3 Myths of Used-Car Buying Today

1. Myth: Buying used is safer, now that "cash for clunkers" has cleared out the jalopies.
Truth: Lemons are still out there -- and they're even more expensive.

The "cash for clunkers" program did take a lot of the lower-end vehicles off the market, but thanks to the recession, drivers have been less able to afford proper maintenance for their cars. That's led to more lemons on the market, including some with problems even a savvy buyer armed with a vehicle history report might miss. "We're not seeing good cars traded in," says LeeAnn Shattuck, a co-owner of negotiation and buying service Women's Automotive Solutions. "A lot of the used cars on the market have been neglected."

Worse, inflation has pushed up prices even on the crummy cars. Shattuck recently spent three months hunting for a basic 2005 Ford Focus for a client, what she says should be a $5,000 car - and was, two years ago. But even the "burned out, smoked out" Focuses showing up at auction sold for at least $6,000. When she found one in decent condition, it had 103,000 miles and cost $6,700.

2. Myth: It's cheaper to buy the same car used somewhere else than to buy out your lease.
Truth: Former lessees can save up to 15% over a comparable used car.

Financing companies have typically kept monthly lease payments low by inflating the value of a car when it's turned in - known as the residual value. But slowing sales of once-leased cars have forced dealers to be more realistic about those residuals, says Sergio Stiberman, the chief executive of LeaseTrader.com. At the same time, used car prices have climbed overall.

But because dealerships set the buy-out value at the time of the lease, drivers may now be able to buy the car they’re leasing for 12% to 15% less than its current market value.

3. Myth: Last year's model is 20% to 30% cheaper.
Truth: A used 2009 model may cost 10% more than a new 2010.

Another big factor: Financing rates. “The automakers are very interested in continuing to sell new vehicles,” he says. While dealers are offering financing rates of 3.9% and lower for new models (even for buyers with less-than-stellar credit), the average rate on a 48-month used car loan is 6.04%, according to Bankrate.com.

That means sometimes, it’s better to buy new. Smart Money