Used Wheels Making Sense

Written by David M. Grice    Friday, 13 February 2009

Automakers have a glut of off-lease luxury cars and are ready to deal Lawyers don't gain business based on what they drive, unless they meet prospective clients at auto club functions. Nor do they transact many deals in their cars unless they're negotiating over a cellular phone. In which case, the only people being impressed are the ones stuck behind them in traffic. An automobile contributes little if anything to the success of a law practice. Yet for many lawyers, it is among their largest expenses. Like most people, they prefer to drive the newest and best car they can fit their budgets around. There is nothing wrong with that, if that's how they want to spend their money. But what if they don't? Saving Thousands Buying new cars, particularly new luxury cars, is one of the easiest, surest ways to kiss lots of money good-bye in the least amount of time and still justify it as a necessity. Fortunately, the market provides an alternative-buying used--that can save buyers thousands of dollars with little functional difference in the delivered product. And buying used has rarely made more sense than it does now, for two reasons: - Automakers have a glut of cars coming off new-car lease programs. These cars--barely used in many cases--are flooding the used-car market, putting downward pressure on prices and forcing the companies to offer incentives. - At the same time, the domination of local dealers is under attack from national used-car chains springing up all over the place, attempting to do for used cars what Ray Kroc did for hamburgers. Data compiled by R.L. Polk & Co. show that the number of new car leases increased 8 percent in the first nine months of 1995, despite a drop in the number of over-all new car registrations. Through September 1995, leases accounted for more than 18 percent of all registrations, up nearly 2 percent from the same period in 1994. More significant, the number of cars coming off lease is growing even faster, and that growth is fastest among luxury cars. Better than half of all new luxury cars are leased, not sold. Projections are that the annual supply of used luxury cars may double before it begins to subside. Automakers are scrambling to maintain some control over the resale of these cars--they own them when leases expire--lest the surplus depress prices for new cars as well as used. To move the oversupply of off-lease cars without pulling the rug out from under their new-car franchises, many automakers are offering warranties on their used cars. The warranties typically extend beyond the original new-car warranties by a year or two, covering major components. They are not as inclusive as new-car warranties, but certainly offer better protection than buying a car "as is." Concurrent with the glut of off-lease cars entering the market, the market for used cars is being shaken up by new "superstore" chains that, at least in the short term, should add to competitive pressures to lower prices in areas where they locate. A handful of national and regional used-car chains have announced plans to open dozens of superstores across the country. Many industry watchers think a revolution is under way that will lead to the demise of the traditional used-car lot. According to Automotive News, the superstores are modeled after "category-killer" retailers such as Circuit City--which happens to own Car Max, one of the first used-car chains. The strategy is to offer the widest selection available at prices that independent stores can't possibly match, driving out competition for miles around. If that's the case, price wars could be the order of the day until things shake out. Because cars have improved in recent years, vehicles with years of useful life remaining can be purchased for a lot less than what new cars cost. In terms of cost per year or cost per mile, the difference can be enormous. While dealers are offering increasingly attractive terms on used cars, the best buys might be from private owners. Car dealers are skilled at selling cars for the highest prices they can get, and at highlighting selling points and glossing over defects. Buying from an individual eliminates the middleman's markup and the competitive disadvantage that car buyers can face in dealing with professional sales people. The guy down the street who trades in his car every three years doesn't have a glut like the car companies do, but he's selling into the same market. A buyer can reap all the advantages of buying from a private owner--that's how most used-car sales take place--and still benefit from prevailing bargain prices.

Last Updated ( Friday, 13 February 2009 )