The keys to getting a vehicle
Needs vs. Wants
Vehicle Researching
Vehicle Leasing Basics
Leasing Quick Tips
Lemon Laws
Leasing Versus Buying
How the Buying Process Works
Auto Financing
New or Used?
Private Seller
Buying Quick Tips
Gap Insurance

The keys to getting a vehicle

Getting a vehicle is one of the most important financial decisions you make. To become a smart buyer, you need knowledge.

Whether you decide to lease or buy, the smart consumer has an attitude that says, “I can learn enough about cars, how the car business works, and how car financing works, to take control and save myself money!” By entering the automotive market with this attitude and the necessary knowledge, you will be in control of the process rather than letting the process control you! You will become a successful buyer.

The information in this guide provides a detailed look at vehicle buying and leasing and other important things to think about. It is meant to help you in your decision-making and guide you through the vehicle-buying process.

Needs vs. Wants

Needs are the necessities of life such as food, shelter and clothing. In today’s world, transportation is usually a need. If you cannot walk or take public transportation to work and shopping, a vehicle is a need for you.

Wants are things we would like to have, but which are not necessities. You may want power locks and power windows on your vehicle, but unless you have special needs, these features probably are not necessary to fill your transportation needs.

Do you need a luxury car or basic transportation? Do you need a new car or just a reliable one? Often there is a lot of “want” mixed into our needs. It is important for you, and anyone else involved in your transportation decision, to distinguish between your actual needs and your wants. Being able to recognize the difference between needs and wants will help you to prioritize how your vehicle dollars are spent.

Taking the Initial Steps:

  • First, distinguish between your needs and your wants. Consider purchases that put your needs before your wants.
  • Do your research before you buy. Determine the features that
    you must have to fill your needs.


“Needs” are things that you cannot survive without. For example, if you have two children, then a vehicle with more than 2 seats would be a need.

Some needs are also known as “must haves”. They are assumed to be a basic essential. When buying a car, you would not ask if the car has four wheels, but you most certainly need them!


Wants differ because they are based on our perceptions. Although they are not absolute needs, they can be high up on the priority list. Using the example above, wanting power locks in your vehicle might be a high priority if you have children, assuming that you believe power locks would make the vehicle safer.

The lowest level “want” is a “like.” There are things we like that we may not be able to afford. They are the “nice-to-haves” that are icing on the cake. For example, your needs may be met with a Toyota, but you might like a Lexus.

Sometimes you don’t know what you like until you see it. These are “surprise likes.” When buying a car, surprise likes can cost you a lot of money! This is why it’s so important to do your research before you shop for a major purchase. Figure out your needs and wants then make a list. Once your list is completed, you are ready to research the price of your car.

Vehicle Researching

To research a new vehicle:

  • Research the MSRP (Manufacturer’s Suggested Retail Price) and the discount pricing of all new vehicles that satisfy your list of needs and wants. This extra effort can really save you money when negotiating a discount price with a dealer. Consult publications and services such as Consumer Reports Magazine and car valuation sources like National Auto Dealers Association(NADA), Kelly Blue Book, or Edmunds.** Some sources may be accessed free on the Internet,,, etc..
  • Compare the price of different vehicles to their features, performance, fuel efficiency and maintenance costs. Then return to your list of needs and wants to determine which model has the greatest value to you.

To research a used vehicle:

  • Consult the car valuation sources listed above. You may also want to look at local newspaper ads, but bear in mind that the condition of advertised vehicles may not be apparent.
  • Always obtain your own inspection before you purchase any used vehicle! A good mechanic can spot things that won’t always show up on a Car Fax** report; things like flood damage, structural defects, or odometer fraud. You may need to pay about $100 to have this done, but it will be money well spent!
  • Compare the features, price, condition and performance of different used vehicles against your list of needs and wants to determine which one will have the greatest value to you.

Research the vehicle. You can access Internet sites dedicated to new, used, and discount car pricing, even if you don’t have a personal computer or Internet service. Most public libraries allow you to use their computers and Internet service without charge other than for printing. Once you’ve narrowed your car choices, you can compare the fuel efficiency, frequency of repair and maintenance costs on each model in auto-related consumer magazines. These magazines are also often available at your public library. You can also check out the chat rooms dedicated to specific car makes and models to learn more on durability and maintenance. The U.S. Department of Transportation’s Auto Safety Hotline (1-800-424-9393) gives information on recalls.

