To the untrained eye, most used-car lots look alike. But if you use this handy field guide, you can identify some of the different species so you can stalk and capture your prey — a great used-car deal.
A new-car dealership is often a good source of used cars, but it is different from an independent used-car lot in several important ways. A new-car dealership is more easily held accountable for its sales practices because it is a franchise, answering ultimately to the carmaker. Furthermore, the new-car dealership is nearly always connected to a service department that reconditions vehicles and is available to repair the used cars it sells.
While some independent used-car lots have been in business for decades, many others are transient and consist of little more than a piece of land to store cars and a trailer for the salespeople to write up the contracts. If an independent used-car dealer offers a warranty, the repairs are often handled by local garages.
There are two more big differences between used cars that are sold by new-car dealers and the independents. New-car dealers will also offer certified pre-owned cars (CPO). Such cars have a warranty backed by the carmaker, much like the warranty on a new car. Also, the new-car dealer may offer buyers loans from "captive" finance companies, which are lending institutions that carmakers have set up solely for auto loans and leases.
Why Shop at an Independent Used-Car Lot?
The main draw at many independent used-car lots is lower-priced cars, many of which new-car dealers won't carry in their inventory because of age. Larry Laskowski, executive director of the Independent Automobile Dealers Association of California (IADAC), says that at an independent used-car lot, a customer gets "a better selection in a greater price range." On the other hand, he says, at a new-car lot, "the inventory will be restricted to a few years old and whatever they feel comfortable selling."
While there are many specialty used-car lots, Steve Monroe, owner of Woodlake Motors in Conroe, Texas, says an independent used-car lot usually reflects the tastes and needs of the area it serves. His business is in a suburb of Houston and many of his customers want cars in the $6,000-$9,000 range, although he also offers vehicles at much higher prices.
"Trucks sell real nice here," Monroe says, adding that they make up about 30 percent of his inventory of 150 cars. "But I also try to keep something that will attract a guy who needs a second car, maybe for his teenager." Most of Monroe's customers have less than perfect credit, and as such are willing to pay 18 percent interest or more on loans that typically run for three years or less.
Monroe stocks his lot by purchasing vehicles from auctions and private parties. Typically, he purchases a car at wholesale cost, has it transported to his lot for about $150 and then spends from $750-$1,000 reconditioning it. These expenses contribute to his asking price for the vehicle.
Now that you have a general idea of how used-car lots work, and the difference between new-car dealerships and independent used-car lots, here are some of the different subspecies of used-car lots that shoppers are likely to encounter.
Used-car superstores: These car lots are independent in the sense that they are usually not connected with a new-car dealership. In fact, an Internet search of any major city followed by "used-car superstore" yields many listings. One such company, CarMax, is growing quickly and has a vast inventory of used cars. Unlike the smaller used-car lots, CarMax offers no-haggle pricing, plus longer warranties. Of course, it's important to remember that while no-haggle pricing means lower stress, it doesn't always mean the lowest price.
Specialty used-car lots: Often, a used-car dealer will develop a preference for a certain brand or type of car and, over time, his inventory reflects this. In other cases, it's the clientele that dictates the choice of cars on the lot. Examples are used-car lots that sell German cars (Audi, BMW and Mercedes) or perhaps just luxury vehicles. Sometimes these lots will narrow the focus even further, selling classic cars of a certain vintage, for example.
While pricing at specialty lots isn't necessarily lower, the variety may be greater. Car collectors and aficionados who are searching for hard-to-find models often buy from such lots as these.
Consignment used-car lots: These lots sell vehicles for private parties who don't want the hassle of handling the transactions themselves. Usually the cars come from local owners, so the choice will reflect the local economy and lifestyle.
There's only one real advantage to buying from a consignment lot rather than going directly to the person who owns the car: The lot will be able to finance the purchase. Interest rates, however, will usually be higher. The prices will be higher, too, since there's a middleman involved.
"Buy Here, Pay Here" car lots: These lots are so named because they finance a buyer's purchase, but then require buyers to make their monthly payments in person. If the owner gets behind on the loan and then returns in the car to make a payment, it makes it easier for the dealer to repossess the vehicle.
The owners of Buy Here, Pay Here lots justify this practice by arguing that they are taking a financial risk in order to provide cars to people who have no other car-buying options. However, the interest rates involved are usually double or triple the going rate for an auto loan, which greatly increases the chances that the buyer will default on the loan and have to give up the car.
Shopping Tips for Independent Used-Car Lots
Shopping for a used car at an independent lot requires a bit more expertise than shopping for a new car or even shopping for a used car at a new-car dealer's lot. Asking prices at used-car lots are typically high to begin with, and many buyers don't realize that they have to negotiate extensively to reach a deal. If a consumer doesn't have an appetite for actively negotiating, it's probably best to steer clear of an independent car business. Also, since independents offer older cars with higher mileage and without warranties, determining the condition is more critical and harder to do, particularly when some dealers might try to cover up flaws.
Used-car dealer Monroe suggests that shoppers find out the car's trade-in and dealer retail prices and negotiate in that range. Edmunds.com True Market Value® pricing offers trade-in, private-party and dealer retail prices. Keep in mind that the dealer will spend some money reconditioning a used car. So when you're deciding on an opening offer to start negotiations, add a reconditioning fee of $500-$1,000 to the trade-in price.
To check the condition of a used car, Monroe recommends getting a vehicle history report. In addition, he says a buyer should also take the vehicle to a reputable mechanic for inspection. Larry Laskowski, a member of the IADAC, agrees. He adds that by law, all independent car lots in California are required to post signs in their sales offices acknowledging that a mechanic can inspect a vehicle before purchase.
Research and patience can easily offset the extra challenges of shopping at independent used-car lots and lead you to a reliable used car at a good price. For more shopping and negotiating tips, read "10 Steps to Buying a Used Car."