The Hindu Business Line : Getting true value from used cars

WANT to buy a car and still be left with cash to deck it up with that Blaupunkt CD changer and alloy wheels that your neighbour has been flaunting? Then head to the nearest company-owned used-car dealer.

Smart car buying really begins with scouring the used-car market for the best bargains. With the myriad new models and variants launched in every car segment in the last five years, out there is a wide range of vehicles to suit every taste and pocket. Buying a used vehicle can also potentially help the buyer leapfrog the car segment by choosing a larger, more expensive car.

With more manufacturers and more choices in new cars, age is having an even greater impact on used-car prices, pushing them down like never before.

There has been no better time to shop for used cars than now. But there is as much nuance as risks to buying used cars. A check on the following aspects should help you navigate this maze of potholes.

Used-car market now

The pre-owned, or used, car market continues to be fragmented and unorganised. Despite the rapid growth of the organised used-car dealers and manufacturer-owned pre-owned car outlets, the market for old vehicles continues to be dominated by individuals trying to sell and buy cars.

However, the pre-owned vehicles market is likely to mature as the car ownership base grows. The scorching pace at which the new car market has grown this fiscal and the growth projections for the next are indicators of the potential growth of the used-car market in the next few years.

Unlike in the past (the pre-liberalisation era), the urge to replace one's car more often and upgrade to a four-wheeler from a two-wheeler are factors that will drive the growth of the used car market. Despite a better ownership experience with the new breed of cars now available, car owners will be keen to switch to a new vehicle what with the constantly expanding choices.

Further, in addition to the number of two-wheeler owners who are looking to buy a car, the number of existing small-car owners hoping to upgrade to a three-box (sedan) car will progressively drive used-car sales in the two critical B and C segments. The C segment (particularly entry-level) used car sales are expected to witness the kind of sales boom that B segment used cars saw over the past two years.

Organised market imminent

Company-owned used-car outlet and increased demand for certified used cars are likely to become the dominant themes. It is evident, from the surge in the number of car manufacturers entering the pre-owned cars business, that the used car market is getting increasingly attractive, both in terms of its potential to generate sales volumes and higher margins. For the car-maker, the organised used-car business also throws up the possibility of better using the dealer-cum-service outlet's vehicle servicing capacity.

The manufacturer-sponsored pre-owned car business has seen entrants such as the car market leader Maruti Udyog, with its Maruti True Value brand, Ford India, with its Ford Assured, and Hyundai with its Hyundai Exchange brand. After starting out in a small way amongst their dealerships, many of these manufacturers are now actively involved in streamlining their used-car operations.

Better place to shop

For the used-car buyer, the manufacturer-sponsored outlet is much better place to go shopping. In addition to being able to buy a certified car at a fair price, these outlets will also ensure that the paper work is right, throw in a couple of free services, offer an extension of warranty at times, help with the transfer of the vehicle's ownership and complete formalities at the regional transport office (RTO).

A certified used car, including the charges for inspection and certification, is usually priced 5-10 per cent more than a similar used car in the unorganised segment. Despite the higher cost, for the average first-time car buyer, a certified car is the better option. In the absence of any organised car history services being offered by independent consultants and a more transparent vehicle insurance system, getting background information about the previous owner and the used-car is extremely difficult for buyers looking for a deal.

Used-car buyer behaviour

However, used-car buyers continue to be hesitant to shop for their cars at manufacturer-sponsored outlets.

A recent study about the resale value of cars in India conducted by NFO Automotive, part of the NFO WorldGroup, threw up interesting points. Some of the key findings of NFO Automotive's inaugural 2003 India Used-Car Buyer Study (UCBS) were:

Very few Indian buyers pay for an expert to evaluate the vehicles; most rely on their personal mechanics and friends.

Low reliance on vehicle financing at 20 per cent compared to nearly 65 to 70 per cent for new car buyers.

Word-of-mouth, classified advertisements, and used-car brokers are the key sources of deciding brand and price, with the Internet and manufacturer-backed sources playing only a limited role.

