It’s that time of the year again. It’s new car season. You are going to be pressured to part with a lot of money. You may be tempted to do this by the siren call of the new car ads. I write this report as a way to help you get through this month of temptation with your finances still intact.
I write this report as a man who had two cars die on him last month, who then bought a “new” used car, and whose son is driving another of his cars that is sounding like it, too, is becoming terminal. I presently drive a car that is in such a state of decrepitude that my wife has said she will no longer ride in it — an extreme view, in my opinion. I have another car in the repair shop today. But there is a real possibility that this car can be resurrected for another two years for under $500, and I can then turn over my car to my son. I’ll sell the terminal one for $1,000.
At present, my newest vehicle is the recently purchased one. It’s a 1994. The dead ones were a 1991 and a 1981. The one in the shop is a 1991. My car is a 1987. The one my son drives is a 1984.
My entire inventory of used cars at the beginning of last month was probably worth about $11,000. I do not tie up a lot of my wealth in cars. And, most of the time, most of them are running. They get me from here to there and back.
My wife did use our AAA card a lot last month. Statistics ganged up on me. That can happen once every decade if the inventory value of your fleet of cars isn’t worth the price of a new Toyota Corolla.
I bought a new car once, in 1972. It was a Corolla. It was a lemon. The engine blew up three times in the first two years. Finally, a local dealer was authorized by Toyota to rebuild the engine at company expense because the engine for that model had been poorly designed. I kept the car for another 14 years. I drove it from 1972 to 1988.
I recall one day when I parked the car at church. My assistant was in the parking area. He was standing with another man — younger, always in debt, and who lusted after hot new sports cars. My associate pointed to my then decade-old Toyota, and said to him, “Maybe someday you’ll be rich enough to afford a car like this.” Exactly!
THE FREE MARKET IN ACTION
Over the next four weeks, the American public will be subjected to a concentrated advertising barrage that takes place every September. After Labor Day, the industry’s new cars are rolled out on the nation’s TV screens.
The annual month-long mass redistribution of wealth will now begin. Keynesian economists regard this as America’s month of months. The auto industry constitutes something in the range of 5% of the U.S. economy. What happens in September to the auto industry points to the entire economy’s performance for the next twelve months. What consumers are willing to spend on new cars is indicative of what they will spend on everything else.
Unlike Christmas, the other great indicator of consumer sentiment, the auto market has a used goods sector. What used car buyers are willing to spend influences the trade-in value of the new car buyers’ existing inventory of used cars. This, in turn, influences the trade-in price offered by car dealers to new car buyers.
There is no more comprehensive, interconnected, top-to-bottom income distribution market than the American auto market. It is the consummate example of free market voluntarism in action.
I regard the system of car sales as the free market at its best, despite the fact that it is regarded by critics as the free market at its worst. When the Democrats wanted to torpedo Richard Nixon’s candidacy for President in 1960, they put up a cheap, mass-produced drawing of him, with this phrase: “Would you buy a used car from this man?” Because of the closeness of that election, that poster probably cost him the Presidency. The suggestion was that Nixon was more crooked than a used car dealer. As it turned out three elections later, he was.
Used car salesmen have bad reputations. Used home salesmen do not. Why the difference? It is probably because of the different levels of pricing ignorance in the two markets. There are lemon houses, just as there are lemon cars. But, because of the size of the loans made to buyers to buy homes, there is more money charged to the buyer by the lending agencies and other support agencies to increase their amount of information regarding the value of the loan’s underlying asset. The lender wants to reduce the risk of default by the buyer. He adopts various techniques to reduce his risk, and these techniques reduce the buyers’ zones of ignorance. Buyers are willing to pay for these third-party services because of the unit price per house. The buyer is more concerned about the possibility of winding up with a lemon house than a lemon car.
There is another factor: gender. Men buy cars. Women buy houses. Husbands may veto a house purchase due to its price, but they don’t make the decision about what to buy. Wives do. So, women are more heavily involved in the purchase of homes than they are in the purchase of cars. Also, female salespeople listen far more closely to what female buyers say they want to buy than male salesmen do. “Men don’t listen to what women say,” women complain. This is why there are so many female realtors. They do listen to what women say. They can actually understand what women mean, despite what women actually say.
