How Does Auction Car Buying Work?

Buying a car at an auction offers the opportunity of getting a really good deal, as long as you don't mind taking a bit of risk. Typically, cars sold at auction have no warranty or guarantee attached to them, meaning that if you make a mistake and buy a piece of junk, it's your piece of junk to deal with.

Auction Bidding

Different car auctions have rules that may vary to some extent, but they all work more or less the same. Cars are either brought up to the podium or pointed out individually, and the auctioneer takes bids from the floor. Whoever is willing to pay the most for the vehicle buys the vehicle. Buyers are sometimes required to pay for the vehicle on the spot, while other auction houses require a down payment followed by full payment within a specified amount of time. Owners of the cars are allowed to impose minimum bids to protect themselves from the risk of their cars selling for too little.

Titles

Ask about the title before you buy a car at auction. A car without a title can be bought for parts, but shouldn't be bought with the expectation of registering it and driving it. While it is possible to replace titles, the process is cumbersome and can be expensive; with the number of cars available on the market, it isn't worth the trouble. If you are dealing with an auction house that allows you to inspect the cars in the days leading up to the auction, go there during the inspection and ask about the titles of any vehicles in which you have an interest.

The Vehicle Identification Number

When you look at a car you are thinking about buying, note the Vehicle Identification Number. This can be seen on a plate behind the windshield attached to the dashboard on the driver's side. You can use the VIN to learn more about the car by inquiring with the Department of Motor Vehicles or by utilizing the services of one of a number of websites that offer this service for a fee. You should be able to learn about how many people have owned the car, and possibly something about its service record.

Buyer Beware

If you go to an auction with realistic expectations, you will be bound to have a better experience. While you can get good deals at an auction, don't expect to buy a two-year old vehicle for $200. Auctions are full of car dealers who know the value of cars. They will be bidding at below-retail prices because they are trying to make a profit, but they won't be letting valuable cars get away for nothing. If you buy a car for almost no money when you're surrounded by car dealers, there's probably a reason for that.

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Can You Pick How Long Your Auto Loan Lasts?

Banks differ in the lending process; many offer a 24- to 72-month term for auto loans, while some offer more. Although you can apply for your preferred loan term, consider your budget and rate differences based on term length before you apply. Also consider the information the bank uses to determine your approved loan term.

Budgeting

To decide how long of a term to apply for, consider your overall vehicle price and budget. Include your taxes and fees; call your state's motor vehicle department for your tax rate and fee requirements. Edmunds.com offers a variety of auto loan calculators that allow you to price a vehicle based on an affordable monthly payment, term options and average interest rates. Using an auto loan calculator initially helps to determine affordability and price range before applying for a pre-approval or pursuing a vehicle.

Rate Considerations

Manufacturers often offer low-rate financing for new vehicles; however, the monthly payments for these offers are not always affordable without a significant down payment. For example, you may find 0 percent financing for a new car, but only for a 36-month term. The car payment for a $20,000 vehicle for 36 months at 0 percent (not including additional purchase fees and tax) is $555 per month. Rates from 24 to 60 months remain consistent for most banks, while longer terms warrant higher rates. Call a bank ahead of time to find out about rate differences.

Term Approval Factors

Banks may approve your loan term or decline it based on your debt-to-income ratio. You may feel you can afford a $555 car payment, but the bank ultimately determines if you can or not. Expect your lender to view your credit report; it uses your debts and monthly payments to determine your debt-to-income ratio. This may be inaccurate if you are the sole person on a mortgage or co-signed a car loan, as the debt appears to be your responsibility. The lender views your most recent pay-stub to determine your gross annual income. A lender can require that you take out a longer term to lower your payment, unless you use a co-signer.

Preapproval Benefits

Once you determine your budget, an affordable term and vehicle price, apply to a lender for a pre-approval. Applying for a pre-approval ensures your approved rate and term so you can shop accordingly. Additionally, the lender will let you know if you need a down payment or if restrictions, such as term, maximum payment or vehicle value, affect your loan approval. Obtaining a pre-approval allows you to adjust your price range so you can stick to your budget.

