Why you should never buy a used car from a dealer

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I'm not here to bash tired old tropes about used car salesmen.

I moonlight as a mechanic, and people often request my help when they are thinking of buying a used car. Going to dealerships is the first and automatic impulse many people have. However, buying a used car from a dealer is simply a waste of money, so I frequently give the following advice.

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The cars on a dealer lot are just commodities.

Because car dealers do trade-ins, you might think that most of the cars on the lot came from other customers of that dealer. This is not the case. Behind the scenes, there is a network of dealers and a system of auctions that move used cars around from dealer to dealer.

When someone trades in their car, if the dealer decides it doesn't fit their niche, or they already have another one like it, or it has problems they don't want to deal with. Whatever it is – they sell it at a dealers-only auction. You must have a car dealer's license to attend one of these auctions. They also buy inventory at these auctions. Why does that matter? Think about it – how comfortable would you be buying a car on Ebay? Dealer auctions aren't much different – just an anonymous auction.

The risk of the unkown

• Who is selling?
• Why are they selling?
• Can I trust them?
• What hidden problems does it have?
• What was the car's previous life like?

Here's the truth: you can't really answer those questions any better at a dealership than on Ebay. The only difference is that you can look at the car in person and drive it around. To be fair, this is a significant factor. However, if a dealer got the car from an auction, they don't have any answers, and even if they took it on trade-in, they have incentive to not be honest about the answers to those questions, even if they have them.

You've certainly seen cars advertised as having been well-maintained, or 'owned by grandma and driven to church on Sundays', but have you ever seen one advertised with 'owned by a reckless teen!' or 'never had a single oil change!'

I assure you – those cars are out there sitting on dealer lots, waiting for unsuspecting buyers.

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It doesn't make financial sense.

The heart of the reason buying from a dealer makes no sense is the margin. Whether on trade-in or at an auction, when a dealer acquires a car they typically pay far less than the car's retail value, sometimes a little as 1/3 the retail value. They turn around and sell it for far more than the private-sales market value.

Here's how it works:

Dealer sells someone a car and takes their old one in on trade. Let's say this person is upgrading from a ten year old Honda to one that's only a few years old. The dealer gives the person a discount equal to the trade-in value of the old car (around $3900) and then because this dealer mostly does newer cars, they sell it at auction for $4500. Another dealer who does more older cars buys it. They list it on their lot for $6999 and sell it for $6800.

Everybody in this scenario is getting screwed, except the dealers.

The private market value of the car is around $5000. The person who traded in the car got only $3900 out of it, when they could have had $5000; and the person who buys it pays $6800 to the dealer when they could have paid only $5000 directly to the original owner.

WOW, you say. The math says the dealer(s) made $3000 in profit on that deal! Dealers must be rolling in cash! Well...some of them are. But operating a dealership involves significant overhead, and part of the equation is that used car dealers often don't turn over as many cars in a month as you might think, so they need to make a lot on each deal. Some small operations might only sell two or three cars like this in a month.

When you see the numbers broken down, does it seem appealing? 'YES! I love paying 50% more than necessary for large, expensive purchases!' said no one, ever.

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So why on earth would anyone buy from a dealer?

Here are some of the reasons, and why they don't actually make sense.

'I need a loan, so I'll buy from a dealer because I can get a loan from them'

You don't need to go to the dealer to get a loan. You can get a loan from your bank or credit union to buy a car from a private individual. It makes doing the transaction more complicated, because the bank wants to be sure that their name is on the title, but it's not thousands of dollars more difficult. You can also get a loan from auto loan specialists.

'But what about those crazy deals they offer - 0% interest, no down, cash back, etc etc...?'

DO THE MATH. If you take out a $5000 loan for 5 years at 6% interest (I promise it won't be this high unless your credit is awful!) to buy that Honda, you will pay a total of $800 in interest by the time the loan is done. Hmm... $800 interest, or $1800 in exorbitant price. Which is better? In all likelihood you will get a much better rate than this from your local bank, so it won't even be $800.

'But what about the 127 point inspections and guarantee/warranty offered by the dealer? Doesn't that mean I can trust that it will be a reliable car?'

NO. The 'inspections' are just some high school kid going down a checklist to see if everything works. it looks like this:

• Tires

  • left front tire is present
  • left front tire has proper air pressure
  • right front tire is present
  • right front tire has proper air pressure
  • left rear tire is present
  • left rear tire has proper air pressure
  • right rear tire is present
  • right rear tire has proper air pressure

• Windows

  • has windshield
  • has left front window
  • left front window goes up and down
  • has right front window
  • right front window goes up and down
  • has left rear window
  • left rear window goes up and down
  • has right rear window
  • right rear window goes up and down
  • has rear windshield
  • etc...

