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May 24, 2012

Essential used car buying advice

The VMS expert provides some thought-provoking advice for used car buyers on how to best manage your expectations when buying a used car.

The implementation of austerity measures in our national and personal budgets since 2008 has resulted in a decreased appetite for new cars and a greater emphasis on the attractiveness of used cars. Some prospective buyers in the new car market have even decided to opt for a fresh used car instead. This is partly explained by an unwillingness to spend a larger sum of money despite being able to afford it. But the issue of social stigmatism should not be overlooked either. Many potential new car buyers are uneasy with the prospect of appearing beyond the recession when their neighbours or family members might be otherwise.

Ironically, however, new car buyers do used car buyers a favour. The more new cars that are sold the greater the potential for these cars to return to the market in future years, thus servicing an increasingly demanding used car market. If new car sales struggle, as they have done, then used cars become increasingly scarce and the motor trade try to stem the problem by importing vehicles from the UK, retailing older model years that had previously been considered “trade” cars (those deemed too costly to refurbish or which there is little demand for and are subsequently sold within the motor trade) or simply sell less. Some used cars can also become more expensive as demand overwhelms the supply chain. Customers thinking of buying a used car should be aware that there is a direct correlation between the price they pay for their car and the performance of the new car market. Nevertheless, here are some tips and explanations of terms to help you get the best deal.

Trade in allowance & cost to change

If you are trading a vehicle into a dealer in part exchange on another car then you will likely encounter the terms “trade in allowance” and “cost to change”. Throughout my nationwide research of the used car market I am frequently met with stories of how a dealer lost a sale to the perception of the deal and not the reality of its mathematics. Take this example;

John drives a 2007 diesel Volkswagen Golf and wants to purchase a 2010 model Golf. The dealer selling the 2010 Golf advertises it for €16,000 and tells John that he will offer him €8,000 for his own car (this is John’s trade-in allowance). This means John’s “cost to change” is also €8,000. Essentially, it is the shortfall between the price of John’s car and the price of the car he wants to buy. John sees similar cars for sale online and thinks he is being short changed for his own car. (We will get to this point shortly).

John then visits another dealer with an identical car but whose price tag is €18,000. The dealer tells John that he will discount the price to €17,000 and offer John €9,000 for his own car. Sounds great, right? A reduction of €1,000 on the car John is buying and a €1,000 increase on his own car compared to what the dealer in the first garage offered is surely a better deal.

The problem is that both deals are identical. Regardless of which option John chooses, he needs to spend €8,000 to buy the new car. Bizarrely though, the optics of the latter deal is oftentimes enough to get the customers business even if it means the customer loses out on a better car.

Advice:

Ignore all other prices except for the one which affects the amount of money you will need to spend to purchase your next car. Everything else is largely irrelevant.

Managing expectations

This point will not make me terribly popular but I’m an avid believer in delivering the medicine the patient needs irrespective of how it impacts on the doctor’s likeability, so here it goes; your car is not worth as much as you think it is. There, I said it.

Except in some isolated instances, most people overestimate their own cars worth.  There is no inherent problem with this. I conduct almost 600 research visits to dealers every year to ascertain the proper market values of vehicles so it would be unreasonable for owners who do not have regular exposure to the prices of cars to be expected to accurately value their own car. This is especially true in a market where values can be so capricious. Take property tax as another example. Most people will plainly admit that they could be thousands wrong with their estimation. Is a €180,000 house actually worth €165,000? It’s possible isn’t it? Well then, couldn’t an €18,000 car actually be worth €16,500? Actually, in this instance the motor trade are better qualified to deliver an accurate market value as the difference in size, shape, location and specification of cars is far less complicated than it is for houses.

While browsing for their next purchase, many customers use online selling sites to gauge the price of their own vehicle. This is a very prudent thing to do but one must remember that the prices online are typically “asking prices” and not what the car will actually make.

Advice:

When valuing your car by browsing an online selling sites, try to remember that a dealer’s value includes profit and refurbishing costs. These values will not be anything like the offers you should expect to receive on your own car.

