The average new car transaction price in April of 2022 was $43,755; a staggering total up 14.7% from only a year ago, according to car shopping site TrueCar. Faced with paying over MSRP when buying a new car, many consumers are on the hunt for more wallet-friendly used vehicles. But buying a used car still means navigating the various fees in the dealership finance office or preparing for potential unforeseen expenses when buying from a private party
The good news is that buying used removes the biggest new-car cost of all: depreciation. While normal car depreciation curves are out of whack thanks to Covid-19 and supply chain disruptions, virtually all new vehicles are depreciating physical assets. In normal times they can lose 20% of their value in the first year and another 15% in year two. On the other hand, new vehicles come with a warranty and most used vehicles don’t.
There are generally two ways to buy a used vehicle, from a conventional new- or used-vehicle dealership (or online equivalent, like Carvana), or from a private party. Each option has its pros and cons, and its own set of potentially surprising fees and costs.
Every car purchase contains three basic cost components: the purchase price, the applicable state sales tax (if any) and your state’s registration and title fees. Many dealers will handle the title and registration for you via a documentation fee, but costs beyond these basics are, essentially, options added by buyer or seller.
To help you navigate both options, we’ve outlined some pitfalls and potential expenses to watch out for below.
Buying from a Dealership
Many of the same potential costs and optional extras seen in the dealership finance & insurance office are offered on both new and used vehicles. They can include:
- Unnecessary fees and dubious extras. Add-ons like key protection, tire & wheel insurance, upholstery protection, nitrogen in the tires and VIN Etching all have some value, but typically their costs outweigh the potential benefits. In some cases, like performance cars with very expensive wheels and tires, some of the add-ons might be worth a look, but third parties also offer many of these services.
- Markups or “market adjustments.” Supply is low, demand is high, and many dealers will charge what the market will bear even for an older car. The only way to avoid these is to shop around or negotiate them down, making used cars under $5,000 harder to find.
- Dealer preparation fees. Theoretically, this covers the cost of prepping a car for sale, but it is often a point of potential negotiation. Similarly “advertising fees” cover the dealership’s marketing expenses, and are usually open to negotiation.
Some used vehicle expenses, mostly related to warranties, are unique to pre-owned machinery. They include:
- Certified Pre-Owned (CPO) programs. Manufacturer-backed CPO programs extend a vehicle’s factory warranty coverage (the best kind of protection for used vehicle buyers) after a mechanical inspection, for which a fee is charged. Cars that are not advertised as CPO can sometimes be certified for that fee as part of the purchase. The fees for CPO programs can typically add 4 to 10% to a vehicle’s purchase price, and older models typically can’t be certified.
- Extended warranties and service contracts. Dealerships offer a very wide variety of both manufacturer and third-party warranties and service contracts, but on any vehicle over about five years old, most of the products come from third parties or the dealership group.
Since this is where the greatest variations in costs happen when buying a used car, pricing out third-party warranties on your own before heading to the store is a good idea. It’ll give you a much better sense of what’s covered and what you’ll be paying than reading complicated documents in the finance office.
Buying from a Private Party
Private individuals don’t have lots and buildings to maintain or detailers and mechanics to pay, which means lower prices than dealers. But they also don’t make any guarantees about the vehicle or offer any warranties.
While you won’t find VIN etching fees here, you should budget ahead of time for extra repair expenses and a mechanical inspection. These extra budgeting costs are particularly true for older vehicles in the 7 to 15 year or 100,000- to 150,000-mile range, when things start to wear out and major maintenance items come due.
- Asking for a mechanical inspection can be socially awkward, and it’ll cost you as much as $250 to $300, but it’s money well spent. Note that even the best mechanics might not be able to encounter every possible issue, but they can help you spot obvious red flags and identify the most common maintenance items that might need replacing soon, such as tires, brake pads, belts and hoses.
- The cost and frequency of repairs depend largely on the vehicle, but it’s a good idea to set aside $750 to $1,750 out of your purchase budget for any unforeseen repairs or replacement parts. Generally speaking, the higher the purchase price, the more you should set aside—think 5 to 10% on cars worth more than $5,000. There is a time when a car is not worth fixing, but that shouldn’t be soon after you buy it.
- Take some time to research major service expenditures on your chosen make and model, and its regular maintenance costs. For example, if a $3,000 timing belt service is recommended at 100,000 miles, buying a 97,000-mile example of that car without documentation of the repair being done means a big cost is looming.
Similarly, knowing what you’ll spend each year on regular maintenance will give you a more realistic idea of long-term ownership costs. The more you research, the fewer surprises there’ll be. You can use a car trailer for transporting private-party cars.
Author – Alex Kwanten, Forbes Wheels