rate. It has certainly lived up to those standards and I never have it serviced at the dealer's. By the way, ever wonder why "service" is such a large part of a dealership's profit? I walked into an expensive auto brand dealership two years ago. There were 4 "service advisors" there all sitting behind a large counter with smiles on their faces. Each wore an identical $5000+ watch. They were obviously rewards from the owner for what? I listened for a while to what they were telling customers at the desk and over the phone. Then I knew the answer.
Maybe your trash truck is a "Porche"?
That spelling suggests to me he's working phonetically with the spelling, and is one of the wad who believe Fernand's last name is pronounced "Porsh."
Mr. Porsche's eponymous automobile is pronounced as the girls' name: "Portia."
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