How to Buy a Car and Not Get Ripped Off Financially

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automobile junkyard
Don’t buy a car that’s ripe for the junkyard. Image credit: Holger Schué.

Tired of walking onto an auto dealer’s lot, full of excitement over buying your next cool set of wheels, only to end up feeling more like a duck swimming in a pond full of alligators?

This article will discuss:

  • How to buy a safe used car. Don’t get stuck with a lemon that racks up expensive maintenance and repair bills.
  • How to avoid predatory auto loans. A dishonest dealer could saddle you with higher payments and unnecessary options.
  • How to evaluate extended warranties. Are They Really a Joke? You might actually have a reason to shell out some insurance money for a little peace of mind. Here’s how to do it right.
  • Why your auto insurance rate seems too high. You might be surprised at the reasons why you might have to pay more than you think you should.

How to buy a safe use car

It goes without saying that Not all used automobiles are safe to drive. One of the might be yours without your even knowing it. 53 million vehicles that have been subject to a safety recall have not yet been repaired, according to research by the vehicle history service Carfax. Pickup trucks and minivans are currently the worst offenders.

Rosemary Shahan recalls a “heart-rending” case in which a teenager died in a head-on collision because the used pickup truck the he was riding in had been sold without adequate safety features.

“A rebuilder cut corners and, instead of installing [replacement] air bags, he stuffed paper into the empty compartments where the air bags belonged,” says Shahan, president of Consumers for Auto Reliability and Safety. “Bobby always wore his seat belt. But without the air bag, that was not enough.”

So, if you’re going to buy a used vehicle, make sure that it’s safe enough to drive off the lot. “It’s smart to take your time and shop for a car before you are under a lot of pressure to buy one right away,” says Shahan. “It’s better to rent a car for a while and give yourself time to find the right car.”

Obtain the vehicle’s history

When shopping for a used vehicle, ask the seller about past damages, including printed copies of all maintenance and repair records. Examine the owners title for what’s called a Title Brand — a descriptive label such as “junk,” “salvage” or “flood” — indicating that the automobile suffered severe damage sometime in the past.

Then conducts your own independent investigation by visiting these free sites:

For just a few dollars, you can also purchase a Vehicle History Report from a U.S. Department of Justice-approved vendor that includes similar but somewhat more extensive information, including odometer (number of miles driven) and title (ownership) history.

Inspect and test-drive it

Hire a mechanic from an automotive diagnostic service to give it a thorough inspection and hand you a written report on its condition.

“Today’s cars include highly sophisticated computerized systems,” says Shahan. “It takes a skilled, experienced technician with expensive diagnostic equipment to perform important diagnostics.”

The price for this service can vary, but averages about a hundred dollars. Choose your own mechanic, even if the seller claims to have already inspected the vehicle.

If you want to perform your own inspection, look for signs of prior damage, such as:

  • Paint sprayed over the original paint job
  • Parts that don’t fit together right
  • Mold or mildew smells
  • Bad wheel alignment
  • Lack of a spare tire
  • Uneven tire wear
  • Non-working lights
  • Signs of welding on the frame
  • Kinks or dents in the fuel tank or floor pan

Dealers are required to post a written Buyer’s Guide on most used cars and light trucks. It will tell you whether or not the dealer offers a warranty and, if so, what it covers. If there is no warranty or if it doesn’t cover all systems, discuss with your mechanic whether might indicate that the vehicle has problems.

When going on a test-drive, try it out under different conditions, such as hills, highways and heavy traffic. Check the steering wheel for shimmy while on a freeway. To test the brakes, drive to a place where nobody is behind you (to prevent being rear-ended), then brake three or four times. If it pulls to the right or left, the brakes need work.

Certified or just “used”

You may have noticed that some used automobiles are advertised as “certified pre-owned,” or CPO, indicating that it has been tested and repaired to a high safety standard.

However, controversy exists over the value of the “certified” designation, because there is no central authority governing its use. For example, a used vehicle can be certified by either the manufacturer who originally built it or the dealer who sells it.

“Certified pre-owned vehicles from new car dealers undergo very thorough inspection procedures and background checks,” says Mike Calkins, Manager of Technical Services at AAA. “Any car with significant prior collision repairs cannot be sold as certified pre-owned. Certified pre-owned vehicles come with an extended warranty backed by the vehicle manufacturer.”

On the other hand, Shahan claims that many dealers certify autos in poor condition. “Some so-called ‘certified’ cars are ‘chop-jobs,’ halves of two different cars that were welded together. “They’re grossly unsafe, and prone to literally splitting in two in a subsequent crash,” she says. “Save your money. Buy a non-certified car, and get your own inspection done.”

Your next car loan: Don’t get ripped off

Now that you’ve picked out the perfect ride, unless you can pay cash it’s time to start thinking about how to finance the purchase. It’s more important than ever to protect yourself from predatory dealers, high interest rates and scams.