Research sellers. Vehicles are sold through different outlets, including dealerships, car superstores, the Internet, and private sellers. Ask friends and relatives for recommendations on sellers. To check out a seller, you can contact the Better Business Bureau (BBB)** or the consumer protection division of your state’s Attorney General’s office.

Vehicle Leasing Basics

Important things to know when leasing a car:

  • You will not own the vehicle-the leasing company will.
  • You are not in the process of buying the vehicle, either–the leasing company is.
  • In a lease, you are essentially paying “rent” for the use of the vehicle for the length of the lease.
  • You will have to pay extra at the end of the lease for any excess mileage or wear and tear.
  • If the leased vehicle is totaled in an accident, you will usually be responsible for paying any difference between the lease amount and the insurance payout.
  • You cannot get out of a lease “early” without paying the total amount due under the lease or early termination penalty fees.

Understand Leasing Concepts

The idea behind leasing is to pay the amount by which a vehicle depreciates throughout the length of your lease. Depreciation is the difference between a vehicle’s original value and its value at the end of your lease. The value of the vehicle at the end of the lease is called “residual value.” Depreciation is the primary factor that determines the cost of leasing, although other costs are added. The idea is for you to pay rent for the use of the leased vehicle.Here’s an example:

$30,000 (original value) – $13,000 (depreciation over 3 years) = $17,000
(residual value)

It is important to realize that the low monthly price of a lease is only buying you the use of a vehicle. At the end of the lease you will have no trade-in, nothing to sell. If you do choose to lease, research different makes and models because vehicles do not all depreciate at the same rate over the same period of time.

Avoid leases that are more than three years long. If a lease is over 3 years, you may end up upside down (owing more for a thing than what it is worth) if the leased vehicle is declared a total loss in an accident. In such a case, there would be a “gap” between the amount the insurance company would pay and the amount due under the lease. You would be responsible for this extra amount, unless you have sufficient gap insurance.

Know the Leasing Process

1. Negotiate the lease price first, without discussing any trade-in. Negotiating the cost of your leased vehicle is the first and most important thing you should do. Offer a price that is less than the MSRP. Negotiating the lease price is critical because you are charged interest on the price, NOT the vehicle’s residual value.

Your negotiation should not include any other factors, including the value of your trade-in. Your trade-in is an entirely separate issue that should not be discussed until after you have agreed on the price of your leased vehicle.

2. Don’t let yourself be “sold.” Vehicle salespeople can be pushy. Stand your ground and remember that it’s your money. Always negotiate; the worst that can happen is that they say no. Because you have done your research, you will know when to use the power of walking away.

3. Look out for “hidden” charges! Capitalized costs are extra charges added into your lease. Be sure you find out about all capitalized costs, have them itemized for you and understand what these costs are for. Capitalized costs may include an “acquisition fee.” Acquisition fees are similar to points paid on a mortgage loan and typically are not specified in lease contracts, so it’s not readily apparent that you’re paying them. Another possible capitalized cost is the balance owed on the vehicle that you’re trading in, less any allowance for applied trade-in credit.

4. Don’t lease longer than 3 years. Lease terms usually come in periods of 24, 36, or 48 months although unusual lease terms are sometimes promoted. Beware of any lease longer than 3 years (36 months). Your lease term should not be longer than the manufacturer’s warranty on the vehicle. Short-term leases are the best choice because of the “gap” problem referenced above and because vehicles usually begin having functional problems after the fourth or fifth year.

