New or Used

Buying a Car
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To buy New or Used, that is indeed the question.

While we can't answer definitively for your particular situation, we can offer some Foolish considerations.

It used to be true that only a master negotiator -- a haggle-hound, a triple-decker dicker-doyen -- could navigate the shark-infested waters of used-car salesmen. However, the used market has recently opened itself up, in rather dramatic fashion, to the no-dicker sticker used-car Superstore concept.

Let's first ask: What exactly are the differences between the new and used-car markets, and how does a Fool best exploit those differences? Probably the most notable one from a pricing standpoint is that used cars are not as commodity-driven as the new vehicle market. This means that a new-car buyer is best served by playing identical-make dealers off each other, kind of like bargaining with four grocers for the same Granny Smith apples on the shelf. Each grocer is only a phone call away from a fresh truckload of the same apples.

On the other hand, in the used market, no two Granny Smith apples are exactly alike; thus, it's nearly impossible to play the grocery stores against each other. Even if a Fool were to find identical '92 eggshell-white Honda Accords with the same option package and mileage, they probably would carry a different price. Why? Two words: different drivers! Yes, one was driven by our Granny Smith herself, while the other was driven by our cousin, Fast Eddy Macintosh. Which should be given the higher price/value in the market? The answer is obvious. Of course, both dealers may tell you that it was Grams who drove their particular Accord.

Certainly another big difference in the used-vehicle market is that some of those used Granny Smiths come with worms. Yikes, that's right, when you buy used, you are taking on more risk. Yes, it is possible to buy a new vehicle that is a lemon, but there are laws to protect you if this happens. In the used market, the law is vague at best. A used vehicle is full of risk, because you are buying "as is," often without any manufacturer to back up the vehicle with a warranty.

With more assumed risk, the investor generally expects a greater potential reward. Buyers of used cars are, partly for this reason, entitled to expect a lower initial cost. It follows that the best Foolish Used-Car Buyer is one who can not only negotiate mercilessly, but who can easily and quickly determine risk -- and establish value from that risk.

What does it mean -- that the new-vehicle market is a commodity market? It means that it is essentially a supply-and-demand-controlled market. When vehicles are in short supply, prices tend to go up, and vice versa. The game is far more complex than that, but any offhand look at incentives that the auto makers offer to drive sales reveals that these price cuts are normally on vehicles that are in excess supply.

You can bet your sweet bippy that you'll find it almost impossible to pay a few hundred bucks over invoice on a new vehicle that is limited in supply and benefiting from high consumer demand. What, you don't believe us? Well, just walk into the nearest Chrysler dealer and tell them you are willing to offer $300 -- no, make it $500 -- over dealer invoice on the new Prowler. Look out, Fool, the wind from the laughter may just blow you back out onto the street, as many dealers plan to auction off their Prowler allotment, and not until after that car has drawn sufficient lookers into the showroom. In fact, many dealers will pack stickers on vehicles in this low supply/high demand situation with dealer options and dealer add-on stickers that will make your head spin, and the price jump well above MSRP!

Why? Simple. Dealers are business people; they know all about the forces of supply and demand working on their vehicle's market, so they ask for and get market prices. Thus, the market price, the price consumers pay, has very little to do with the sticker price, the dealer invoice price, or even the cost the auto maker has put into the vehicle to design, build, and sell it. Instead, market price is fixed on the graph at the point the demand line intersects the supply curve.

Why, then, don't the auto makers always limit supply? Some do, particularly the import models. As for the others, essentially it is all part of the insanity that we discussed in the previous step. Basically, auto makers are profit-driven, and the quickest way to more profits is through more sales. Thus, they are competing with one another for sales dollars, and that is a war that not every auto maker can win. So, in order to reach breakeven thresholds and keep assembly lines humming, they battle in each niche on price.

If the new vehicle market is the doggie of supply and demand, then it is certainly wagging its economic tail in glee, and that is where the used-vehicle market sits. That's right, the used-vehicle market often follows the new-vehicle market; when prices rise in the latter, they also rise in the former.

Predicting the direction of used-car prices is a bit like saying you know the direction of the Dow in the coming week. It's guesswork at best. In the last few years, though, the used-car market has been increasing, price-wise, ahead of those in the new-car market. Why? It may be that used-car prices were depressed to start with, but many experts feel that it is a question of supply and demand. The reasoning goes that used-car prices have risen sharply because of high new-car prices. High prices often lock many buyers out of the new-vehicle market, and this creates demand in the used-car market.

In addition, the longer-lasting, more-reliable new cars have created a supply shortage in the used-car market. Many experts now feel that the trend will reverse itself, particularly when coupled with a large volume of off-lease vehicles returning to the used-car market. In addition, higher incentives in the new-car market are expected to create less demand for used vehicles.

What is the average Foolish vehicle buyer to do?

Without being so presumptuous as to try to compress your many talents and traits into a little box, we may be able to categorize you with a few simple questions. Read these questions and answer them as best you can.

  • Are you an astute negotiator?
  • Can you rapidly determine real value in just about any product as if you were a born "merchant of the World Bazaar"?
  • Do you like vehicle shopping? Do you roam used-car lots late at night, and browse the classifieds on Sunday afternoon -- even when you're not in the market for a vehicle?
  • Are you mechanically inclined, or have ready access to such an individual?
  • Do you have the patience of a praying mantis in a concrete-covered shopping mall parking lot?

If you answered an enthusiastic "Yes!" to all of these questions, you might be an excellent candidate for the used-vehicle market.

If you answered "No" to one or all of these questions, and can't afford a new vehicle, you need not despair just yet. Console yourself with the thought that there are people out there who crave the latest Bavarian luxury sedan but have no cash! (Why you should console yourself with the misfortunes of others is something that has puzzled the Fool since the beginning of time.) In any event, you may be a candidate for the "no-haggle" used-car market. You also may want to consider the used-car lots of new-car dealers, which are overflowing with off-lease vehicles that are being re-warranted by the manufacturers.

If, however, you answered "No" to all of the above questions, and you have no cash, and you must drive the latest metal the auto makers have to offer... well, then, there are two possibilities: Either you are seriously deluded and need to go straight to a neurosurgeon, or you might be a candidate to lease new.

Whatever the case, consider your answers. If you don't determine your new or used hue at this point, you run the risk of becoming a consumer ping-pong ball in a championship match. You'll be bounced back and forth, endlessly, like in some bizarre variation of a Greek drama, until you are finally and firmly smashed by a world-class salesperson.

Take your time -- the decision is an important one. And don't forget that you can always change your mind later. So sit back, sip an iced tea, think about how you fit in with the two car-buying/leasing markets. If you decide you're a New-Car Buyer, we'll see you in the cylinder of Step 5, where we'll be the spark to your heavenly blend of gas and hot air.

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