Why Buying A Used Car Is A Good Idea For An Intelligent Investor?

Last week, I decided to go for a used car to replace my existing small hatchback car. Though I usually recommend a small car to save money on gasoline, this time I went for a sedan that runs on diesel. The primary reason going for a sedan from a small hatchback is to save on gas costs, as gasoline has become almost double the price that of diesel at my place, and I had less choices for a small diesel car in the market. Furthermore, I preferred a used car instead of a new one and these are the reasons that prompted me for a used car instead of a new car:

Value for Money

Buying a car itself is a bad idea for a value investor as it is a depreciating asset (or rather a utility), and buying a new car should be the worst decision for an investor looking for value for money. However, a car is a necessary evil. So the wisdom would be to invest the least possible amount in a car; therefore, a used car would be the right choice. The only hiccup would be to spot the right car.

In the used car market, cash is the king and altogether it is a different experience buying a used car with cash. It is a buyer’s market and if you are going to make a 100% down payment, you have the power to bargain and get good deals. If you are able to spot a potential individual seller in dire need of cash, you are going to get a good deal.

Maximum Depreciation in the First Few Years

A new car that is used specifically for business purposes starts depreciating at the fastest rate at the moment you roll it off the lot, and the maximum depreciation for such a new car occurs in the first few years. Usually with the standard permissible depreciation rates stipulated by the tax authorities, a car loses 50% of its value in the first three years. So the value of a car bought for $20,000 becomes $10,000 in mere three years. Assuming a lifespan of 15 years, there are still 12 more years of useful life left in a good car for us to take full advantage of. Let the first owner bear the major brunt of depreciation, and let us reap the fruits of benefit.

Affordability and Ample Selection

When going for a used car, you have the liberty to choose all the specifications according to your budget. Depending on your budget, you can look out for the brand, make, model, color, accessories, features etc. Furthermore, even low-income-group people have a chance to own a luxury segment used car. You have the freedom of owning your dream car just by compromising to own a used car. By grabbing a splendid used car, you kill two birds in one shot; you are frugal as well as luxurious!

Ability to Avoid Debt

With tough economy and job losses everywhere, if you buy any car by borrowing, used or new, it is going to be a fearful life until you fully repay the borrowed amount. If you buy a car with the aid of an auto loan, your investment keeps adding up day by day with interest and borrowing costs, while the value of the car keeps decreasing day by day, leave aside the running and maintenance costs. Buying a used car gives you a chance to avoid debt, as the value of a used car is far less compared to a new car. You can pay it off 100% with your savings, avoid debt, interest and borrowing costs, and moreover improve your credit score.

Minimum Investment in a Depreciable Asset

As I said earlier, a car is a depreciating asset. By going for a cheap used car, you are making a minimal investment in a depreciable asset. The less you invest in a depreciating asset, the less your money evaporates into the air.

Pay Less on Car Insurance Premium

Since the value of a used car is far less than its original price, obviously the amount that you have to spend on auto insurance premium also becomes correspondingly less.

Buyers are Less for Used Cars

People are reluctant to buy used cars because of the fear of landing in trouble. Wherever there is fear, a value investor tries to find opportunity.

Get Free Accessories, Like it or not

Whatever accessories, features, or extras that the previous owner has added to his car do not get added to the resale value of a car, and you get all of them for free which otherwise would have emptied your wallet if you were to buy a new car. Whether you need them or not, whether you like them or not, you get all those extras, additional features, and accessories for free.

