What is the best place to buy a used car?

Woman looking into the window of a car with sale information on the windowImage: Woman looking into the window of a car with sale information on the window

In a Nutshell

The best place to buy a used car will depend on your budget, your creditworthiness and the car you want to buy. It’s a good idea to learn about the pros and cons of dealerships, used-car lots and private and online sellers before you start shopping around. Depending on where you go, car prices can vary. And while some sellers may have access to a network of lenders or specialize in working with borrowers with lower credit scores, their loans may come with higher interest rates.
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Shopping for a used car can be a time-consuming process — especially if you’re comparing different sellers.

There are many different kinds of sellers, including new-car or independent dealerships, used-car retailers and private or online sellers. The buying experience, car costs and financing options can vary across these different types of sellers, too.

Let’s take a look at the pros and cons of buying a used car from each type of place.

Types of used car sellers

Whether you have a specific car in mind or not, it’s always a good idea to shop around for the best deal you can get.

New-car dealerships

New-car dealerships are typically affiliated with one car manufacturer for new cars, but new-car dealerships may also sell used cars from other manufacturers on their lots. In some cases, these used vehicles are sold as “certified pre-owned” — meaning the dealer or manufacturer is vouching that the car meets certain standards. Certified pre-owned cars may also come with a warranty (terms of certified pre-owned programs can vary by manufacturer and dealer).

Another plus with new-car dealerships is that they typically offer several financing options — with lenders competing for your business — because they have relationships with a variety of finance companies. If your credit isn’t in great shape, having access to more lenders could mean a better chance of approval.

But your interest rate may be higher than if you get a loan elsewhere. With dealership-arranged financing, your approved interest rate can be marked up by the dealer and lender to generate more profit for themselves.

New-car dealerships also tend to have high overhead costs due to internal business expenses such as staffing and maintaining inventory of new models. That means you might end up paying more at a dealership than you would buying from a private seller — even if you manage to negotiate on the price.

Why car loans from banks may be a better option than dealership loans

Independent dealerships

Independent dealerships tend to be smaller than new-car dealerships, which can mean lower overhead costs and potentially lower sticker prices.

On the flip side, some independent dealerships may offer only in-house financing, giving you fewer lender options. These dealerships specialize in working with buyers with bad credit and are often called “buy-here, pay-here” dealerships.

You’ll want to think twice before working with a buy-here, pay-here dealership. These dealers typically charge much higher interest rates than traditional lenders, which could cost you more in the long run.

Used-car retailers

Large used-car retailers like CarMax and DriveTime function like independent dealerships, but they’re different for a number of reasons. For example, CarMax calls for inspections of all of its cars for sale, and each comes with a free vehicle history report and safety recall report. DriveTime’s program is similar.

Just keep in mind that CarMax and DriveTime sticker prices aren’t negotiable — part of the haggle-free experience they offer.

Another positive: Salespeople are paid a flat-rate commission, so there’s little financial motivation for them to push you to finance in a certain way.

Private sellers

If you have a specific car model in mind, you might be considering buying from a private seller. You can easily find cars from private sellers online.

It’s widely understood that dealerships have certain profit expectations that may drive their prices up. Private sellers, on the other hand, negotiate according to their own wishes and needs — possibly making it more likely to buy for a lower price than a dealership might offer.

But you’ll need to do a significant amount of research to help make sure you’re getting a car that’s in good condition, and for a fair price.

Note that you may have little legal recourse with private sellers. Buying a car from a private party may be considered an “as-is” transaction, depending on your agreement with that private party. That means that if the car ends up breaking down a few weeks later, you’ll need to pay to fix it.

If the seller makes specific promises or guarantees, get it in writing and include it in your purchase agreement. That way, you may be able to take legal action if it turns out to be false.

Also, private sellers don’t partner with lenders, so you’ll likely need to find your own financing through a private party auto loan, or pay with cash or debit. Just keep in mind that lenders may typically charge higher interest rates on private party loans than they do for used cars purchased from a dealership.

Online sellers

Online sellers and auction sites allow you to compare several car listings without leaving the comfort of your home or office.

Though that may sound appealing, it’s not easy to know exactly what you’re getting just by looking at pictures. Some online sellers may offer a seven-day test drive to give you time to take the car to a mechanic and decide if you like it. But cycling through multiple test drives can be time-consuming. Also, not every online seller offers that opportunity.

Depending on the website, you may be able to finance directly with the online seller — or you might need to find your own financing. Some online sellers work with borrowers with low credit scores.

What’s the best place to buy a used car?

There are many places where you can get a used car, and no single source is objectively better than the rest — it depends on your situation.

New car dealerships and used car retailers that have access to several lenders can do the legwork for you and potentially provide competing offers — although these offers may have higher interest rates than you’d find with other lenders.

On the flip side, if you’re considering a seller that doesn’t provide financing, you’ll need to do your own auto loan shopping. This process can be time-consuming, but shopping around and getting preapproved could help you find the best offer for you.

Bottom line

Shopping for a used car can take time, especially if you’re considering your options from different types of sellers. But doing your research beforehand can help you find the right car for your needs at the right price.

If you have good or excellent credit, you might have an easier time getting approved for an auto loan with a low interest rate, regardless of which seller you buy from. But if your credit scores need some work, you may benefit more from a seller that specializes in working with people with less-than-stellar credit, or that has access to several financing options.

About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Credit Karma, you can find his wo… Read more.