How to buy a used car

Shopping for a used car is like going on a treasure hunt. There are amazing deals out there, and with the Internet, you can find a real diamond in the rough.

Shopping for a used car is like going on a treasure hunt. There are amazing deals out there, and with the Internet, you can find a real diamond in the rough.

There are plenty of incentives to buy used instead of new: It will save you money on insurance, registration, taxes and depreciation, which is the loss in a car’s value due to wear and tear over time. It also makes sense because cars have never been more reliable. It’s not unusual for some vehicles to be trouble-free for well over 100,000 miles.

Before we go into detail, here’s an overview of the steps you’ll need to take to buy a used car:

1. Set your budget. Decide how much you can spend on a car and how you’re going to pay for it.
2. Choose the right car. Pick the right model based on your needs.
3. Check reliability and ownership costs. Make sure the model you’ve chosen won’t break down — or break the bank.
4. Locate good used cars. Search online classifieds or do it the old-fashioned way, by walking the car lot.
5. Price the cars. Use pricing guides and find out what experts say the car you’ve chosen is worth.
6. Check the vehicle history report. Use the car’s vehicle identification number to see its history.
7. Contact the seller. Save time by calling the seller and asking questions before you take a look.
8. Go on a test drive. Decide if this is the right car for you and if it’s in good shape.
9. Negotiate the best price. Use the information you’ve gathered in your car search to set a fair price.
10. Close the deal. Whether you’re on the car lot or buying from a neighbor, you have to handle the payment and paperwork correctly.

So that’s the basic outline. Now, let’s have a look at where the rubber meets the road.

Set your budget

There are really only two ways for you to buy a car: Pay cash or take out a loan. If you’re paying cash, budgeting is pretty simple. But don’t spend all your savings. Remember to set aside money for registration and insurance — and possible future repairs.

Most people take out a car loan so they can protect their savings and buy a more expensive model. It’s smart to get preapproved for a car loan because it simplifies the buying process and puts you in a stronger position at the car dealership. You’ll see later how preapproval fits into the process.

Use an auto loan calculator to compute the best loan for you. Plan to put about 10 percent down and finance the car for three years. Ideally, the total of your monthly auto expenses shouldn’t be more than 20% of your monthly take home pay.

Choose the right car

Now the fun begins — picking your car. Take some time to think about how you plan to use this car. For example, if you have a family, you’ll want enough room for everyone plus ample cargo space. If safety is a top priority, check out the Insurance Institute for Highway Safety for crash tests.

Narrow the field by making a list of must-have features. Then, search for models with those features using tools such as Car Finder on Edmunds.com. As you move forward, build a list of three target car models to research in more detail.

Check reliability and ownership costs

Every used car is different. Some have been driven more miles and have more wear and tear. But, in general, you want to make sure you’re choosing models known for their dependability. Consumer Reports and J.D. Power collect maintenance reports from owners and rate all used cars.

A closely related issue is the total cost of ownership. Some cars are cheap to buy, but will cost a lot in the long run because of insurance, maintenance, repairs and depreciation. Several automotive websites, such as Kelley Blue Book’s Five-Year Cost to Own or Consumer Reports’ Cost of Vehicle Ownership, show estimates of these expenses.

Locate good used cars

There are a lot of websites that list used cars, and each site seems to have its own character. Here are four good ones to check out:

• Craigslist. This site lists used cars for free. It’s best for low-end cars in your area, but be careful about scammers.
• AutoTrader. Here, sellers pay to list their cars. Paid sites are better at keeping out scammers and usually provide a list of mid- and high-end cars. AutoTrader allows you to easily filter by year, make, model, price range and features.
• AutoList. This site is an aggregator — it pulls together information from many different areas into one searchable site.
• CarMax. This online used car superstore is a good place to look because it has a large inventory and no-haggle pricing. This means prices are clearly posted on the cars and negotiating is not allowed. Carmax also offers an included warranty and provides financing.

Most used car lots have the cars in their inventory posted online. However, if you’re someone who likes to see and touch the cars you’re considering, there are countless used car lots across the country where you can do just that.

