NerdWallet's Smart Money Podcast - How do I buy a used car?

Episode Date: September 23, 2019

Buying a used car can be confusing. Should you shop around a used car lot, or are the online classified ads a better route? With the help of NerdWallet car-buying whiz Philip Reed, that’s the debate Dayana and Sean settle this episode.

Hello, and welcome to NerdWallet's Smart Money Podcast, where we answer your money questions in 15 minutes or less. I'm your host, Sean Piles, and joining me is my co-host, the one and only Dayana Yochum. I am the one and only. This week, we're going to settle a debate that Sean and I have been having. We're both looking to buy a used car and have completely different ideas about how to go about it. I'm shopping around for a used midsize SUV and want to buy a car how I bought my last one, which is meeting up with a stranger on Craigslist, giving them cash, getting my car, driving away.

All right. That sounds kind of sketchy and also quite scary to me. My approach is maybe the more traditional one. So I've been researching used cars ad nauseum, getting opinions from everyone I know, spending all of my spare hours scouring used car sites. Step two will be making a decision, doubting that decision, then going into a spiral of remorse and regret and probably never actually settling on a car. But I'm totally on the same page as you, Sean, about paying cash for a car. So we've got that. Okay, at least we have one thing in common here. But to help us settle our argument so we can be friends again, we're talking with NerdWallet's own Phil Reed, a lifelong car enthusiast who's been writing professionally about cars and car buying for over 20 years. Phil has written 10 books and once wore a hidden camera to show how to haggle for a

used car. Basically, he's the best guy for the job here. He is. Hey, Phil. Welcome to the show. Thanks. Good to be with you guys. Okay. We really need you to mend Dayana and mine's friendship here.

We're having this really heated debate over car buying. So in your opinion, Phil, where is the best place to look for a car, Craigslist or CarMax? Well, if you're a bargain hunter, Craigslist is definitely the best, you know, because you can deal directly, you know, when you're dealing directly with a former owner, there's, you know, no markup, there's no, you know, like going to CarMax, they will have inventory that they need to pay for, you know, keep the lights on and all that stuff, plus salesman's commission and all of that. So Craigslist is where the bargains are.

And someplace like a CarMax or a used car lot or even a used car section of a new car dealership is another way to go. And it's not as enjoyable a shopping experience. So you're kind of weighing the experience versus the price. Okay. And I'm also wondering about quality control of getting a used car off Craigslist. When I got my last car off Craigslist, I got really lucky. I mean, I was fairly naive and I just brought a bunch of cash to a grocery store parking lot in Oakland and that could have gone a lot worse, but the car was in

great shape. I got it checked out after buying it, which I think is maybe the mistake there. But how do you think someone like me, who's kind of going the Craigslist route, can make sure the car they're getting is decent? You really need to, first of all, screen the car. So there's some tools that we have these days, which have really speeded up the process and made it so much better. And that's what they call a vehicle history report. And so we're talking about either Carfax or AutoCheck. Those are the two big companies. And they collect data based on the VIN number, the vehicle identification number for the car. And they store that information and they're getting more and more information. So these reports are getting more and more detailed and accurate.

But you have to either pay for them or they are sometimes provided by the seller. So that's the first step, yeah. So with those vehicle reports, what are the, I mean, there are obvious red flags like has been in, you know, 10 accidents and things like that. But what are some of the things that would make you raise your eyebrows if you saw that? If I can, I'll answer it sort of the opposite way. What are you looking for? You know, so one owner, you know, is always good. So if you're shopping for a car like that's 10 years old, it's unrealistic to think that it's necessarily

going to be one owner. But if it is, that's a big checkmark in, you know, in the benefits column. Also, you know, one of the things that vehicle history reports show, whether it was serviced and when it was serviced. So you can look at the service intervals, you know, was it maintained regularly? And where was it maintained? You know, those are good things. Sometimes it's at a dealership, which a lot of people would consider to be better because they use factory parts and all that impressive stuff. So those would be two things to look for. Also, did it come from out of state? Like if it's right after like a major weather event, like a hurricane, you want to be really careful about flood cars. I always kind of like dealing with more local cars, you know, so a car, if I'm in Southern California, you know, a car that was sort of born and raised here would be one that I would tend to trust more. They can put up with your local terrain a little more because they've done it. So Phil, you worked undercover as a car salesman. That's right. Tell us what is happening behind the scenes when you see me or Sean saunter onto the lot. Yeah.

