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3 new myths of used-car buying

The days of finding a 2-year-old car for thousands less than new are gone -- at least for now.

By Karen Datko Sep 29, 2010 1:32PM

This Deal of the Daycomes fromKelli B. Grantat partner site SmartMoney.

 

After the engine blew on his 2004 Saturn, Tom Wright figured his next car would, obviously, be used. Given that new cars lose value faster than a 35-year-old utility infielder, why not buy a year-old Toyota RAV4 and save $5,000 right off the bat?

Then he started pricing cars around his hometown of Asheville, N.C. After cash back and a promotional financing offer, the 2010 model was only $1,000 more than the used cars he saw on the market. Sold! "Why buy someone else's problem," he says.

 

Many car buyers are encountering surprises, both good and bad, as market conditions have turned tried-and-true used-car-buying advice on its head. The tight economy has driven more consumers to used-car lots in search of savings; that increased demand has pushed prices up. The days of finding a 2-year-old car for thousands less than new are gone -- at least for now.

 

With that in mind, here are the biggest used-car buying myths, now busted (post continues after video):

  • Myth: Buying used is safer, now that Cash for Clunkers has cleared out the jalopies.
  • Truth: Lemons are still out there -- and they're even more expensive.

The Cash for Clunkers program did take a lot of the lower-end vehicles off the market, but thanks to the recession, drivers have been less able to afford proper maintenance for their cars. That's led to more lemons on the market, including some with problems even a savvy buyer armed with a vehicle history report might miss. "We're not seeing good cars traded in," says LeeAnn Shattuck, a co-owner of negotiation and buying service Women's Automotive Solutions. "A lot of the used cars on the market have been neglected."

 

Worse, the prices of even crummy cars are up. Shattuck recently spent three months hunting for a basic 2005 Ford Focus for a client, what she says should be a $5,000 car -- and was, two years ago. But even the "burned out, smoked out" Focuses showing up at auction sold for at least $6,000. When she found one in decent condition, it had 103,000 miles and cost $6,700.

 

Don't bet on a recently turned-over leased car, either. Most cars require their first major overhaul at 36,000 miles -- a marker that often coincides with the end of a three-year lease. Often financing companies or dealerships will cut costs on that maintenance, says Phil Reed, the consumer advice editor for Edmunds.com. So in addition to a maintenance examination by an impartial mechanic, find out if the regularly scheduled maintenance has been done and, if not, negotiate a lower price.

  • Myth: It's cheaper to buy the same car used somewhere else than to buy out your lease.
  • Truth: Former lessees can save up to 15% over a comparable used car.

Financing companies have typically kept monthly lease payments low by inflating the value of a car when it's turned in -- known as the residual value. But slowing sales of once-leased cars have forced dealers to be more realistic about those residuals, says Sergio Stiberman, chief executive of LeaseTrader.com. At the same time, used-car prices have climbed overall.

 

But because dealerships set the buy-out value at the time of the lease, drivers may now be able to buy the car they're leasing for 12% to 15% less than its current market value. For example, a customer could take over the lease on a 2008 Audi A4 2.0T Quattro for $0 down and $399 per month for the next nine months, with the option to buy for $18,470, according to LeaseTrader.com. That's $5,594 off the current market price -- even after the remaining lease payments.

  • Myth: Last year's model is 20% to 30% cheaper.
  • Truth: A used 2009 model may cost 10% more than a new 2010.

If your used-car plans involve a vehicle that's just one or two years old, "definitely consider buying new," says Reed. It might be cheaper.

 

How'd that happen? For starters, large trucks, SUVs and Japanese brands like Honda and Toyota have been able to hold their value lately, which means recent model years won't be cheap.

 

Another big factor: financing rates. "The automakers are very interested in continuing to sell new vehicles," Reed says. While dealers are offering financing rates of 3.9% and lower for new models (even for buyers with less-than-stellar credit), the average rate on a 48-month used-car loan is 6.04%, according to Bankrate.com.

That means that sometimes it's better to buy new. While a new 2010 Audi Premium Plus sedan, for example, costs $45,900, or $1,630 more than the used 2009 model, according to Edmunds.com, the monthly payments on the new car would be $67 cheaper. Over a 60-month loan period and based on current rates, buying that new Audi would save $4,020. In many cases, similar math holds true for models one to three years away from new. In the past, even a year-old car would have been a better deal.

The 'real deals' come with miles

Daniel Gray of Belle Mead, N.J., spent months looking for a used car in good condition for his son. The biggest challenge: finding a vehicle that Gray, who crafts video reviews of new models at MPG-o-Matic, found acceptable for the family's $5,000 budget.

 

"Just about everything in that price range had more than 100,000 miles on it," he says. A few years ago, cars at that price point with fewer miles were easier to find. Buying new wasn't an option because of higher insurance costs, so Gray kept looking, eventually settling on a 1998 Jeep Wrangler in excellent condition in spite of the 130,000 miles its previous owner had racked up.

 

Another driver, Eric Wentworth of Tiburon, Calif., found an innovative solution to the high-mile inflation dilemma by scouring listings for older models on sale in upscale neighborhoods. His reasoning: Wealthy people are still able to maintain their cars well in the recession. Wentworth recently purchased a 1989 Mercedes-Benz 300SEL sedan with only 40,000 miles on it for $4,200, about $1,000 cheaper than its current market value and still close to "new car smell" condition.

 

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