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How to Sell a Vehicle You Still Owe Money On

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Financial Concerns When Buying a Car

If you want to purchase a vehicle, but are unsure about your credit, financing options or budget, take the time to set your budget and method of payment before shopping for a car. This way, you can shop by your budget to purchase a car you can comfortably afford.

Setting a Budget

To avoid various financial issues that can result from an unorganized car purchase, set a budget for yourself and stick to it while shopping. Go over your monthly bills to determine how much money you have left over to comfortably spend on a vehicle payment and various costs of vehicle ownership, such as maintenance, insurance and gas costs. The money you have left over each month should not be used for a car payment alone, but the total cost of car ownership.

Extra Vehicle Costs

Finance or lease contracts require collision insurance on the car during the contract term. Collision coverage is expensive compared to state-required liability policies, so budget accordingly. Obtain insurance costs before you purchase a car. Depending on your driving and driver's license history, your monthly insurance payment can equal or exceed the cost of a monthly finance payment. Also check the cost of maintenance by contacting a service shop to obtain pricing of the vehicle's maintenance schedule. Check fuel economy at Fueleconomy.gov to figure out the price of fuel costs.

Monthly Loan or Lease Payment

If you have concerns about your interest rate or other loan issues, obtain a pre-approval before you choose your car. If your auto loan provider requires a down payment or restricts your term, you'll be well prepared to adjust your price range before shopping. Once you're pre-approved, you'll know your interest rate, which affects your monthly loan payment. A lending representative can help you to determine a price range based on the payment you can afford. If you're declined for a loan pre-approval, you can take the time you need to find a co-signer or fix your credit before you pursue a car purchase.

Warranty

Don't limit your car options because of a vehicle warranty. While purchasing a vehicle still under factory warranty may seem like a money-saving option, you can also buy an extended warranty for vehicles outside of the factory warranty period. Dealerships, insurance companies and aftermarket providers sell warranty coverage, which may open up your vehicle choices. For example, a vehicle still under factory warranty coverage may cost $15,000, while a higher-mileage option may cost you $12,000 when including extended warranty coverage.

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Can I Give My Car Back to the Creditor?

Giving your car back to the creditor is known as repossession. Repossession significantly damages your credit and should be avoided. Other options exist that may prevent you from having to return your car. Learn about the process, effects and other options before you decide if you should give your car back.

Types

The two types or repossession are voluntary and involuntary. An involuntary repossession occurs when the bank hires a towing company to come and collect your car for return when payments are late or behind. A voluntary repossession occurs when you decide you will no longer pay for the car as stated in your contract and you make arrangements to return the car to the creditor.

Significance

A voluntary and involuntary repossession have the same impact on your credit report. Your credit score will drop significantly and you can expect the repossession to remain on your credit for at least seven years. While you can still secure a loan after enough time has passed with your repossession, expect a higher interest rate while the mark remains on your credit. Rebuilding your credit after a repossession is difficult and can cost you thousands of dollars in interest payments if you do secure a future line of credit.

Warning

A repossession does not mean you can return your vehicle to the bank and go on payment-free. You are responsible for paying the loan amount specified in your contract. Once the vehicle has been resold by the bank, any money lost is due by you at some point. If your bank offers to settle the loan and allows you to pay less than the total amount owed, the canceled part of the debt is reported to the IRS (Internal Revenue Service). The IRS considers the canceled debt a gift of sorts; you will have to pay taxes on the amount. If you ignore attempts by the bank to collect payment or arrange for a payment plan, the bank is within its legal rights to sue you, enforce a judgment against you and garnish your wages.

Other Options

Avoid repossession if you can. Call your lender; it might have programs to help you, such as payment deferment, loan extension or a temporary reduction in payment. You might be able to sell your car on your own. Once your bank knows of payment problems, ask for the vehicle's payoff amount if you want to try to sell it privately. If you make a profit beyond the payoff amount, you can keep it. If you sell for less, you must come up with the remaining money due to satisfy the loan. Explore your options before returning your car to the creditor.