Price the cars

Once you find several cars for sale in your area — but before you physically inspect them — look up that car model in a pricing guide such as Kelley Blue Book. You can use the guide to estimate the market value of the actual car you’re looking at by assessing its condition based on factors such as age, mileage and options. Once you have the price, if you want to make a deal, you’ll have the information you need to negotiate effectively.

When you look up a price, include the following information:

• Year, make and model. The model is sometimes called the “trim level.” For example, when looking up a 2015 Nissan Sentra, XE is one of several trim levels.
• Options. These are special features installed when the car was built, such as a navigation system.
• Mileage. Typical annual mileage on a car is about 12,000 miles. If a car has been driven more or less than this, the price is adjusted accordingly.
• Condition level. Read the descriptions of the condition levels carefully. The difference between “clean” and “outstanding,” for example, could easily be $1,500.

Most pricing guides give you several different prices. If you’re buying the car from a dealer, look at the “Dealer Retail” price. If your next-door neighbor is the seller, you should look at the “Private Party” price. You might also notice that pricing guides tell you what the car is worth as a trade-in. Make sure to price your current car if you plan to trade it in at the dealership.

Check the vehicle history report

Before you drive across town to see the car you’re interested in, run a vehicle history report. Using the vehicle identification number (VIN), you can get a detailed report of the car’s history from Carfax or AutoCheck. It’s a quick way to know if you should seriously consider buying this car.

In some cases, online classifieds will have links to free vehicle history reports. If not, it’s worth it to buy one. Here is some of the important information you’ll learn:

• • Does this car have a clean title? If a car’s been in a serious accident, fire or flood, and was “totaled” by the insurance company (declared a total loss) it still might be driveable. However, the insurance company will issue a “salvage title” to alert future buyers. Steer clear of cars with a salvage title because it kills the resale value, and the car might still have hidden problems.
  • Serious accidents are reported to the insurance company and will probably be on the vehicle history report.
  • Shady car lots might spin the odometer back to increase its selling price. The vehicle history report can alert you to this scam.
  • It’s nice to think the car you’re interested in was driven to church by a little old lady for its entire life. If you order the report, you’ll know for sure each time it changed hands.
  • Some reports show if required maintenance was done on time and where the work was performed.

Contact the seller

A quick chat will answer lots of questions and save time. First, verify the information you read in the advertisement. Then, here are some basic questions to ask:

• Are you the first owner?
• Are the service records available?
• Do you have the title and is it clear? (A clear title shows there are no liens on the car.)
• How did you set the asking price?
• Is there any important information that wasn’t in the ad?
• Can I have the car inspected by a mechanic?

Test drive the car

Up to this point you haven’t actually driven the car you’ve chosen. Now, you’ll not only see if you like this model, you’ll also have to decide if this particular car is worth buying.

Unless you’re a mechanic, you can’t be expected to inspect a car thoroughly. However, you can give the car a pretty good initial inspection. If it looks good, then you can pop for a full inspection, which will cost you about $100.

Select a test drive route that has a little bit of everything: hills, rough pavement, curves and even a stretch of highway. Drive the car with the radio off — you can test that later. Pay attention to the following things:

• Visibility: Are there any blind spots?
• Acceleration and cornering: Does the car have enough power? How does the steering feel?
• Brakes: Are they responsive and predictable?
• Ergonomics: Can you easily reach all the gauges and controls?
• Mechanical condition: Listen for any unusual noises or vibrations that could indicate worn suspension parts or tires.

After the test drive, check the back-seat leg room and cargo capacity. Now it’s time to blast the sound system and see if your phone connects via Bluetooth.

Inspect the car

If you liked driving the car, and it seems to be in good condition, you should still take it to a mechanic. Private party sellers are pretty relaxed about this. Some dealers might give you pushback, claiming they’ve already inspected it. Go ahead and insist if you have any doubt about the car’s condition.

On independent used car lots, you often see a sign in the window saying that the vehicle is “certified,” which can mean almost anything — and usually means nothing  — about the condition or reliability of the car.

But on new car lots, “certified” means the car’s in a certified preowned (CPO) program, which have become very popular and make used car shopping a whole lot easier. CPO cars are thoroughly inspected and include an extended factory warranty. You really don’t need to take a CPO car to your own mechanic.