You can see how quickly you can build a '127 point checklist' by checking for the obvious.
If you want, you can find similar checklists online and do them yourself, or pay a mechanic $50 or less to do it for you.

'What about the warranty?'

When you're shopping, salespeople convince you that the car will be covered if anything goes wrong, but when something goes wrong, they'll pull anything they can out of thin air to excuse themselves from actually covering anything.

'Your engine overheated and seized. That will cost $4138.63 to fix.'
'But the car is under warranty, I just bought it!'
'I'm sorry, it says here you were carrying passengers unrelated to you during commuter traffic on the freeway, that constitutes commercial use, the damage won't be covered by the warranty.'
'But that was just my office carpool. I can't use my car to commute?!?'
'No, sorry. It's on page 87 of the contract. $4138.63 please'

In the rare cases of dealerships offering warranties that actually cover things that happen in real life, they still come out ahead. Dealers willing to offer this kind of warranty usually only deal in late model (newer) cars with hefty price tags. The percentages of margin in the above example still hold up, so you're looking at buying a $15,000 car for $22,000 or so.

Yes, they'll replace the transmission if it fails in the next 12,000 miles (not very long, actually) but that might happen to one of 50 cars they sell. And if it doesn't happen, they made off with $7000 of your dollars.

If you want the protection of a warranty, just set aside 50% of the purchase price of your new (used) car, and use that money to fix your car if it breaks. You'll still be better off than if you'd paid dealer retail. If it doesn't break, you'll have big bucks sitting in the bank.

'I like going to look at all the cars in one place.'

Great. Do that. Just don't buy one from them.

'My friend bought their car from X dealership and they're really happy with it.'

Doesn't mean you'll be happy. Also, your friend didn't do the math, and at this point, if they did, the cognitive dissonance would trigger them into making up reasons to believe that they made a good choice to pay 50% more than necessary.

'My grandfather bought every car he owned from X dealership and they always treated him really well.'

Of course they did. He gave them a lot of money. People treat you well when you give them lots of money. That doesn't mean it's wise to go around giving people lots of money. Unless, of course, you have plenty and you can't get anyone to treat you well any other way.

'I feel uncomfortable making such a big purchase from some random stranger on the internet.'

Reasonable. However, most people selling their cars on Craigslist (my go-to, though Facebook marketplace is growing rapidly) are actually perfectly nice, honest people who simply want a different car, or don't need theirs anymore. They're just as scared of you as you are of them. It may seem scary, but once you do it you might find it's not actually that bad. I've met some really nice people buying and selling cars on Craigslist.

If you're worried about it:

• bring a friend or relative with you to look
• meet the person at your/their bank, where you will feel safe and can make a bank transfer to buy. That way you don't need to worry about checks or cash and everybody can trust that the money is where it is supposed to be.

'I don't want to buy a lemon. I feel like I can trust an authority like a dealership more than I can trust a random stranger on the internet.'

Don't fall for this. Dealers do everything they can to build and capitalize on 'institutional trust'.

Yes, on some level, if a dealer were to just sell lemons all day every day, eventually word would get around and they would have a hard time. Reality is, they can sell a lot of lemons before it comes back to bite them, and they do. It's not always their fault – sometimes stuff just happens to cars.

However, if you want to feel more secure about buying a used car from an individual, line up a reputable mechanic to inspect the car you want before you buy it. Any reasonable seller will be happy to do this. Many mechanics will do this kind of inspection for free, because it's not very hard, and they know you're likely to come back to them for maintenance in the future.

'I want to get rid of my old car, and they offered me a deal if I trade it in for a newer one'

Of course they did. See the math above. It's not actually a good deal. If you like getting screwed both coming AND going, by all means, you're an adult!

'X dealership has really good prices'

Compared to what? Other dealerships? 'We screw you less than the other guys!' is a really great motto.

'It's convenient.'

I can't argue this one much, except to remind you how much you are likely to get jerked around by pushy salespeople eager to 'close the deal' and meet their sales quotas. Private sellers aren't trained and pressured to 'close the deal'.

Remember: It's a dealer's job – their income relies on convincing suckers like you to pay far more than you should.

Moral of the story: buying a used car from a private seller will ALWAYS be a better deal than buying from a dealership.

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Thanks for reading. Hope I saved you some money and headaches!