American collectively own $1.36 trillion in auto loan debt, comprising over 9% of all household debt, according to Investopedia.

The key to obtaining a good auto loan is doing your own research, according to Jack Gillis, director of public affairs for the Consumer Federation of America. “You’re buying a car, selling a car, and arranging financing,” says Gillis. “All too often the dealer will try to bundle all three with such statements as: ‘What if I can get you out the door for $356 a month?’ You have no idea what you’re paying for the car, getting for your trade-in, or paying in terms of financing charges. So it is critical to keep the three deals separate.”

(For a broader discussion of loans and debt management, read our article Critical Strategies to Protect Yourself From Debt.)

The Credit Rating Scam

Before the dealer discusses financing with you, they pull copies of your credit score and credit report to review. If you have good credit, they can offer you a lower interest rate.

However, a dishonest dealer might claim that you have a lower credit score than you really do. Then they fool you into accepting a higher-interest loan that is more profitable for them but more costly to you.

Ironically, the dealer isn’t even the one who loans you the money. They just work as middle-men for banks and finance companies. So, instead of borrowing money through the dealer, ask banks, credit unions or loan companies directly for pre-approved financing.

Also, you can obtain your own copies of your credit report and score from the major credit reporting agencies.

“You should shop around for financing with the same vigor you shopped around for the car itself,” says Gillis.

Negative Equity Fraud

When you owe more on a vehicle than it’s actually worth, you have what is called “negative equity.” For instance, if your car is worth $7,000 but you owe $10,000 on it, you have $3,000 in negative equity.

Dealers might offer to take your car as a trade-in and pay off the entire $10K for you. Sound too good to be true? Sometimes they add that $3K in negative equity to your loan balance without telling you about it, or even claiming otherwise, according to the Federal Trade Commission.

This isn’t necessarily a bad deal, if it gets you into a vehicle that you really want. But an honest dealer will tell you up-front that they plan to add the negative equity to your contract.

Never accept oral promises that aren’t included in the contract language. Before signing, study the contract to see what’s included in the total balance. Better yet, pay off your current loan before doing a trade-in.

Loan Packing

Now that you’ve obtained approval for financing, are you sure that you’re borrowing money for a car, and only a car?

“Do not talk financing with the dealer until you have a firm, and satisfactory to you, price for the car,” says Gillis. “Then beware that in the financing office, you will be under great pressure to purchase additional items which are generally unnecessary and a bad value.”

Some dealers will just add options and services to the contract that you didn’t ask for, such as rust-proofing, extended service agreements or insurance, claiming that they are required for financing. They aren’t. Banks and loan companies don’t care about rust-proofing, they care about your credit worthiness.

They might even neglect to tell you about them at all. That’s why it’s vital for you to read the contract before signing it. Cross out any unasked-for items in the contract and re-total the balance.

Yo-Yo or Spot Delivery

You’ve picked out a car, obtained approval for a loan, read and signed the contract, then driven your new baby home.

The next day, the phone rings. It’s the dealer, claiming that your financing has problems and he’s already sold your trade-in, so you need to sign a new loan agreement at a higher interest rate.

You refuse, of course — after all, you already signed.

Then dealer claims that the contract wasn’t “final” and he has every right to change it, threatening to repossess your car or report it as stolen if you don’t agree.

Before signing, check the contract for language such as “conditional upon” or “subject to,” which may indicate that it isn’t final. “It is critical to insure that you have been approved completely for the credit terms offered by the dealer before you take possession of the vehicle,” says Gillis.

If the dealer demands a new agreement, reply that you’ll first consult with your attorney.

Extended Warranties: Are They Really a Joke?

Most likely, you’ve already heard numerous reasons for not purchasing an extended warranty on your vehicle — or for that matter, on a new digital device or home appliance. They only cover accidents on Thursdays, the repair center is in a country you’ve never heard of, the service company is owned by Barbary pirates etc.

This might have something to do with the fact that not everybody who buys one will ever need it. For instance, fifty-five percent of car owners never use it and, on average, those who do never use it enough to justify the cost, according to Consumer Reports.

“A consumer will always pay more for an extended warranty than the expected cost of repairs. That is why they are offered,” says David Soberman, Canadian National Chair in Strategic Marketing at the University of Toronto’s Rotman School of Management. “So self-insuring is best if you can afford to do so.”

But do scenarios exist where extended warranties — also referred to as service agreements, repair plans or similar monikers — might prove useful for the savvy consumer?

Your cash flow doesn’t flow. In today’s economy, not everyone has a fat savings account set aside for a rainy day. If you can afford a service plan, but not an expensive repair bill, purchasing one might make sense. “If a breakdown or failure would create costs for the consumer that are unaffordable, then extended warranties can be attractive,” says Soberman.

You’re the bull in the china shop. Do you treat your vehicle like a beloved pet, in constant need of love and attention? Or do you drive it like a battle tank during urban warfare? “If a consumer knows she is hard on products then an extended warranty can be a useful purchase,” says Soberman.

