What to Pay for a Used Car and How to Finance It
Know about prices
Used cars for sale by dealers and individuals are listed with "asking" prices. Most sellers expect buyers to negotiate price. However, if you don't know the fair market price of a car, you won't know how much to offer. Many inexperienced buyers "talk down" a seller's price and still pay too much.
Used car values can vary widely based on a number of factors, including market demand, make/model/year, options, condition, mileage, and history (wrecked, salvaged, repaired). Even a car's location can make a difference, which is the reason that pricing guides ask you for your ZIP code. For example, convertibles sell for higher prices in Florida than in Michigan. Hybrids and sports cars are more popular in California than in North Dakota.
Used car price guides
Use a used-car price guide such as Kelley Blue Book or NADA Guides to determine the market value of any used car you are considering. Note that there will be price differences between different pricing guides for exactly the same car. Which is the "right" price? Which is "more accurate?" The answer: There is no "right" or "most accurate" value since all such values are estimates based on collective market data. Since most smart sellers use these pricing guides to help set prices, buyers should use them as well. In fact, most sellers expect buyers to know guide values.
Notice in the pricing guides that dealer retail values are significantly higher than "private-party" sale values. There are three reasons for this. First, dealers often clean up and repair their cars, making them generally more valuable than similar cars being sold by individuals. Second, dealers run a business that must make a profit to survive. Third, notice that the pricing guide web sites also list used cars for sale by dealers. They don't want to appear to be in conflict with asking prices on dealer- listed vehicles.
Watch out for prices that are too low
If you find a car for sale at an unbelievably low price, it might be real, or it might not. It might be that the car has problems, hidden or otherwise. The seller might not be completely forthcoming in disclosing the problems, which makes it even more important for buyers to get a mechanic's inspection.
Or it might be common scam in which a "seller" lists a nonexistent car for a low price that he explains away with a story about family distress or financial problems. His car's picture and VIN was snatched from somewhere on the Internet and the "eBay protection" or "eBay payment" services he describes don't exist for car's not purchased through eBay. If you fall for the scam, you get no car and your money disappears.
How to pay
If you buy a used car from an individual, you are nearly always expected to pay with cash or a certified bank check. Smart sellers don't take personal checks or promises to pay later. Dealers often accept checks but might make you wait until the check clears to pick up your car.
You can get used-car financing – a loan – from a bank, credit union, or online loan company such as Up2drive.com
— even for a private-party purchase from an individual. Dealers often use their own financing sources. It's a good idea to pre-arrange your own financing to compare with a dealer's financing, and go with the best deal.
Your ability to get a loan for the amount you need depends primarily on your credit score. If you don't know your score, you need to. MyFICO.com is where you get your score directly from Fair Isaac Corp., the company who supplies credit scoring for U.S. credit bureaus. Dealers and finance companies will usually only get one of your scores, but you won't know which one. A "prime" score (about 680 or higher) will get you the best interest rate and lowest payments.
When you apply for a loan, or pre-qualify for one, the lender will also look at your income and your debts. They want to make sure you have sufficient income to afford new car payments, considering your other financial obligations. If you find that you can't qualify for the entire amount you need to buy the car you want, you can either look for a less expensive car or you can make up the difference with a cash down payment.
If you have bad credit you could get a co-signer or buy from a dealer who sources his own financing without credit checks. One such national dealer is Drivetime.com
. You may also find local dealers who do self-financing.
If the seller still has a lien (loan) on the car
Often when buying a car from an individual, he will still be paying on a loan, which means he does not have a "clear" title to give to you. Smart buyers don't accept a promise of getting a title later, after the loan has been paid off. It's best to go with the seller to his bank or finance company, who holds the loan and the title. Write a check or give cash directly to the bank for the amount of the loan and get your title. Have the seller sign over the title to you then and there.
What if the sale price is not exactly the same as the amount owed on the seller's loan? If the sale price is more than the loan payoff, pay the seller the difference in cash after you've written the check to the bank for the loan balance. If the sale price is less than the loan payoff, the seller is "upside down" and must be prepared to pay additional cash to the bank after you've given them your loan payoff check. Again, never accept a promise from a seller to pay off his loan and send you the title later.
What's next?
After you've gotten your car and a clear title, call your insurance company immediately to insure the car. Then go to your state Department of Motor Vehicles (DMV) office to register the vehicle, get tags, pay sales tax, and apply for a new title in your name.