Leasing Quick Tips

  1. A lease contract is stricter than a financing contract to purchase a vehicle. If you think, for any reason, that you might end your leasing contract early, DO NOT LEASE. This is costly. Leasing companies don’t like it when customers try to ‘get out’ of a lease, so they punish you for doing so…in DOLLARS.
  2. If you plan on ultimately owning the car, leasing will cost you more. It is almost always more expensive to lease the car and later exercise your purchase right than to buy the vehicle from the start, using credit wisely.
  3. Lemon Laws do not apply to leased vehicles in some states. Check your leasing company’s reputation and your state’s current lemon law.
  4. Remember that sales tax may be added to advertised lease payments. The quoted lease payments usually don’t include sales tax, and when sales tax is added, your monthly payments may be higher than you think. Most states tax your monthly payment, but some states reportedly tax the car’s full value even though you are using only a portion of the car’s value. Be sure you know (and get in writing) the amount of your monthly payment, including any sales tax. This is especially important if you live in Illinois or Texas.
  5. Watch your numbers. Check for any additions, or ‘junk fees,’ that the dealership may add to your lease contract. Examine all the lease documents line by line. Know what the termination fees are before you sign. The initial price of the vehicle is the biggest factor in determining your payment, so always negotiate this first, before you discuss trade-in value. Be alert. For example, if a dealer offers to take $3,000 off the price of the $25,000 car you want to lease, make sure that $3,000 is not added back in somewhere else, by lengthening the term of the lease, or in “hidden” costs and fees.
  6. Stick to your leasing limits! Don’t go over your pre-determined mileage. Extra miles can cost about 10-15 cents per mile. For example, if you go over your limit even by 5000 miles, you may have a mileage fee ranging from $500-750. This can really add up!
  7. Check with your insurance agent before you lease and figure this into your costs. Most leasing companies require you to keep auto insurance with higher, more expensive coverage. Any extra insurance costs should be figured into your transportation budget and can be an additional cost of leasing. A typical policy for a leased vehicle would include $100,000 per person/$300,000 per occurrence liability coverage, $50,000 property liability coverage and require that you have no higher than a $500 deductible.Remember, the car belongs to the leasing company, and they want to protect their investment.
  8. Keep good records. Document all oil changes, tune-ups, inspections, etc. and make sure you do them on time or the leasing company might charge extra for excess ‘wear and tear.’ To avoid disputes and extra charges, have your leased vehicle detailed and photograph it thoroughly before you turn it in. Then be present for your car inspection and get a copy of the report.
  9. Do not make large down payments on leases. In a purchase contract, a down payment has value because it lowers your principal and therefore lowers your monthly payment. But with a lease, you receive no advantage and lessen the advantage leases offer:Less money upfront.
  10. Get gap insurance if needed. This type of insurance covers situations such as theft or wreck, when you end up owing more on the lease than the car is worth. Standard insurance will cover up to the car’s value or even the replacement value, but if the lease amount you owe is higher, standard insurance will not cover the difference. If you have negotiated well and stick with a short lease, gap insurance may not be necessary (see above). Many leasing companies include gap insurance as part of the lease.

Lemon Laws

A “lemon” is a vehicle that continues to have a defect that substantially impairs its use, value, or safety. In general, if the vehicle has been repaired 4 or more times for the same defect within a defined warranty period and the defect has not been fixed, the vehicle qualifies as a lemon. State laws differ, and not all states even have lemon laws, so research a lemon law summary or state statutes for your particular state. Note that the “warranty period” for the purpose of a lemon law may or may not be the same as the manufacturer’s warranty period.

Whether or not your car falls under a state’s lemon law is based on several factors. Some states include used and lease cars in their lemon laws. Some states have separate laws for used vehicles. Some states provide protection only for new cars. In some states, the law is not clear as to whether leased vehicles are covered or not.

Some sources of more information on lemon laws:

  • Non-profit organizations such as
  • The Consumer Protection Division of your state Attorney General’s office
  • Your local library
  • A lawyer with experience in this area
  • Your local Bar Association or Legal Aid Office

Leasing Versus Buying

It’s a common dilemma: Should I lease or buy a car– which is better?

There is no single answer. Although leasing may give you a lower monthly payment, the total costs are usually more expensive than buying. You should avoid leases longer than 36 months. When you lease, you are paying “rent” on your vehicle. At the end of the lease term, you will have nothing except the issue of turning in a leased vehicle, which can be unpleasant, with disputes over penalties for unusual wear and tear.

In the final analysis, whether you buy or lease depends on your situation and what is most important to you. So, when making a ‘lease or buy’ decision, look at your personal priorities as well as the financial comparisons.

Read the statements below; if you agree with them, then leasing might be right for you!

  • It is more important to me to change cars often and always have a late model car than it is for me to build equity in a vehicle.
  • I keep my cars in great condition.
  • I know how long and how far I will drive my vehicle.
  • I have a steady income and the possibility of a lower income is unlikely in the future.
  • I drive less than 15,000 miles per year.
  • I do not plan on moving to another state.