The Skills Needed to Identify a Potential Used Car

Finding the right used car is an uphill task. However, you don’t need any extraordinary skill to buy a used car but have to just adopt a precautionary stance to not land into trouble. Keep yourself a checklist to buy a used car and verify if the car you are going to buy meets all the criteria in that checklist. These are a few quick guidelines on what to look for while buying a used car:

• Before you go looking out for a car, research for the asking price on the Internet, ads in the local newspapers, local used and new car dealers, car rental and leasing companies, and friends and neighbors. Kelly Blue Book is a good resource to get a fair idea on what you should pay depending upon the condition of the car. If you do not belong to US, convert the value provided by Kelly Blue Book from US Dollars into your local currency to get a rough idea (brands, specifications, and models vary from country to country).
• Choose a brand or model that has high resale value, with large number of cars on the road and in the market.
• Look for a car that has run low kilometers and is with the first owner.
• Verify whether all the relevant statutory records (registration, tax, insurance, title, smog certification etc.) are up to date and to your satisfaction. Research the history of the vehicle if it can be accessed online in your country. By doing so, you can avoid stolen, junked, salvaged, flooded, or a totaled car by an insurance company, or a car involved in a crime.
• If possible, take the car for a test drive. Identify the noises and their causes and the expenditure the noises may incur you.
• Identify the wear and tear and the possible longevity of the parts (Eg., tires, battery etc.)
• Check for major dents, ripples, waves, welding spots, poorly fitted panels, and mismatched colors all of which indicate serious accident or major repairs for which body work may have been done.
• Look for minor dents, cracks, rust and scratches, and estimate expenses like tinkering and painting that you may have to bear.
• Ensure that the engine room is clean and dry, free of leaks, with a well maintained engine that can easily be started, ideally with less emissions and leakages. Even if the engine room has been cleaned to show a buyer, any leak can be traced by looking at the ground where the car is parked.
• An auto mechanic can easily identify the aforementioned repair and maintenance issues. Taking a mechanic with you for inspection is a good idea.

Risks Involved in Buying a Used Car

Manufacturer warranty may have expired for a used car of more than 3 years of age but if the car was well maintained until then, you might not be needing warranty cover thereafter. Furthermore, you have those risks that I have outlined above if you fail to identify them. However, you can lower your risks by significantly lowering the acquisition price.

Negotiate with the Owner

It is better to buy the car from an individual rather than a dealer as the benefits are many. Dealers refurbish crap to look good to dump it on you. On the other hand, if you buy from an individual, you know about the seller, you can talk face to face with the owner, you can inquire about the mechanical problems if any, you can know who the principal driver was, the reason for selling the vehicle, and other pertinent history in detail and also request maintenance records. Craigslist is an excellent resource to find individuals willing to sell their cars in your locality. Once you have spotted the right car and satisfied, sit down with the owner of the car for negotiation. Bring to the owner’s notice all the defects and the negative factors in the car to lower the price in your favor. Offer the owner full down payment, a rate that is very much in your favor or pretend to walk away. Mostly you should win the deal. However, I didn’t have a chance to sit on the negotiation table this time! Why? Read below.

Conclusion:

Usually manufacturers sell cars used in their factories, used by their managers, through bidding or auction. You may try to find some good deals there, as the cars may be factory maintained. I got an opportunity to participate in one such closed bidding at a factory where the cars were used by the factory managers and were factory maintained. I was successful in three bids.

Let me detail that incident a bit. In that factory on that occasion, a person was allowed to bid for three cars only, and the bidders have to be referred by an employee. There were totally about thirty cars available for bidding and I made for three, in a hope to win at least one. When the results were announced initially, I was the successful bidder for one car. I bought that car for myself. I was the fifth or sixth bidder for the other two. However, the fear factor rolled in. The bidders above me for the other two cars gave way and the bids rolled down to me. I became the successful bidder for the other two cars too. Chance favors the prepared mind!

Agreeing to my views that I stated above in support of going for a used car and being satisfied with the prices and the vehicle conditions, my dad and my brother in law bought one car each out of the other two successful bids.

So the key takeaway message here is that, going for a sparingly used, 3-year-old used car for far less than 50% of the original price tag without being fearful by carefully evaluating the condition of the car could be the best deal for a guy who looks for value for his money. Are you intelligent, emotional, or fearful?