If you’re leaning toward purchasing an extended warranty, take steps to protect yourself first.

Wait until you leave the store.

Don’t make an impulsive decision at a busy checkout counter or in a cozy sales office. The salesperson in front of you has been trained to pitch that service plan right at the moment when you have no research tools at hand for making an informed decision.

“Listen to the salespeople when you buy your product,” says Soberman. “If they really push hard and give you horror stories about what happens if the product breaks, the EW’S are highly profitable so they are less attractive for you as a consumer.”

Get the facts.

Instead of buying one then and there, ask for some literature that you can take home to study. Then find out more about the product that it purports to cover.

“Do research on the likelihood of failure and the cost of a repair. Or if the product cannot be repaired, the cost of a new product,” says Soberman. “Do the calculation and see if it is worth it. For most common products this information is readily available on the web.

“Firms sell extended warranties that seem inexpensive but if the products rarely breakdown, they are a waste of money,” says Soberman.

Contact your insurance agent.

You don’t necessarily have to purchase the warranty from the retailer. Why not talk to the same folks who have always covered you for home, medical or auto accidents?

For instance, a few insurers offer “mechanical breakdown” policies for automobiles. While you’re at it, ask if your existing policies already cover your household or business possessions or can be amended to do so.

Why your auto insurance rate seems too high

So you have a new ride, worked out all the financials and are ready to drive it off the lot. Not long after that, you might want to reevaluate your auto insurance policy.

Everybody knows that your insurance premium will shoot through the roof if you crack open a bottle of gin and drag race past a police station with your finger in the air, assuming that they ever let you drive again.

But let’s say you’re a sober and safe driver with a good record. Can the insurance companies still find reasons to hike your monthly payment?

“Many factors can affect your premium, and they all help determine how likely you are to have an accident,” says Loretta Worters, vice president for communications at the Insurance Information Institute. “Perhaps surprisingly, many of them do a better job than just your driving record.”i

Where you live

If you want to lower your rate, move into the countryside. Insurance companies consider metro areas a greater insurance risk. “Generally, due to higher rates of vandalism, theft and accidents, urban drivers pay a higher auto insurance price than those in small towns or rural areas,” says Worters.

If you stay in the city, specific neighborhoods can also matter. In a much-criticized practiced often called “redlining”, a driver is likely to receive higher premium quotes if they live in a zip code that is predominantly poor, Black or Hispanic.

“Because losses tend to be higher in urban areas, rates for auto and home insurance are often higher than average in inner cities,” says Worters. She also points out that it is illegal for insurance companies to refuse to insure someone based on their location.

Your state of residence also matters. Drivers in approximately fourteen states pay more than the national average, according to Institute.

Stiffing your creditors

Insurance companies are financial institutions, so they want to know how well you manage your financial affairs. When deciding what to charge you, they use an “insurance score” based on your credit history. If you credit history is bad, expect to pay higher premiums.

“Consumers with the worst insurance scores are twice as likely to have an accident or insurance claim as those with the best scores,” according to a public statement by Progressive Casualty Insurance Company.

Your spending habits

Some insurers will base your quote on how much they think you’re willing to pay, according to Consumer Reports. To that end, they’ll look at how many beers you purchase, what kind of electronic toys you own and other data indicating your tolerance for higher premiums. Called “price optimization,” several states have have banned the practice for determining for auto insurance rates.

You’re a guy

A couple of generations ago, referring to someone as a “woman driver” implied that she — along with all members of her gender — was clumsy and prone to getting into accidents. Insurance companies, however, are less likely to trust men behind the wheel.

“As a group, women tend to get into fewer accidents, have fewer driver-under-the-influence accidents and most importantly less serious accidents than men,” says Worters. “So, all other things being equal, women generally pay less for auto insurance than men.”

On the other hand, the following urban myths definitely won’t affect your premiums:

Seeing red

Go ahead, buy that fire-engine red corvette. It’s not true that insurers jack up rates for owners of red-painted vehicles on the assumption that they like to drive them like race cars. They’ll consider make, model, body type and engine size — not to mention your driving record — but not color. So if you plan on burning rubber like it’s the Indy 500, painting your car blue won’t help you cover your tracks.

Sports cars in general can receive higher or lower rates based on a variety of factors, such as the model’s safety record and the likelihood that it will be stolen, according to Worters.

Growing old

Contrary to popular belief, insurance companies don’t penalize senior citizens for their supposed loss of mental clarity or motor control. If you’re over 55 and take an accident prevention course, your insurance company might even give you a discount.


David Arv Bragi, profile picture

David Arv Bragi is a multidisciplinary journalist with experience in health, safety, personal finance, technology, arts and cultural topics. He is also a former team leader and volunteer in community/tower emergency response teams. He currently lives just outside of Bellingham, Washington.