Now read this set of statements. If you agree with these, then buying a car might be right for you!

  • I drive more than 15,000 miles per year.
  • I tend to hold onto cars for more than five years.
  • I like the idea of ownership.
  • I like to customize my car.
  • I want my money to build up trade-in or resale value.


  • When you buy, you pay for the entire cost of a vehicle, regardless of the mileage you use. Assuming you are not paying cash, you usually make a down payment, pay any sales tax in cash or roll it into the loan, and pay an interest rate determined by your lender based on your credit history. You make your first payment a month after you sign your contract.
  • When you lease, you pay for only a portion of a vehicle’s cost, the portion you use during the lease term, plus other fees. In most states, you pay sales tax only on your monthly payments (with exceptions), and you pay a financial rate called a money factor that is similar to the interest rate on a loan. You may also be required to pay special lease-related fees such as capitalized costs, deposits and higher insurance costs. You make your first payment at the time you sign your contract — for the month ahead.

Click here for a real-life Leasing Versus Buying example.

How the Buying Process Works

When purchasing a vehicle, you have two options:

1) You can pay cash or

2) You can get a loan*

Here are some things you should know:

Avoid being upside down- be able to afford the payment on a loan no longer than 4 years!

If you get a loan to finance a vehicle, remember the “Rule of 3 to 4.” Since you have already done your research, you will know what you want to pay for the vehicle and how much you can afford in a monthly payment. It is best to finance a vehicle for no more than 3 years, but avoid ever financing a vehicle for longer than 4 years. This is a maximum of 48 months. The reason for this is to prevent you from being “upside down” in your vehicle. Being upside down means owing more for your vehicle than it is worth. If you cannot afford the payments on a new vehicle financed for 48 months, then you should look for a less expensive vehicle to meet your needs.

To understand the term “upside down” you first need to understand depreciation. Depreciation is the decline in an object’s value over time. A vehicle loses about 15 to 20 percent of its value each year, and it tends to lose more than this amount the first year. For example, a brand new $20,000 car is worth about $15,000 at the end of the first year. The primary reason for the large drop in value is that when you purchase the new vehicle from a dealer, you are paying retail price. Once you drive the car off the lot, if you were to sell it, it would only bring its wholesale price. Also, the money spent on taxes and licensing is gone for good. At the end of the second year, the same vehicle is worth only about $12,750 (85% of the value at the end of the first year).

Now, let’s say you financed a $20,000 car by obtaining a loan for 5 years. At the end of two years, you may still owe $15,000 on the car. In this situation, your car’s value would be $2,250 less than what you owe on it. This is known as being upside down. Dealers who advertise that they can put you in a new car “even if you’re upside down on your current vehicle,” simply take the excess loan amount ($2,250 in this example) and roll it into the new loan. Now, after two years you would be “double upside down” on the second vehicle! It looks like this:

Vehicle price/value new: $20,000 Amount of Loan: $20,000
Value after year 1: $15,000
Value after year 2: $12,750 Amount of Loan: $15,000–$2,250
more than value(upside down)
2nd Vehicle price/value: $25,000  Amount of Loan: $27,250
(value plus $2,250)
Value after year 1: $18,750 Amount of Loan: $24,750–$6,000
more than value:(double upside down)

So, “double upside down” is when, despite being upside down, you finance another new vehicle and the amount of negative equity from the first vehicle loan is rolled into the new loan. Since the new car loses a great deal of its value in the first year of ownership, you will not only be upside down on the new vehicle, but your loan on this vehicle includes the “upside down” amount from your prior vehicle. This is known as “double upside down.” This can continue to become triple, or quadruple “upside down” so that you owe much more than what your vehicle is worth because of continuing to refinance before you have equity in a vehicle. To avoid becoming upside down, do not finance a vehicle for over 48 months, 36 months is even better. If you can’t afford the payments, look for a less expensive vehicle.

When you are upside down (have negative equity because you owe more than the value) on a vehicle and it is declared a total loss because of an accident, the insurance company will only pay the vehicle’s value, in this case less than the debt owed on the vehicle. The amount the insurance does not cover is called a deficiency balance.” If you do not have Gap Insurance, you will be responsible for paying any deficiency balance.

Vehicle financing basics.