There are almost no car saleswomen. They don’t have the stomach for it. Macho sales techniques have more to do with the sales of cars than with the sales of homes. Car sales are determined more by specialized sales pressures from salesmen than by the buyers’ decisions. This is true in home sales, too, but not to the same degree. Wives spend more time in houses as consumers or trying to keep them running than husbands spend in cars as consumers or trying to keep them running. Buyers of houses have more knowledge about houses than buyers of cars have about cars. Sellers of cars therefore have an advantage over buyers of cars.
Fortunately, the World Wide Web is beginning to offset the sellers’ advantages.
CAVEAT EMPTOR
In Tyler, Texas, there used to be the most accurately named used car dealership in American history: Caveat Emptor Motors. “Let the buyer beware.” It was a clever name, but the company went out of business. I guess the buyers bewore too much.
Because the zone of ignorance is larger regarding used cars than new cars, there is more room for skilled negotiating and deception by sellers. A buyer can find out on the Web what a car dealer paid for a new car. He cannot find out what the dealer paid for a used car.
The ignorance factor is why there is such a fast rate of depreciation for a new car. A new car that is running well is unlikely to be sold. When a very new car is sold, the prospective buyer thinks, “What’s wrong with this car?” He doesn’t think, “What’s wrong with the seller’s situation?” To make the sale, the seller has to offer a believable reason. The usual reason is this: “I have an emergency.” But this reason produces lower offers. Buyers seek to take advantage of the seller’s lack of liquidity and lack of time. So, prices of recently purchased new cars fall like a stone. Drive a new car off the lot, and you have just lost at least 10% of the sales price, and maybe 15%.
For new car buyers, the re-sale value of the car is less than the money they owe on the car. This remains true for at least three years. Only after year three does the rate of depreciation slow enough to allow the borrower to catch up with the re-sale value of his car. But then, in year four, he buys another new car. He never really gets ahead. This is why I will not buy a new car.
I won’t borrow money to buy a car. I don’t borrow money to pay for any depreciating asset. So, I limit myself to used cars, and normally used cars that are at least five years old.
Last month, I bought a 1994 Lincoln Continental for $3,500. It runs almost flawlessly. It has only one defect. The oil pressure gauge is hooked up to an electronic gong, and the thing beeps for no reason from time to time. The driver has to whack the dashboard to get it to quit. I am hoping there is a wire that some mechanic can cut to stop this. But it’s a small price to pay in annoyance for an otherwise smooth-running car. My wife plans to drive it for at least six or seven years. At the end of that time, it will probably still be worth $1,000.
I do have to take each of my cars to the repair shop twice a year or maybe more. So what? If I spend (say) $200 per visit, that’s way less money spent in that month than most people pay to their lender every month to drive a new car. I could spend $200 every month per car in repairs, and I would still be ahead of a new car buyer, except for my lost time. I own several used cars, so I have always one in reserve. If one car is in the shop for a few days, it’s no problem.
I don’t have to pay extra money in auto insurance to cover the repair cost of a new car. It doesn’t pay to buy collision damage insurance for a car worth less than $5,000, which mine are worth. That’s more in insurance savings per car per year than I normally spend per car in normal repairs.
One of the dead cars died on my wife on the way back from a trip to Nashville, a drive of about 450 miles each way. She had just visited my daughter. So, we sat down and figured a better way. We should have done this earlier. We can rent a mini-van for a week for about $375. If we shop around, we might get it for $350. If she visits twice a year, that’s no more than $750. What would the depreciation and insurance be for a comparable used mini-van that is two years old? It would cost $16,000 to buy it — probably from Enterprise Car Rental. It would then depreciate by at least $2,000 a year. It would cost money to insure it, and I would probably buy collision damage coverage. On the road, if a rental car breaks down, you get a replacement car that day and an apology. If your 2-year-old $16,000 car breaks down, you are stuck in a distant city with a mess to sort out. You may face a repairman like the one in that TV ad ten years ago. “How much will it cost to repair my car?” Answer: “How much do you have?”
How many long driving trips do you take each year? Most people take no more than two or three. So, rent a car for long trips. It’s cheaper than buying a new one that you would trust on the road. Buy older cars that don’t depreciate fast. Use them around town.