Buying the motor tax: Petrol vs Diesel

I’ve written, debated and vehemently argued at government level against the preposterous motor tax system in this country which mindlessly favours lower CO2 emitting cars regardless of their size or cost new. It is my opinion that customers place too much emphasis on motor tax in this country to the extent that many opted and continue to opt for more expensive cars in order to avail of a moderately cheaper annual tax charge. It’s a phenomenon that the motor trade refer to as “buying the motor tax”. Don’t be suckered into this. If you do not need to buy a used diesel car then don’t buy one. The premium in value enjoyed by used diesel cars over their petrol equivalents can be as much as €3,000 on even the most standard of family hatchbacks. And €3,000 buys an awful lot of motor tax and petrol.  Motor tax for vehicles from band A0 (0g CO2) to B2 (131g-140g) ranges from €120 to €280. Most consider anything above this latter charge to be utterly unpalatable. All too often I meet people who cover less than 15,000 kilometres per annum but who bought a used diesel car because the motor tax was low. This is a counter intuitive.

Example:  A driver covering 15,000 kilometres annually.

Petrol:

15000kms / 500kms(range per tank) = 30 fills

30 x €60 (avg. cost of refill) = €1,800

Motor tax on 1.6 petrol pre 08 (1598cc) = €514 per annum

Or

Motor tax on a CO2 Category car (156-170g) post 08 – €570 per annum

Annual fuel and motor tax cost = €2,314-€2,370

Diesel:

15000 / 750kms(range per tank) = 20 fills

20 x €60 (avg. cost of refill) = €1200

Motor tax on category A4 car (111-120g CO2) = €200 per annum

Annual fuel and motor tax cost = €1,400

Difference in yearly cost petrol to diesel = €914

In this example a diesel car costs €914 less per annum to run than its petrol equivalent. If the initial purchase price of the diesel was €3,000 more then it will take 3 years for this outlay to be recouped. This sum does not factor in higher servicing costs for diesel cars or interest rates on a higher amount borrowed to purchase a diesel car.

Advice:

Estimate your average mileage and calculate this in terms of petrol and diesel costs. Add the cost of the relevant motor tax charge to each fuel type and weigh up which car makes most financial sense. Do not “buy the motor tax”.

Private versus Dealer

This is a hugely contentious topic as those who offer a defence of dealers are typically chastised for having a vested interest in their success. Though I am entirely independent, I can not ignore that my position might also be construed, however inaccurately, as being slightly nuanced in the dealer’s favour but nonetheless I always consider a car from a dealer to be of a higher quality than most privately sold cars. At the very least, a dealer is bound by the Sale of Goods and Supply of Services Act.

There are countless others who think differently so let’s suffice it to say that if you are in the position to buy from a dealer then I would not even think about buying privately.

If you are fixed on buying privately then ensure that you perform these steps

1. Perform the necessary history checks offered on this site

2. Bring a mechanic with you to scrutinize the vehicle thoroughly before buying it

3. Do not view the car at night or in the rain (stone chips on black cars can be disguised easily by droplets of water)

4. Do not be afraid to rev the engine vigorously to check for smoke from the exhaust.

5. Leave the car running while talking to the owner to check if it overheats.

6. If the owner has any problem with these tests then I suggest walking away.

7. Check the ownership certificate to ensure the person you are dealing with is the registered owner of the car.

8. If a deal is struck, I always advocate having two copies of a document that sets out the terms of the deal, the amount being paid, the date and the time to be signed by both parties who include their drivers license numbers.  This way, you avoid inheriting any penalty points obtained by the previous owner. These can even be handwritten.

9. Do not spend your entire budget on a privately sold car. At a minimum it is sensible to earmark €200-€300 for servicing the vehicle upon buying it. If the seller assures you the car has been serviced but can not show you any record of this then a mechanic is your first port of call.

10. Never buy a car that has no service record whatsoever. Sure, it could be fine and perhaps you might have even done so before with no negative repercussions but buying privately is all about limiting risk and a car with no service record is by far the most risk laden.

Regardless of your budget, cars represent an enormous investment and the ultimate decision on where to place your money is a daunting one. Don’t be flattered by a greater “trade in allowance” (the amount offered for your car against the one you are looking to buy) from a motor dealer. Instead, reduce the calculation to its most basic form. Keep every alternative, including petrol cars, on the table. Finally, be totally risk-averse when buying a used car. Exercise caution and critical thinking in all deals but especially so in privately sold cars.

Aidan Timmons

Aidan is the Senior Research Analyst with Vehicle Management System, Ireland’s leading experts on valuing used vehicles. His research is used by insurance companies, finance houses, motor dealers and he has negotiated for changes to motor tax at senior governmental level.