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Know your credit score. Know the value of your trade-in. And know how to say no.
Armed with this knowledge and a willingness to negotiate, I recently purchased a used car—and saved myself thousands of dollars by pushing for better terms and declining unnecessary maintenance plans.
If you’re in the market for a used car, here’s what you need to know to get the best deal possible.
The Used Car Market Is Hot Right Now
One might assume that record unemployment, travel restrictions, and the embracing of work-from-home policies would also lead to a decline in car sales since fewer people are driving these days.
But the opposite has been true.
Between rental car companies liquidating assets and the lucrative financing incentives made possible by record low interest rates, there has been a huge spike in demand and prices for used cars.
Nevertheless, I recently went hunting for a deal and purchased a car for the first time since 2009. It was finally time to upgrade my family’s 14-year-old vehicle to a more attractive and reliable 2-year-old model. Some aspects of my experience were the same as they were 11 years ago and others were wildly different.
Haggling Is Off Limits
The last time I bought a car, I was well prepared with offers to get the sticker price down—and the salesman was willing to negotiate with me. But this time, there was little room to haggle with the saleswoman. She knew the car was in good shape, in high demand, and that if I didn’t buy it, someone else would. She even expressed to me well in advance that the internet price was inflexible and already discounted.
That doesn’t mean there aren’t opportunities to save.
If you’re trading in a vehicle, focus on getting maximum value for that trade-in. You shouldn’t just be doing research on the approximate cost of the vehicle you’re purchasing; you should also research what the vehicle you’re trading in is selling for in the marketplace. The more you can get for the vehicle you’re trading in, the less you have to finance on your loan or pay out of pocket for your new vehicle.
To find the best estimate of your current car’s value, check the Kelley Blue Book, the most widely cited assessor of used cars.
If you’re not trading in a vehicle, then it’s best to have backup plans on the model and year of the car you’re looking to buy. You can expect to find a better deal on vehicles with higher mileage, slight deficiencies or older models. You may find your best deals on previously leased vehicles that are at least three years old with relatively low mileage.
Know Your Credit Score—and the Rates You’re Entitled To
Car dealerships don’t just make money by selling cars. They also make money by financing vehicles for buyers who don’t have the cash to purchase the car outright. If you’re seeking to finance a car through the dealership, you need to understand your credit score so you know whether or not they’re offering you competitive rates.
In my experience, the dealership offered me three potential car payments without disclosing the interest rate and before running a credit check. It was only after I requested they disclose the rate that I learned they ranged between 6% and 7%.
I have a high credit score of 845, so those rates are way too high. After declining and requesting a credit check, they then offered significantly lower payments and rates as low as 2.39%, which was much more in line with an applicant like me. Over the life of the loan, the difference between the dealership’s initial offer and the rates I actually qualified for would save me over $1,500 in interest payments.
I also knew what the going rates were for auto loans ahead of visiting the car lot. The average car loan rate for a used car for someone with high credit is about 4.69% right now, according to Bankrate.com.
Know what to expect, and keep in mind that dealerships often add in a little cushion for themselves, which makes them more expensive options than financing through credit unions or banks directly.
Understand Service Plans and Warranties
When you’re doing research on your car, try to get a good idea of how reliable it is and what the expected cost of ownership may be by reviewing rankings and reviews. Ensure your annual car budget has room to pay for standard maintenance such as oil changes, tire rotations, and repairs.
This is important because dealerships may aggressively offer you service plans and extended warranties. While these plans give you an added layer of comfort in knowing your car is protected, it also means you are paying a premium for standard maintenance that you can likely get much more affordably elsewhere. Even worse, the premium for the plans and warranties are often rolled into the loan, which means it accrues interest on top of the amount you’re borrowing.
Instead, you should only get these service plans if you can pay for them in cash outside of the loan agreement. To ensure this happens, simply ask the finance manager if you can pay for the coverage separately. If they attempt to persuade you to roll it into your loan, stick to your guns or opt out of the service entirely. You can always set aside the money you would’ve spent on a service plan into an interest-earning savings account. That way, your money actually grows over time and you can pull from it as you need it.
Know When to Say No—and When to Say Yes
Ultimately, after declining several offers that included maintenance plans, I settled on a five-year financing plan at 4.9%—knowing that I’ll pay it off much quicker.
As a general rule of thumb, it’s smart to finance a car for no more than three years. If you need to finance over a longer term than that, it’s an indication that you’re buying more than you can afford. Finally, try to keep your total car costs—including monthly payments, insurance, and gas—within 10% of your take-home pay.
Knowing what you can afford, and what a car dealership shouldn’t get away with, is key.
My Car-Buying Journey, in 12 Steps:
- Saleswoman was inflexible on the price. It is what it is.
- Dealership lowballed me on my trade-in. According to Kelley Blue Book, my old car was worth $1,750, but the dealership offered $1,000. I countered at $1,700, and they countered at $1,250.
- To finance the purchase, they offered an APR between 6 and 7 percent.
- I told them that was ridiculous — and they came back with 4.9%.
- I asked them to make up for the low trade-in offer with a $500 credit. They finally agreed to meet me at $1,750. Check.
- Surprise, surprise…they offered an APR of 4.9% but only if I included a maintenance plan and a service contract. I declined. My credit score is 845…do better.
- We went back and forth on four,- five- and six-year financing plans. I focused on payments, NOT rates.
- Swapped finance managers. I wore the other guy out so they sent “the brother” in the room.
- New guy offered me 2.39% APR, but only if I got a maintenance plan. I declined…again.
- We settled on a five-year financing plan at 4.9%, which I’ll likely pay off in 12 months. Over it.
- Phone number and address were wrong on several documents. Took another 30 minutes to reprint them all.
- Final deal. A simple loan, no bells, no whistles, no plans. $10k down.