Most people know that cars are a depreciating asset. A brand new car will lose 10% of its value as soon as it is driven off the lot. Over the course of 3-5 years, the value of that same new car will have dropped by approximately 48%. So a car that was bought for $40K is now only worth around 21K…ouch. A lot of people in the F.I.R.E world, like myself, drive bomb cars. Old beat-up Toyota’s that are reliable and cheap to maintain. This is because I prefer to sink my money into things that will grow in value instead of losing value.
The general consensus in the personal finance community is that new cars are a bad financial investment. The prevailing opinion is that taking a loan out for that new car is an even worse financial investment. However, that doesn’t mean you have to drive a bomb car like mine. Why not purchase a used car that is 3-5 years old and let someone else pay for the large depreciation that occurs in that initial five-year period?
Buying a used car can also have financial risks associated with it. Outlaying 10K-20K on a second-hand car that is a few years old is not something that most people take lightly. When spending that sort of money, it is important to make the right choice. There is nothing worse than buying any sort of vehicle, whether it is new or used, and getting a lemon. Let’s face it, there are many unscrupulous people in the world who would be happy to rip you off. This does not even just refer to private sellers but even used car dealerships who are supposed to be professionals. There is a reason why car salesmen have the same reputation as real estate agents.
Things to look for when buying a used car
- The test drive. Any used car that you are considering purchasing you will want to take it for a test drive. A test drive does not mean a 2 minute spin around the block. You need to take it for a proper drive. Listen to the engine as you drive, it should be running smoothly and quietly. If you are hearing clacking/banging/clanking, that does not sound normal, it probably warrants further investigation. Keep an eye on the dashboard for any warning lights that might come on, especially a check engine light.
- Open the bonnet and look at the engine. If you do not know how to open the bonnet (hood) of a car then that is the first thing you need to learn. Have a general look at the engine bay, does it look clean and well looked after? Or does it look filled with dirt and grime?
3. Check the radiator coolant but only when the engine is cold. You can check the coolant by removing the radiator cap and checking that the fluid is brightly coloured. But be careful, never open the radiator cap when the car is hot.
4. Check the oil. You can easily check the oil by removing the dipstick. Oil (in a petrol car) should look clean and clear on the dipstick when you pull it out. If the oil is black then it might mean that it has not been changed in a while. This could be cause for concern as changing the oil regularly is one of the most important ways to keep the engine of any vehicle in good condition. You also want to remove the engine oil lid and look underneath the lid. If you see a milky frothy substance it can mean a possible issue with the head gasket. Definitely cause for further investigation.
5. Ask to see evidence of regular service history. Most normal people get their vehicles serviced by a mechanic and will keep a record of this. (unless you are super tight with money like me and change your oil yourself because your car is such a bomb) Especially if the used vehicle you are looking at is within 3-5 years old, it should have a service history. Most new vehicles have price-capped servicing for the first couple of years so if there is no record of service history that is something to be aware of.
6. Check the condition of the tyres. Tyres should have tread on them and bald tyres are very dangerous, not to mention illegal. Inspect all four tyres including the spare. If they are getting to the end of their life, then factor that as an additional cost you will need to pay for if you end up purchasing the vehicle.
7. Check all the lights are working. This includes the break lights, the front lights, high beams, indicators etc. Your best bet will be to ask the owner to flick them on and you stand outside to check that everything is working. If they are not working, you should ask for them to be replaced to make sure a new bulb is all that is required.
8. Check for rust & leaks. This means you will actually have to get on the ground and look under the body of the car. Using a torch is even better, so you can really make sure there is no visible rust on the underside of the vehicle. This is especially relevant for 4WD vehicles as they are often driven on the beach. Or if you are buying a vehicle from someone who lives in a beachside location.
9. Bring someone along to the vehicle inspection with you. Two eyes are better than one. Ideally, this person that you are bringing would be someone who has more of an idea of cars than you might. However, if they don’t that is okay, having a second person still means that they might spot something that you miss.
10. Check the exterior for damage. Ensure you check that all the doors close easily including the boot. Look at the exterior panels to see if there is any evidence of prior damage. If there are panel gaps, different coloured paint, welds in unusual places it might be an indicator that the vehicle was previously in an accident but has been repaired. Make sure the boot and bonnet both open and close with no issues.
11. Check that the tool kit is in place. This includes things like the tyre iron & the Jack. The last thing you want to not check this and only find out 6 months down the track when you get a flat tyre and can’t fix it yourself.
11. Do a REVS Check (Australia). If you are buying a used card in Australia you can do a Revs check on the vehicle to ensure that there is no money owing on the car or that it has not previously been written off. You can do this by using the Rego or the VIN number (17 digit number found on the car) The reason this is important is because you never want to be in the position of paying someone 20k for a vehicle that they don’t actually own. If they have a loan on their vehicle, it does not belong to them, it belongs to the finance company
12. Do your research on the best types of cars to buy second hand. Everyone has different preferences but generally speaking Japanese cars like Toyota & Mazda’s have a good reputation for reliability and retaining value. Due to how common they are their parts are usually more available and cheaper to buy when they do need repairs. Lesser known car brands might seem like cheaper or more exciting options but there is usually a reason for this. European cars can be more expensive to service and they also lose value as they age. There is a reason why you will see old cheap BMW’s kicking around on market place….steer clear. Chinese cars are only just becoming more mainstream and popular in Australia. However I would be very cautious, in my opinion, they are still unproven in terms of longevity and quality when compared to Japanese made vehicles.
If you are interested in purchasing a used car and you feel like you want a professional’s opinion. You can pay for a pre-purchase inspection from a licensed mechanic. This can set you back about $100-$120 but at least it can give you some more security that an expert has had a look over it. If you are purchasing a used car from a dealership, different states have different laws on warranty. Be sure to familiarise yourself with these laws. Unfortunately, if you are buying from a private seller then you don’t really have any legal recourse. It is Caveat Emptor, buyer beware so make sure you do a thorough inspection prior to purchase.
