Why is buying a used car so miserable?

Why is buying a used car so miserable?

Lesson summary

Hi there, welcome to Plain English lesson number 311. I’m Jeff; JR is the producer; and you can find this full lesson online at PlainEnglish.com/311.

A new generation of startups is taking aim at a massive market that is ripe for disruption: the used-car market. Kavak in Mexico, Cazoo in the UK, Volanty in Brazil, and Carvana in the United States are all trying to take one of the worst consumer experiences and make it, if not fun, then at least tolerable. On today’s lesson, we’ll talk about why buying a used car is so miserable. Next Thursday, I’ll tell you more about the companies that are trying to take the pain out of the process.

The perils of buying a used car

Have you ever bought a used car? If so, then you know the stress and worry that comes from paying so much money for a car that—let’s face it—might be problematic.

Let’s start with a basic question: Why is buying a used-car so miserable? The answer lies in an economic concept called “asymmetric information.” In many markets, the buyer and seller have a similar amount of information about a product—not exactly the same, but similar. When you buy a new mobile phone at an electronics store, for example, both you and the store know all about the phone. The specifications are printed on the box, the manufacturer has a reputation, the price for the identical phone is openly advertised at other stores, and there are online reviews giving information about the phone’s quality and features. You know all this as a consumer; the store knows that as a seller. There aren’t any secrets. The store offers it for a price; if you accept the price, you buy it. If, in the unlikely scenario the phone is defective, you can return it to the store or to the manufacturer for a replacement.

That’s not how it works with used cars. In a market for used cars, the seller has more information than the buyer. Why is that? Well, the value of a used car is related to its condition. How has the car been treated? What parts have failed? How well has the owner maintained it? Has it been in any bad crashes? These are things the seller knows and the buyer does not know. In a transaction, information is power—and the seller has all the information.

Can the seller offer any protection to the buyer? Often, no. Although the carmaker may have a brand reputation for quality, the used-car seller is often an individual. Once you buy the car, you can’t take it back and ask for a refund and you can’t leave a negative online review for an individual.

Used-car buyers can ask to have the vehicle inspected by a mechanic. This is always a good idea. However, it has its limitations. Even a thorough inspection cannot uncover all the potential problems that can arise with a used car.

What’s more, a vehicle is one of the biggest purchases a typical person makes. The stakes are high for the buyer. If you wind up with a problematic used car, you can spend a large part of your budget fixing it. As a buyer, you are facing a high-risk transaction with little good information and no recourse if something goes wrong.

And you often have to pay in cash. Many people find it difficult to pay the entire price of a car upfront, so they would like to get a bank loan. In the US, a bank loan for a used car is more expensive than a loan for a new car. In other words, you will pay a much higher interest rate for a used car, and some buyers may find it difficult to get approved for a loan.

This is not surprising. Any bank that lends on vehicles relies on the quality of the vehicle as security for the loan. But if there are so many risks to the quality of the vehicle, the loan is less secure, so banks naturally charge a higher interest rate. In many developing countries, banks don’t even offer loans on used cars.

Can this story get any worse? Yes, it can. We already learned that buyers and sellers have asymmetric information. Any buyer has to assume there is a chance that a used car is problematic. Therefore, a smart buyer will offer a little less than the full value of a car, knowing that there’s some probability that it’s going to be a problem.

Now put yourself in the shoes of a seller of a good car. You’ve taken good care of your car. You haven’t been in any accidents. You’ve had all your required maintenance. But none of the buyers believe you! You don’t have any way of proving that your car is good, so everyone offers you a price that you think is too low. Over a large market, some owners of good cars will simply not accept the lower price, so they keep their cars instead; meanwhile, the owners of the worst cars are all too happy to offer their cars in the market (and hide the defects).

This is a classic example of a market failure. Buyers want to buy and sellers want to sell, but because of the gap in information, they can’t come together on price.

There are consequences. For one, many people who really want—and can only afford—a used car actually buy new ones because they can’t get loans for used cars. For another, sellers often have to accept a too-low price for a car in good condition.

Some dealerships try to solve this problem by offering “certified” used cars, where the dealership certifies that it has inspected the car and offers a guarantee. This is how I bought a used car many years ago and it does provide some peace of mind to the buyer. But the dealerships still have a less-than-stellar reputation for honesty and transparency.

Goodbye old friend…

I bought my 1998 Toyota Corolla in 2002 as a certified used car from a dealership and I must say it was a good experience. When I sold that car 12 years later, I sold it to an individual. I definitely had to accept a low value for the sale. Mind you, it wasn’t in perfect condition. It was in good condition, but by that time, it was 16 years old. It ran fine; I only sold it because I didn’t need a car at that time. But I had to accept a much lower price than I think it was worth since everyone assumed a 16-year-old car was a piece of junk. I loved it, though. It was my piece of junk. I’ll never forget watching the new owner tow it away; it was like saying one last goodbye to an old friend.