Financing is more expensive than paying cash because you are purchasing on credit, which includes interest and other possible loan costs. Used vehicle loans normally have higher annual percentage rates (APRs) and shorter loan periods than new vehicle loans. Be cautious about advertisements that offer financing to first-time buyers or people with bad credit. These offers often require a big down payment and a high APR or a loan term that is too long. If you cannot get any other financing, then: (1) be sure that the used vehicle will be reliable transportation for you for the length of the loan and beyond (pay a good mechanic to inspect the vehicle before you buy and ask him or her about this); and (2) be sure that the payment will fit comfortably into your spending plan.

Buying a vehicle is actually a series of negotiated transactions, including:

  • Negotiating the purchase of the vehicle;
  • Negotiating the sale or trade-in price of your current vehicle; and
  • Potentially negotiating the purchase of other products and services such as vehicle protection packages, extended service contracts, etc.

*If you are not paying cash for your car, please also visit our Auto Financing section.

The vehicle purchase process in 5 Steps.

First step: Decide whether you want a New or Used?.

Second step: Decide from whom you will buy: A dealership, a car superstore, over the Internet or a Private Seller.

Third step: Decide what to do with your current vehicle. If you are not going to keep it, then you can sell it yourself or trade it in when you purchase the new vehicle. Selling it yourself will usually get you more money, but there are other factors to consider such as the time it will take you to market and show the car, dealing with potential buyers, collecting funds, money spent on advertising, etc.

Trading in your vehicle is the other option. The first and most important thing when trading-in your vehicle is – negotiate the price of the vehicle you are buying before you discuss a trade-in price! If a dealer asks you whether you are trading-in, simply say you want to focus on the car you’re buying first. Vehicle salespeople can be pushy. Stand your ground and remember that it’s your money. Always negotiate; the worst that can happen is that they say no. Because you have done your research, you will know when to use the power of walking away.

If you still owe money on the loan of your trade-in, remember that you, not the dealership, are responsible for paying off the loan. Also remember that you can’t sell a vehicle without paying any loan against it in full. If you’re using the vehicle for a trade-in, only the amount of the trade-in above the amount you owe on the vehicle will go towards the price of the new vehicle. For example, if you still owe $10,000 and the dealership offers you $12,000 for the trade-in, the $2,000 difference is the actual amount you are getting toward the purchase of your new vehicle.

Results if you are “upside down” on a vehicle:

If you owe more on your vehicle than you can get for the trade (you are upside down on the loan), then instead of lowering the amount of your new vehicle loan, you will have the difference added to your new loan! For example, if you still owe $10,000 and the dealership gives you only $8,000 in trade, the other $2,000 will be added to the price of the vehicle you’re buying! In this situation, if you finance for longer than three years, you could be “double upside down” on your new purchase. It would be better to keep the existing vehicle, at least until it’s worth what you owe on it. Otherwise, you will be paying for the new car and for the negative value of the old car you don’t even own any more.

Last but not least, before you take your trade-in to the dealership, have it professionally detailed. This usually increases the value you receive for your trade-in.

Fourth Step: Get your insurance quote before you sign a contract! One true story will show you why. Sue had a car that was paid for. Because money was tight, she carried only liability insurance, which cost her $62 per month. Her vehicle broke down and she had to finance a used car. All commercial lenders and leasing companies require full insurance coverage on any vehicle they are financing. Sue called her insurance company from the car dealer’s office, but they were unable to give her a quote at the time. Sue signed the contract to finance the car for payments of $142 per month. She later discovered that a traffic violation she thought was off her driving record was still there. Her insurance payment ended up being $351 per month, more than double her car payment! She couldn’t afford this and when the insurance lapsed for non-payment, the car dealer repossessed her vehicle. Don’t let this happen to you. Get your insurance quote before you sign!

Fifth Step: Decide whether to purchase vehicle options, extra packages and/or extended warranties. There are many vehicle feature options to consider and salesmen often use them to increase the price of the vehicle (and their profit) by selling you additional features you may not want or need (see “Wants” in Needs vs. Wants). Examples of such options include: automatic transmission, a more powerful engine, anti-lock brakes, four-wheel drive, CD/AM/FM stereo, cruise control, power windows, power door locks, remote-adjustable mirrors, sunroof, tilt steering column and alloy wheels. The point here is to research the prices for these options before you go to the dealership, know what you can afford and what such options are truly worth to you.

