Dynamics of used car shopping
… challenging common wisdom
In my first post, I wrote about my recent car shopping journey that completed with the purchase of a brand new Hyundai Sonata Hybrid (2015). In the recent car shopping event, I, of course, did a lot of research and made several decisions based on my criteria. As with anyone like me, I was in dilemma to get a cheap used car or certified used car or a new car. Common wisdom is that you would like to spend the least money on car as it’s an asset that’s depreciating rapidly. Including myself, I know a lot of people in my family and friend, who bought certified used car because it’ just as reliable as new and save some money compared to the new car. However, after my recent experience, I feel that the decision to buy used car or certified used car or new car is not as simple as many of us thinks it is.
Before I get into the content, I would like to classify what I will call used car in this article. There are four categories of car that you would be looking at when you are in the market:
I. Cheap used cars: Usually <$5,000 and may be as old as 15yrs
II. Used cars: It can be $5,000 – $20,000 depend on age, mileage and the type of vehicle
III. Certified used cars: Manufacturer certified used car. Typically <3yr and <36,000 mile
IV. New cars
- When you are targeting the first category of used car (Least expensive), it’s simple. Buy the least expensive running car with best possible condition you can find with reliable history on the car itself as well on the brand. If you are in the market for this car, this article is of no help to you. Stop right here and continue your car searching and shopping adventure.
- When you are looking to buy a brand new car, a little more decision making on brands, options, financing, incentives, and your budget is required. It’s still less complicated if you use step-by-step filtration approach or you have already set your mind on something. You can probably benefit more by reading my earlier article, “Why I bought Hyundai Sonata Hybrid (2015)”.
- Things are very cloudy when either you are not sure or looking to buy a decent (non-cheap) moderately used car. In the sedan car market, this is when you are comparing sedans between $15,000- $25,000 or in other words, you are probably torn in-between higher end of used cars/ certified cars/ new cars. Keep reading as we will discuss some of most common questions encountered when we are torn between these cars.
Let’s cover few key topics to consider in decision making.
- Certified used car : Manufacturer certified cars are in high demand and buyer thinks they save somewhere 15-30% off MSRP and get just as new car. I bought it once but no more. My recommendation is that before you sign this deal, make sure you count additional warranty and purchase price together and compare it against new car to make sure you are actually saving significant amount of money. Often times you would spend near $1,500 extra for additional warranty that would only last maybe next 3-5 years (As much as you may have gotten with new car or a little more). I doubt after all this considerations, you would save significantly. Sale’s person will say new car goes for such and such amount referring to MSRP but remember if you go out to buy new car, you would not pay MSRP (More on that later).
- Best used car: I call this best-used car because that’s what you want. This requires some deal hunting and luck. However, if you can find a good quality used car with clean record and single owner directly from the owner, you may be in good shape. My experience says that it would not be for much less compared to buying from the dealer because people who are selling their relatively new car directly are the ones who refused to surrender to dealer’s low ball offers for trade in. So expect to pay KBB price or very close.
- MSRP: Maximum retail price is just a reference price. New car is sold for less than MSRP and there is no standard rule. How much lower is depend on too many factors and it can be as high as 20%. Read my earlier post on Hyundai Sonata Hybrid 2015. Manufacturers often have a lot of incentives and offers on new cars and you can expect to buy a car lower. Therefore, when you are shopping for moderately used car or certified used car, do not trust sale person’s comments on how much it would save you compared to the new car. Remember, MSRP is not what you would pay if you will buy a new car.
- Depreciation: Popular online auto related sites list car depreciation value and based on that perception has been created that cars from some of the brands are a good buy! It is based on assumption that all cars are sold for MSRP and market resale value is calculated from MSRP. Since MSRP is not what actual price buyer had paid, depreciation calculations and recommendations are all invalid. Period. I have noticed that many brands that have lower resale, also sells for more discounts off MSRP. I practically bought Hyundai Sonata Hybrid pre-depreciated!
- Invoice price: Although this is not a topic to discuss here, let me say that if company tells you that a car cost them this much and you can buy it for same, I would not take it seriously. It can not be real.
An example deal: Let me briefly provide an example of my last car buying experience. I wanted to buy a best used car but end up buying a brand new car. I was not looking for cheap or least expensive used car but rather looking to buy least used car with maximum saving.
- Used car of my choice would cost me ~$16,000 and Certified used (Honda Accord/ Toyota Camry) would also cost very close to that. In either case, with additional warranty, I was looking at ~$17,500 for best used car. Also, some of the high-end trim features in used cars are available in lowest trim today. So you can compare new price of lowest trim to higher trim used car price.
- New Hyundai Sonata and Sonata Hybrid 2015 both were very competitive option to the above used car option. Why would I buy used car for the same price of new car? I did not. That’s why I bought new Sonata Hybrid.
The line is very thin between higher ends of used cars, certified cars, and new cars. It is very easy to lose track and overspend. In fact if you are in this category, I recommend that before you make a final decision, forget the car shopping for a day or two to clear your mind and come back to where you were. It will really help you see through the cloud. You may think that you could lose that great deal you had found, but you will not, as couple days will not change price significantly. Even if you lose the deal, cars are not appreciating assets (it’s a depreciating asset), you will find cheaper or better deal later, most of the time.
Conclusion
- Do not lose track of new car incentives and offers in all directly competitive cars when you are in market for used car.
- Do not give too much weight to article who suggest to buy used car or certified cars or recommend specific brand because it has lower depreciation value!
- If you can, take a break from car shopping for a day or two before final decision. Happy car shopping.
- Today, new car prices are very close to the certified car prices and sometimes it’s not worth buying used car for the saving that you would get at the end.