REDUCING YOUR IGNORANCE, CHEAPLY
The reason why used cars sell for so much less than new cars is buyer’s risk. The buyer is taking a greater risk when buying a used car than a new car. Also, the seller is in a weaker bargaining position than a new car dealer. He is not a skilled salesman. If you can reduce your risk by obtaining better information on the make and model of the car, and if you are in a position to walk away from a deal, you will save a lot of money when buying a used car from a private party.
There are two wonderful free Web sites, Kelley Blue Book and Edmunds. You can look up any brand of car, any model, any year. Kelley has a great feature: the used car price from a dealer (retail), and the price from a private party. Here is where you regain your advantage as a buyer. You can find out what is a reasonable price for any make, year, or model, in one of five levels of condition. You can even put in the mileage. Kelley lets you identify your zip code. You will find out what prices in your region are.
Nobody likes to pay for car repairs. You can consult Consumer Reports to find the reliability factor for most cars. It’s in the book that they put out annually. Your local library has it. Or you can subscribe for $3.95 for one month to the on-line version of Consumer Reports. Cancel after one month if you like.
CR also runs a “Used cars to avoid” list. That one, you must consult. Another list: “Used cars: best and worst.” Read it.
Subscribers can search for any make or model and find out its reliability history and used car price range. The Toyota Camry is always at the top of the list. Most of the top-rated cars are Japanese.
Note for economy car buyers: A Chevrolet Prizm is identical to a Toyota Corolla, but it usually costs less to buy used. Most people don’t know they are the same car, produced in the same Fremont, California factory.
Another way to reduce the likelihood of buying a lemon is to buy a particular brand of used car only at a car lot where that brand is sold new. If you want to buy a used Chrysler, buy it at a Chrysler dealership. The used car on the lot was a trade-in from someone who presumably bought a new Chrysler. He was satisfied with the older car, so he bought the same brand. He was reeled in by the ads for the new model. Too bad for him. Good for you.
Buy a FAX-based report on any car that you really are ready to buy. The service is called CARFAX. CARFAX’s report will reveal if the car was ever involved in an accident. If the car was ever in an accident, don’t buy it for anything but a super-low price. As a run-around-town car, it may be OK, but only at a very good price.
GETTING THE BEST DEAL FROM A DEALERSHIP
I suggest that you go to this Web site: http://www.carbuyingtips.com/used.htm
The article is long, detailed, and really hard-nosed. If you will do what it says, no used car salesman will have an advantage over you. The author of the report has certain rules, such as these:
Have a mechanic put the car up on a lift for inspection. Check for accident damage. Run a vehicle history report (CARFAX). Never sign an “sold as is” paper at a used car dealership. If you need financing, have it lined up before you go to a used car dealership.
I would add these rules:
Don’t buy the car without going home, running a CARFAX check, and thinking carefully about buying. Be sure you have a top price in mind that is lower than the dealer’s asking price. When you return to negotiate, have in your possession a filled-in check for your top price, including tax & license. When you sit down with the salesman, hand him the check. He can take it or leave it. Don’t ever negotiate with a pro. Put the burden to decide on him. A signed check does this. Because nobody buys cars without debt, your check in his hand will unnerve him. This is good. If he doesn’t accept it, come back when he isn’t there, go to another salesman, look at the same car, and go back to his office. Write out a new check right in front of him, with the same top price. He may take it.
Shop during daylight hours. You can more easily see any defects in the car’s exterior.
Shop in the morning. Negotiate the first round before noon. Then come back in the afternoon, if you like. Deal with the same salesman.
If the morning’s salesman doesn’t capitulate, come back in the evening and try to find another salesman, preferably young. Make a beeline for the youngest guy on the floor. Don’t let an old, experienced salesman intercept you. Spot the young guy before you walk into the showroom.
Don’t tell him that you made an offer earlier. Have him walk around with you. Then, lo and behold, you just happen to find the car you’d like to buy. Go back to his office. Write the check in front of him. Don’t use the original check. He may catch on that you have been there before.
There is another strategy to get down the price. It’s a good one when you have a particular car in mind. Don’t come back to buy it for 30 days. Any used car that is on a lot for more than 30 days is a loser for the dealer. He ought to sell it. The salesman has an incentive to sell it.
There is an ultimate fall-back strategy for any negotiation, once you have decided to buy any item. It is a good strategy when you really don’t know what an item is worth in the open market. The better the salesman is as a negotiator, the better this strategy works for you. Rarely does anyone use it.