Extras are another source of extra profit for the salesman. Typically, the value of a vehicle is not increased very much compared to the cost of extras like fabric protection and paint sealant. Most vehicles already come with these items and if you really want extra protection, you can do it yourself for very little money.

Extended warranties may cost hundreds of dollars and are worth considering only if you plan to own the car a long time. The manufacturers’ warranty that comes with a new vehicle is usually sufficient, offering bumper-to-bumper coverage of three years or 36,000 miles and even longer coverage on the power train. If you are intent on buying an extended warranty, purchase one from the auto manufacturer; avoid buying any “third party” warranties.

If you are purchasing a used vehicle from a dealer, the dealer is subject to the Federal Trade Commission’s Used Car Rule. The Used Car Rule is in effect in all states except Maine and Wisconsin (these states have their own similar laws). Under this rule, the dealer must provide a disclosure document—a “Buyer’s Guide“– that gives consumers the following important purchasing and warranty information:

  • Whether the vehicle is being sold “as is” or with a warranty;
  • What percentage of the repair costs a dealer will pay under warranty;
  • That oral promises are difficult to enforce;
  • To get all promises in writing;
  • To keep the Buyer’s Guide for reference after the sale;
  • The major mechanical and electrical systems on the car and some of the major problems consumers should look out for; and
  • To ask to have the car inspected by an independent mechanic before they buy.

Click here for a list of Buying Quick Tips.

Auto Financing

Look at other financing sources before you go to a dealership.

Understand that dealerships want to finance your vehicle because it’s profitable for them. They make money from vehicle financing! Before you even go to a dealership, take the time to compare other auto loan rates available to you. Check a local credit union, a local bank, and other options via the Internet.

Know your numbers. The higher your credit score, the better your interest rate is likely to be. Find out your credit score several months before you begin looking for a car. This will give you time to correct any mistakes on your credit report, or to begin improving your credit score if it needs improving. You should know your credit score before you start shopping for a car loan.

Avoid financing over four years. Remember the Rule of 3 to 4! Don’t finance a car for more than four years. Loans that span 60 months or more cost you much more in interest, even though the monthly payments are less. And, if you finance for a longer amount of time, you are likely going to end up owing more than the car is worth at some point. To avoid this, use a large down payment so that you can afford to finance the balance for 4 years or less, or else find a less expensive car you can afford to pay for in no more than 4 years.

New or Used?

  • Depreciation: When you buy a new vehicle, as soon as you drive it off the dealer’s lot, a huge chunk of the vehicle’s value is gone forever because it is no longer new. New cars generally lose about 25 percent of their resale value the first year. Some models hold their value better than others. When you buy used, the car already has started depreciating, so someone else has taken the big, initial depreciation hit. To learn more about vehicle depreciation, see How the Buying Process Works.
  • Costs: When you buy new, you pay more, and not just for the initial purchase, but also in taxes, higher insurance premiums, registration and licensing fees. On the other hand, used car owners have to consider the higher maintenance costs of keeping an older car running (such as replacing brakes, muffler and battery), as well as the possibility of a major repair (like replacing the transmission). This is where good research on makes, models and your particular used vehicle pays off: the more reliable the research, the less likelihood of unexpected expenses or buying a lemon.
  • Warranties:The advantage is clearly with new cars here. Basic manufacturer’s warranties are standard with new cars, and you can buy extended warranties for an additional cost. Avoid warranties from third parties. Some dealers may offer a limited warranty on a used car, but these are typically much weaker than a new-car warranty. And if you buy used from a private individual, it’s highly unlikely that you would receive any kind of warranty at all.
  • History: Many buyers want to know the exact history of a vehicle that they might buy. When purchasing a new vehicle, there is no real track record established, you’re simply buying on the model’s potential track record. However, there are various sources that track vehicle models’ repairs and defects. To learn more, visit Vehicle Researching. Some places to check a used car’s history
  • Condition: The “shiny new” factor is a big selling point to some buyers. Some people also like the idea of being the original owner of a vehicle so they can be sure of how the vehicle
    is treated and maintained. On the other hand, the leasing market has created a large pool of previously leased cars that are good values since the individual and leasing company have taken the big hit on depreciation. You must decide what’s most important to you.