Well, if you actually are sauntering, I would notice that. But, you know, car salesmen, they are trained to qualify. That's what they call it, qualify customers. And so they make a lot of judgments, a lot of snap judgments that are often inaccurate. But I think that they can't avoid making snap judgments based on how old you are, how you're dressed, how you act. And a really big thing is displaying a level of knowledge. So if you come in and just say, you know, I really don't know what I want, but I kind of think I want a big SUV because those look really say, you know, I really don't know what I want, but I, gee, I kind of think I

want a big SUV because those look really cool. You know, those, that's not a good way to open a conversation with a car salesman. And so speaking of getting the knowledge here, I mean, car buying is a pretty scary experience. And that's why I think I've opted for Craigslist as opposed to another used car dealer, because I don't really want to get caught up in that game, the haggle, the subtext of what shoes I'm wearing and all of that. And so I'm wondering, what would be a good resource just to figure out, okay, I need to know these three things about a car before I'm going in. If you're dealing with a used car, it's all about the condition level of the vehicle. And so before you even go to inspect that, of course, the very first thing to

do is vehicle history report. We already covered that. So the next thing to do is make contact with the seller and make sure the car is still for sale and ask them, first of all, what you would do is probably verify the information that was posted in the advertisement. And then it's a good idea to ask a number of other questions. You know, was it serviced regularly? And as you're asking these questions, you're really sort of getting a feel for the buyer. Right. So, you know, it's almost like you don't necessarily buy the car. You're buying, you know, the previous owner.

And, you know, what I find a lot of people don't do is use their intuition. Because if you're like five minutes into a phone call, and this guy is telling you about how he bought the car, serviced it, he loves it, he took his kids to school in it every day, he's telling you a story, you're going to develop a pretty strong sense of integrity surrounding that person. But if a guy doesn't seem to know the answers to questions, he could be flipping the car. You know, he could have picked it up cheap and he's trying to sell it. So, you know, it's a dual process and you're going to do it whether you realize it or not. You're going to be asking questions about the car, but you're going to be getting information about the buyer and how it was maintained.

So, you know, that opening conversation is really important. It seems like there are a few pitfalls that people can fall into with this. I'm wondering what are the most expensive mistakes that car buyers make? On the car lot, the biggest mistakes are made in what they call the finance and insurance office. So people don't understand it, but it's a process that they've honed over decades of car selling, which is you make kind of a relationship with the salesman. And then he says, okay, well, we've got a deal. So you're going to sign the paperwork now and we'll get you out of here. So you go into the finance and insurance office and

you're actually entering the most critical phase right at that moment. But you've been led to believe that you're done, you know, kind of like, oh, great, you got a good deal, you know, and then you get into the finance and insurance office. And, you know, there's a guy that looks or a woman who looks sort of like a banker, you know, in a suit, and they're giving you financial advice. And you sort of believe that this person is on your side, but they're not, they're definitely not. Because there's the opportunity to sell extended warranties and a whole bunch of stuff that doesn't have a lot of value and costs a lot of money. So that's where your good deal that you made with your salesman just totally falls apart. So I mean, people really need to almost work backwards. I mean, what happens now is somebody says, I'm going to buy a car. Let's