Lack of shopping - over 60 per cent owners are pre-determined in their used-car model choice and do not shop around.

The age of car (model year) and kilometers on the vehicle are the top evaluation criteria. The degree of importance attached to accident history, ownership transfers, and service/ parts availability is relatively lower.

In addition to the depreciation index, the NFO study analysed used-car owner evaluations in the key areas of satisfaction, product durability, after-sales service, cost-of-ownership, and brand image.

Used-car finance

More than two-thirds of all new cars sold are part financed through auto loans. Intense competition, reliable retailing channels and cross-subsidisation of the financier's interest costs by the vehicle manufacturer have brought down interest rates for new cars dramatically during the last two years. However, the interest rates for financing used-cars continues to be uncompetitive.

The interest rate for financing of new cars ranges between 7 per cent and 11 per cent on a reducing balance basis depending on manufacturer and model. On the other hand, interest rates on used cars range from 14 to 19 per cent, close to the rates for a personal loan.

The interest rates for certified cars being offered by manufacturer-sponsored outlets are usually lower than financing for used-cars bought from the open market.

This again is largely due to the higher reliability factor and, in some cases, to some kind of preferred financing arrangement the manufacturer has with the financier.

More reliable experience

Overall, the process of buying a used-car can be fruitful and risk-free, if you take the necessary precautions (refer accompanying story) and opt for buying a certified car. With the increased presence of the organised used-car dealer, the rate of growth in the pre-owned car market is likely to outstrip new car sales.

Though a more market-friendly interest rate, which is on a par with the prevailing rates for new cars, will continue to elude used-car financing, at least the differential between the two rates are expected to gradually narrow. This is likely to happen after the reliability factor goes up in the used- car market.

Tip sheet

Buyers

Check out these following aspects before closing a deal:

If you are on a tight budget and plan to buy an entry-level car in any of the segments, a used-car may not always be the best option to upgrade to the higher segment. Instead, you may opt for a new car in the lower segment.

If you do decide to upgrade to a bigger, higher segment used-car, then you have to be ready for accelerated depreciation post-purchase and uncompetitive interest rates, if you are part financing the buy.

It is better to go in for a certified used-car rather than trusting the judgment of your neighbourhood mechanic.

Check the used-car seller's insurance records for the car's claims (accident) history, if any.

Avoid cars that have had more than one previous owner.

A used-car owner who has been meticulous with the car's paper work and maintains an exhaustive log of repairs, oil change, service will, in all probability, have been meticulous with the car too.

If you are confident of about your own assessment skills and feel that you can do the job of scouting for a used-car better, then the pointers given in the box alongside may be of help.

Sellers

Here are a few pointers that can be of use when you decide to sell your car:

Selling your car through a used-car dealer may be a better option than attempting it yourself, despite the commission that you have to fork out to the dealer.

It will also still be worth it, especially if your car is more than three/four years old, to get the vehicle used-car certified by an authorised car dealer or certifying agency.

Passenger car manufacturers are nowadays offering attractive loyalty bonuses and exchange plansrogrammes for existing car owners to upgrade or switch to a new car. But if your car is not more than three years old, it may still fetch a better price in the open market. So, sell that car yourself and talk down the price of the new one with the dealer. You will win both ways.

Go to the used-car market with realistic expectations. Remember if your car has had crashes in the past, no matter how well it has been restored, its resale value will have dropped never be the same.

If you have avoided frivolous repairs and the subsequent insurance claims from your auto insurance company, or if your car has had an accident-free history, then, do not forget to transfer the no-claims bonus from the used car's insurance policy to the insurance cover for the new car. You can transfer almost half of your no-claims bonus and help shave off a large chunk of the premium payable on the new car.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Quiz

Union Bank of India's bill payment service

Tata Indicom's CUG facility

MTNL's new WLL services

Equity outlook for 2004: Top fund managers cautiously exuberant

2003: `Dividend dogs' beat active funds

Hold on to those PSU stocks

Software sector in 2004 — Gung-ho, but check the pulse

Index funds: Still the poor cousins

Templeton India Growth: Invest

Alliance Equity: Book profits partially