Private Seller

An alternative to buying from a dealer is buying from an individual. You may see ads in newspapers, on bulletin boards, or on a car. Buying a car from a private seller is very different from buying a car from a dealer.

  • Private sellers generally are not covered by the Used Car Rule and do not have to issue a Buyer’s Guide. The Federal Trade Commission’s (FTC’s) Used Car Rule says that anyone who sells more than 6 vehicles per year, excluding RVs and motorcycles, must post the FTC’s “Buyer’s Guide” on any used vehicle offered for sale. Although the FTC’s rules do not usually apply to private sellers, you can still use the Guide’s list of a vehicle’s major systems as a shopping tool. To see the “Buyer’s Guide” and for more information, see the FTC’s web site at You should always have your own mechanic inspect the vehicle before you make any commitment. There are mobile inspectors who can come to the vehicle’s location if the seller will not allow it to be moved.
  • Vehicles purchased from a private seller usually do not have warranties or implied warranties. That means a private sale probably will be on an “as is” basis, unless your purchase agreement with the seller specifically states otherwise. You can enforce the terms of a written contract, but verbal promises are usually not enforceable. A used vehicle may be covered by a manufacturer’s warranty or a separately purchased service contract, but such warranties and service contracts may not be transferable to you, and other limits or costs may apply. Before you buy, review any warranty or service contract it has and be sure you understand all the terms.
  • Many states do not require private sellers to ensure that their vehicles will pass state inspection or carry a minimum warranty before they offer them for sale. Ask the consumer protection division of your state Attorney General’s office or local consumer rights group for the requirements in your state.


What are vehicle warranties?

Warranties are contracts that pay the costs of certain repairs. They are like vehicle repair insurance. The manufacturers’ warranty that comes with a new vehicle is usually enough, offering bumper-to-bumper coverage of three years or 36,000 miles and even longer coverage on the power train. You can also purchase extended warranties.


You will get a manufacturer’s warranty on new vehicles. You can buy an additional, extended warranty from the manufacturer if you wish.


For used vehicles, you can buy a warranty from your own insurance company unless there is warranty coverage remaining on the vehicle that can legally transfer to you and you have this in writing.


Avoid buying warranties from other third parties such as vehicle dealers and warranty companies.

Extended Warranties. When your manufacturer’s warranty expires, you will have no coverage for repair bills. Extended warranties continue repair coverage as specified and also have benefits such as towing, car rental, toll free assistance, trip interruption insurance and lost key lockout. When the manufacturer’s warranty ends, the extended warranty can go into effect for another few years. If you want an extended warranty, it is crucial to purchase one early. Just like life insurance, the longer you wait, the more it will cost, so if you plan to buy a warranty, lock in your savings when your car is young and healthy. As more repair data surfaces on your make of vehicle, it may be placed into a higher rate class, making an extended warranty more expensive. Once you buy your extended warranty, your rate class cannot change. Get it sooner, not later.

DO NOT buy an extended warranty at the time you purchase. With car dealer extended auto warranties, you often pay double for less coverage. Remember that dealerships usually have a high mark-up on extended warranties. Although you do want to purchase an extended warranty while your car is still “young,” you should not make this decision until you have researched cost and coverage options.

