Meet the New Used-Car Buyer

Hard times have turned a lot of new-car buyers into used-car buyers. Two different groups switched, some willingly, some not.

Some did so, by choice, because the economy did a number on them. Their earning power diminished, housing values declined and bills mounted. They could no longer afford a new car. So, if they must buy, they now buy used.

But the second group that went from new- to used-car consumerism, consists of people who should not have bought new cars in the first place.

Pre-recession easy credit tempted them to buy cars exceeding their budgets. It was the “buy now, worry later” plan. A lot of consumers, who should have been watching their pennies, instead drove away from dealerships in $30,000 new vehicles they couldn’t afford. Loans went bad, repo rates hit record levels and credit ratings got maimed.

It took a national economic disaster for many lenders, dealers and consumers to regain their senses. That is why many members of the financially strapped set, forced into a reality check, now think that dinged-up four-year-old Chevy Cobalt on the used-car lot doesn't look so bad after all.

But it wasn’t just their personal decisions that caused them to wise up. Lenders, who reeled in the easy credit and 100% advances in 2008, now wield much power over who buys what car. Auto lending’s new rules of engagement require shoppers to select vehicles within their means and pony up a 20% down payment. Otherwise, no loan. Dealers got that message, too, and started steering customers to the "right" cars. Often, that meant a first-time visit to the used-car lot.

“If the guy can’t afford the automobile, don’t put him in it,” Peter Biscardi, president of National Auto Care, a vehicle service-contract firm, says at the 2010 F&I Management and Technology conference in Las Vegas.

Smart dealers have figured out how to sell used cars. Sure, there are the needed business disciplines, such as stocking right, turning inventory often and wholesaling units that linger unsold after 60 days.

But a successful used-car department also hits the right emotional buttons, especially when it comes to customer treatment.

Whether someone is buying a shiny new car that just came off the assembly line or a vehicle that has been around the block more than a few times, “to that person, it is still a ‘new’ car,” says Dave Duncan, senior vice president of Safe-Guard Products International, an auto finance and insurance firm.

That’s why many dealers are giving used-car shoppers the same treatment afforded those folks browsing in the new-car showroom, although the latter's numbers have thinned.

Some franchised car dealers now sell 80 used vehicles to every 20 new, Duncan says.

Last year, when new-car sales barely edged past the 10-million unit mark (compared with 16.4 million in 2007), some dealers wouldn’t have survived without their used-car operations.

“The pre-owned market rescued a lot of dealers,” Duncan says.

Yet, used cars can challenge other dealership operations, and not just the new-car department. For example, some lenders are reluctant to advance loans for F&I services and aftermarket products for older cars, especially ones priced below $10,000.

“If you are looking at aftermarket products, lenders have dialed back, even though used cars need those more than new cars in many cases,” says Adam Pope, a vice president at Wells Fargo Dealer Services.

On the one hand, it’s unfortunate the recession has pushed a lot of former new-car consumers into the used-car market.

But some people, who were financially challenged well before hard times hit, never belonged in the new-car realm in the first place. They delusionally roamed that land.

They have made the necessary switch to used, with some outside help, such as banks with stricter lending standards and dealers who know how to structure a deal that will get financed. Before, too many lenders and dealers were enabling those consumers to make folly-filled purchase decisions.

It has been a hard recessionary lesson for all. But, says Duncan, “we have learned how to live with less.”