Negotiate the best price

Here’s the part that everyone dreads: negotiation. But it doesn’t have to be stressful, particularly if you’ve done your research and have a good idea what the car you want is worth. Compare the seller’s asking price to the average market price you determined on the pricing guides. Chances are, the seller is asking more than the market average.

Let’s say the seller is asking $12,000 and your research has told you the car is worth only $10,500. Start by pointing out any concerns you have about the car’s condition. For example, you can say, “I like the way the car drives. But it really needs a new set of tires. And besides that, the book value is only $10,500. So I’d be willing to buy it for $10,000.”

Now, it’s up to the seller to either accept your offer or make a counteroffer. If his counteroffer still seems too high, you can either stick to your guns or invoke the time-honored phrase, “I’ll meet you halfway,” and split the difference. You can go back and forth until you agree.

When you bargain with a car salesperson at a car lot or dealership, keep in mind that you’re dealing with a pro who knows all the tricks.

Here are a few tips to use on the car lot:

• • Don’t be a monthly payment buyer. If you have a preapproved loan, you’re a cash buyer as far as the dealer is concerned and you should negotiate on the price of the car, not the size of the monthly payment. This allows you to dodge a common trap set for buyers by salesmen: convincing a buyer to focus on the monthly payment rather than the overall cost of the car.
  • Start low, but in the ballpark. Lowball the seller and they won’t treat you as a serious buyer. Instead, make an offer that is on the low side, but still enticing. Then, improve your offer slowly, perhaps in increments of $250.
  • Don’t be trapped in the sales office. Don’t let a salesman leave you alone while he “goes to talk with his boss.” Instead, roam around the showroom or go get a cup of coffee. Uncontrollable buyers keep salespeople off balance, which can help you in negotiations.
  • Negotiate slowly and repeat the numbers you hear. It’s easy to get confused, so go slow or even write down the numbers thrown at you. Make sure you know if you’re talking about the “out-the-door” price, which includes all taxes and fees, or just the sale price of the car.
  • Ask about fees before saying yes to a deal. Some dealers include bogus fees to take back profit they lose in negotiating. Ask for a breakdown of additional fees before you agree to any deal.
  • Always be ready to walk. If you aren’t making progress toward a deal, or you don’t like the way you’re being treated, just walk out. No goodbyes are necessary.

Close the deal

Before taking ownership of the car, you should add it to your insurance policy. Then, you only need to pay for the car — usually with cash or a cashier’s check. Make sure you get a title and have the seller sign it correctly. When in doubt, check the state’s registry website for more information. Most states allow about 10 days to register the car in your name.

If you’re buying from a private party, and there is still a loan on the car, call the lender to find out how to close the deal. If the lender is a bank, offer to meet the seller in a branch office and sign papers there.

If you’re at a dealer, even if you have a preapproved loan to pay for the car, the dealership’s finance manager will probably offer to beat the terms of the loan. It doesn’t hurt to see if he or she can get a better interest rate. Just make sure all the other terms of the loan are the same.

But before the contract is drawn up, the finance manager will also likely pitch you additional products and services. Buying an extended warranty at the right price can provide peace of mind. But check first to see how much warranty still remains on the car. Many manufacturers now include “powertrain” warranties up to 75,000 miles. This covers all the parts that make the car driveable, such as the engine, transmission and suspension.

Once you sign the sales contract, the car is yours. So take your time reviewing the contract and don’t let yourself be pressured into signing just to get it over with. The contract will include the agreed-on sales price and these additional items:

• State sales tax. This is a percentage of the cost of the car.
• Documentation fee. It seems crazy but the dealership actually charges you for filling out the contract. This “doc fee” is limited in some states. In others states, such as Florida, some dealerships charge as much as $700 for doc fees.
• Registration fees. A dealer has the ability to register the car for you, which is really convenient.

Some dealerships might include additional fees, some of which are bogus. It’s tricky to know what’s legit and what’s just included to boost their profit. If the finance manager can’t explain a fee in the contract, ask to have it removed.

Philip Reed is a staff writer at NerdWallet, a personal finance website. Email: preed@nerdwallet.com. This article first appeared at NerdWallet.