Buying Quick Tips

  • Check your credit score before you shop! Your score is the major factor in what loan terms you can get. The lower your credit score, the more money you will be paying in interest rates; the higher your credit score, the better your loan terms will be. You can check your credit score and report online. Review your credit report before the dealership sees it. Your credit report is available free from and your credit score is available for about $20 from Fair Isaac Corporation** at
  • Research Sellers. Vehicles are sold through different types of outlets including car dealerships, superstores, and over the Internet. Ask friends and relatives for recommendations. You can contact the consumer protection division of your state Attorney General’s Office or your local Better Business Bureau (BBB) to check a particular dealer.
  • Know your trade-in value before you shop. Kelly Blue Book, the NADA Used Car Pricing Guide, and Edmunds are all available free on the Internet. Local editions are often available in libraries, banks and bookstores.
  • Research non-dealer financing options before you go shopping. Many
    people use dealer financing because it’s convenient– you buy a car and finance it at the same place.
    But there’s a difference between what dealers ‘sell’ you and what dealerships ‘buy’ from the bank. That difference is the dealer’s profit and more money you will pay! If you arrange your own financing with a local bank or credit union, the extra effort can mean significant savings for you!
  • Be sure you know your cancellation or return rights, if any. In some states, you may have no cooling-off period or cancellation right. In some states, you may have up to three days to change your mind on your purchase. In other states, you would have to buy a cancellation policy and in still other states, once you sign the contract there’s no turning back. The safest thing is to ask your seller what its cancellation and return policy is and then have them show you where the policy is written in your contract. It’s also good to find out where your state stands on this issue before you buy.
  • Take a careful test drive. Drive the car in all ways you normally would drive. Go up hills, enter the freeway, make a controlled emergency stop, etc. to be sure how well the car functions and handles. Don’t let music or the salesperson distract you during the test drive.
  • If you buy a used vehicle, you MUST get an independent mechanic to give it a thorough inspection BEFORE you purchase it. There is no substitute for this and once you purchase the vehicle it may be too late. It is well worth the mechanic’s fee to save you from accidentally buying a lemon! An independent inspection is a good idea even if the vehicle you are trying to purchase has been “certified” by a dealer and is being sold with a warranty. Do NOT rely on the safety inspection of the vehicle alone; safety inspections do not evaluate the mechanical reliability of the vehicle. If the seller will not let you take the vehicle off the premises, look in the yellow pages, Internet, etc. for a mobile vehicle inspector who will come to the vehicle’s location.
  • Check out the history of used vehicles. You have the right to request the names and history of previous owners. Dealers are required to provide this information to you as a potential buyer. Remember, buying a car “as is” means YOU are responsible for any hidden defects and necessary repairs. Some places to check a car’s history;; **
  • Do not rely on spoken promises. Get all promises in writing. Dealers are required to place the Federal Trade Commission’s “Buyer’s Guide” in cars that have been previously owned. Any agreement made outside of a Buyer’s Guide provided to you must be in writing to protect your rights. To view the Buyer’s Guide, go to
  • Make sure you read every line on every document and understand what is required of you. Be sure there are no blank spaces. Your signature binds you to every obligation in that contract.

Gap Insurance

The resale value of a new vehicle drops quickly once it is driven off the Dealer’s lot. Often, this results in the new owner owing more than the vehicle is worth, or being “upside down” on the vehicle. Depending on such factors as make, model, loan terms and condition of the vehicle, it could take several years before the vehicle is worth more than what is owed on its loan. You can also be “upside down” on a leased vehicle if it is involved in an accident or stolen. This means that more is owed on the lease contract than what the insurance company will pay. Whether it’s a new vehicle, used vehicle or leased vehicle, you can be upside down (owe more than the value of the vehicle and/or the insurance on the vehicle) for many reasons.

When a vehicle is repossessed or declared a total loss because of an accident while you still owe money for it, you will still owe any loan balance after deducting the proceeds from the sale or the insurance payment. Generally, vehicles sold after repossession bring very, very low prices because they are sold at wholesale auction. The lender can then pursue you for the difference between the loan amount and the amount the lender gets from auction, plus the lender’s cost of repossession and sale. This amount is called a “deficiency balance.” Similarly, when insurance makes payment for a total loss, the amount is often much less than what you owe.

Regardless of the reason, anytime more is owed on a vehicle than the amount available from sale or insurance, there is a “gap” between the amount owed and the amount available from the vehicle to pay the loan or lease.

Gap insurance provides financial protection for consumers when such a gap exists between the actual value of their vehicle and the amount of money owed to their lender or leasing company. It’s best to avoid having a “gap” in the first place by keeping loans and leases to 3 years. If you cannot afford the payments (they do not fit into your spending plan over 3 to 4 years, you should get a less expensive car.

For example:

Bob bought a new car for $30,000. Six months later he’s involved in a bad car crash and his insurance company declares the vehicle a “total loss.” Bob still owes $28,000 on his car loan, but the insurance company will only give Bob the current trade-in value of $26,000. Bob has a “gap” or difference of $2,000 that he owes but the insurance will not pay.

If Bob has gap insurance, it would pay Bob’s lender the difference
(gap) of $2,000.

By Victoria Wright, JD

**Butterfly does not endorse any companies. Butterfly mentions other sources of information that it considers helpful to the reader, but does not guarantee the accuracy or completeness of any entity’s information.