go look at cars. What they should do is sit down and say, I'm going to buy a car. Let's go look at cars. What they should do is sit down and say, I'm going to buy a car. I wonder what I can afford. Where can I get financing? How should I structure the loan? Like 36 months? How much should I put down? They should ask all of those questions and they should answer those questions themselves. Don't go into the finance or insurance office thinking the guy's on your side and say, well, what do you think would be a good idea here? Because you'll pay through the nose for that. Let's dig into that, some of those issues a little bit more. Are there any rules of thumb that our listeners can use to determine what is in their price range? Right, right. So this is actually something at NerdWallet that we looked

at really closely. I've been dealing with this for years and there's a lot of advice that gets passed around and some of it is very vague. So we tried to nail all that down and what we came up with is that your monthly payment, if you decide to finance the car, should be no more than between 10 and 15% of your monthly take-home pay. And your total car budget, meaning adding in gas, insurance, and all that stuff, shouldn't total more than 20%. So throw the whole thing together, and it should be no more than 20% of your take-home pay, which sounds pretty restrictive to some people. To other people, it sounds like a lot. It sounds very high to me, but I am into notorious cheap school about cars. Yeah, well, I think I am, and I think people should be,

and I think there's a lot of money to be saved here. And cars have gotten so expensive in recent years that it kind of behooves people to think conservatively because they don't want to get caught in a car they can't afford. Well, that's true. And talking about mistakes, when you were asking earlier, a big mistake people make is they think about the car, they don't realize that there's going to be fees on top of that, registration fees, sales tax, and all that stuff totals at least 20% more. So if you buy a $20,000 car, you know that's quite a bit of money on top of that, and they don't see that coming. So we've talked about the Craigslist route, buying from a dealer or a used car place.

Are there any other alternatives to this traditional car buying model that we should consider? Yeah, well, there's some good news for used car shoppers. There are some people that are trying to kind of crack the code. Because let's face it, it kind of takes a lot of work to buy a used car. Oh, yes, it does. Yeah, a lot of legwork, a lot of time, a lot of uncertainty, and so on.

But there's some new sites. The kind of leader in this area is Carvana. And basically, you look at the car online, there's video of it, there's a picture of it, there's a vehicle history report that you can view for free. And if you decide to buy it and you're within one of their areas, the car will be flatbed, put on a flatbed truck and brought to your house, you then sign contracts there. And you have a return period of, I forget whether it's seven or 30 days, which is unusual. A dealership would not do that for you. Plus you have kind of a limited warranty. Again, I think

it's 30 days, but it can be extended. So this is actually a pretty attractive option. Now, kind of the downside of it is that it's not really a bargain. So if you went the Craigslist route and did a little legwork and so on, you could probably beat those prices, but you can't beat that shopping experience to be in your house and just have a car arrive at your front door. So there's Carvana, there's Shift, there's Vroom. Those are the three big ones. Carvana has a pretty good inventory, which is sort of the weakness of some of these is that they don't actually have a lot of cars to choose from.

But Carvana really seems to be doing well with this business model. We'll check that out. Well, I'll check that out. Sean still wants to go. Yeah, Craigslist. Yeah. Thank you. Thank you so much, Phil.

This has been great. Very enlightening. And I know I feel more confident going into the car buying experience. Very good. That's important. Let's get to our takeaway tips. All right. First, set your budget.

Aim to keep all costs, including car payment, insurance, maintenance, and gas, within 20% of your monthly take-home pay. Also, think about the method of car buying that works best for you. If you're a pro-haggler like Sean, Craigslist can be a great way to find a deal. The more traditional approach is through places like CarMax and Autotrader. And as Phil mentioned, you can get a car shipped to you from anywhere in the country with a newer online place like Carvana. Lastly, no matter what route you go, be sure you're making an informed decision. Start by looking at reviews of the make and model that you're interested in,

and then check the vehicle history report of any car that you're considering buying. And that's all we have for this episode. Do you have a money question of your own? Turn to the nerds and text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more information from this episode. Of course, remember to subscribe, rate, and review us wherever you're listening from.

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