Tell the salesman that you have a top price in mind. You absolutely will not go higher. In fact, if you don’t get this price, you will walk out of the dealership and go to another. You will not be back until the next time you buy a car — but not for this purchase. The salesman must believe you for my strategy to work. You must be willing to do what you say.
Tell the salesman to write down his absolutely lowest price on a piece of paper. You will write down your top price. You will then exchange the papers. If your top price is above his lowest price, you will split the difference: 50-50. For example, if your top price is $7,000, and his lowest price is $6,000, you will pay him $6,500.
Make sure that he knows that this price is for everything: taxes, license, whatever. The check will be exactly this: no add-ons.
If he accepts your challenge, do the exchange of papers. If his price is lower, split the difference, write the check, and hand it to him. A check in a used car salesman’s hand is a powerful motivator. He can go back and talk to his manager, or whatever other ritual song and dance he wants to perform for you. But his manager will know that it’s all or nothing. “Take this offer or lose any sale whatsoever.”
Go shopping in the first week of the month. Then wait for a month to buy the vehicle you want. Have three or four in mind. Don’t feel pressured to buy. There will be other cars. By the way, this is another reason to have a spare car in reserve: less pressure on you to buy when your main car dies, or you get tired of taking it to the shop.
A salesman has a monthly quota to meet. If he has met his quota by the end of the month, he is less pressured to deal. At the first of the month, he is under more pressure. Make your offer in the first week. But let the cars you’re interested in sit there for a month.
Sell your existing car in the local newspaper. Don’t try to trade it in to the dealer. If you do, it will confuse the issue, and a salesman makes more money when the issue is confused. Better yet: keep the car as a reserve car. This will reduce the future pressure for you to “buy now.” You want the pressure on the seller to “sell now.”
The more valuable your time, the less time you should invest in shopping for a used car. But take your teenage son or daughter along with you. Make it a teaching experience. If your children don’t get into the habit of going into debt for cars, this will help them immensely in later years.
NEWSPAPER ADS
Go onto the Web and go to your local newspaper. It probably has classifieds listed on-line. Our local paper has an auto section on-line, divided into a van section, an SUV section, and a trucks section. Each is broken down by brand, then by price. It’s easy to use.
Start looking. Call around. If your top goal is a low price, keep looking for two or three weeks. You’re looking for an ad that keeps showing up in the classifieds. At some point, the seller may get discouraged.
Go see the car. Take a print-out from Kelley or Edmunds. Tell him that you won’t pay more than this price. Tell him that your offer will stand for three days. Hand him the print-out. Put your first name and phone number on it. Then get in your car and drive away. If he calls, fine. If not, keep looking.
The ads in the weekly Thrifty Nickel-type newspapers are probably run by people with less money in reserve and more immediate pressure to sell than the person who runs an ad in the daily paper. Be ready to negotiate with these people.
One way to find out over the phone why the person is selling is to say, “That sounds like a really great car. Why would you want to sell it?” The person is more likely to tell you the truth if he thinks you are interested in his car, unless the truth is that it’s a lemon. Most used cars aren’t lemons, which is why their owners keep driving them. You want to discover his motivation for selling, so that you can make an offer he won’t refuse. His motivation probably has more to do with alimony payments than auto repair expenses.
CONCLUSION
When a new car costs as much as a used house, buy the used house and rent it out. It will probably appreciate. The new car won’t.
By buying used cars and avoiding debt, you will reduce your lifetime costs of transportation by a significant amount. If the barrier for you to avoid debt on a depreciating item is for you to buy only cheaper used cars, then buy cheaper used cars. Assume that you’ll buy a lemon once in a while. I bought a 1994 Lincoln for $3,500. I can afford to buy a dozen of them that way, year by year, rather than a new Lincoln. They won’t all be lemons. Also, there is no guarantee that a new Lincoln won’t be a lemon.
Note: before you buy any used car, rent a copy of the 1980 comedy, “Used Cars.” It is my favorite Kurt Russell movie. The segment on the interrupted Jimmy Carter TV speech on inflation is worth the $1 it will cost to rent the movie.
September 6, 2002
Gary North is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North’s twice-weekly economics newsletter, click here.