Process

Once your vehicle is returned to the creditor, you'll get a letter within a few weeks that states the amount due to get your car back before it is sold by the bank. The amount includes any past due payments, bank fees and tow fees if your vehicle was repossessed by a tow company. You don't have to answer the letter. Once the vehicle is sold at auction, you'll receive another letter that states the selling price and whether or not a profit was made. The profit will be returned to you, but you are responsible for any money due. The bank will contact you soon after the auction to discuss payment arrangements. The bank may take you to court at any time after bank efforts for payment have been ignored.

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Do You Have to Buy the Car After You Paid the Deposit?

You can back out of a car deal after you've paid a deposit. Depending on the agreement you made with the dealer, it may not want to refund your money. Do not leave a deposit on a vehicle unless you intend to buy it. Otherwise, if you want to hold the car, make sure the dealer notes that the deposit is refundable.

Your Receipt

Prevent any hassle at the dealership by signing a receipt that truly reflects your purchase decision. For example, if you aren't sure you want to buy the vehicle but are offered a chance to hold it by leaving a small deposit, make sure the dealer notes this on the receipt. The dealer should note that your deposit is refundable based on your ultimate decision. If you intend to purchase the car and leave a deposit to prove your interest, read your receipt. Most states don't allow a dealer to keep a deposit unless you actually buy the car, which involves signing additional paperwork beyond the receipt.

Additional Paperwork

If you left a deposit and only signed a receipt, you did not buy the car. If you signed additional paperwork, you may have bought the car, although unless you're driving it, you can probably back out of the deal. Go over your paperwork to review the documents you've signed. If you agreed to an end-of-month deal and signed loan contracts and motor vehicle paperwork but didn't take the car, your dealer probably did not process your paperwork and you can still cancel the purchase.

If You Took the Vehicle

Most dealerships require a deposit if you want to purchase a vehicle but can't do so that day. For example, some customers may have a loan approval but need to pick up the check, or they may be waiting for an insurance settlement to provide a down payment. If you leave a deposit, take the vehicle and change your mind before completing the paperwork, you do not have to buy the car. In this situation, you'll likely lose a portion of your deposit. The dealer can charge you for putting mileage on the vehicle's odometer and for its cleaning fees.

Pursuing the Return of Your Deposit

If your dealer refuses to return your deposit, call the proper authorities to initiate a complaint. Before initiating the complaint, let the dealer know you plan to do so. Many dealers would prefer to avoid this. Call your state attorney general's office or the motor vehicles department to begin the process. In most cases, the dealer will receive a phone call. The proper state authorities can help you back out of a car deal or get your deposit back, if you are eligible.

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Can I Buy Back a Totaled Car From the Lien Holder?

Depending on the extent of the damage and your vehicle's value, a car accident could result in your insurance company "totaling" the car. Insurance companies typically total out vehicles that would cost more to repair than to replace. In the case of older cars or cheaper vehicle models, your insurance company could total your car when the vehicle itself sustained minor damage and is still functional. Should this occur, you can negotiate with your insurance provider and attempt to buy back your car.

Legal Owner

When an insurance company totals your car, the company sends you a check for the car's estimated value minus any wear and tear or previous damage. If you still owe money to your auto lender, it's your responsibility to use the insurance money to pay off the damaged vehicle. Unfortunately, paying off the car doesn't mean that you'll automatically get your damaged vehicle back. The lien holder has the title to your car, but the insurance company has the actual vehicle.

Insurance Company Negotiations

If you want to keep your car after an accident rather than taking the money the insurance company provides to pay off your loan or put a down payment on a new car, contact your insurance provider as soon as possible and explain your desire to keep your car. The insurance company may sell you your vehicle for the price it would have otherwise charged a salvage yard. Although many consumers have successfully bought back their totaled vehicles from the insurance company, your insurance provider has the right to refuse to sell you your car back after an accident.

Keeping the Car

In order to avoid the possibility that your insurance company will refuse your request to buy back your car, consider working with your insurance provider to avoid having your vehicle classified as a total loss. Insurance company policies vary, but if you find a repair shop that can fix your car for less than the replacement value, your insurance company may rethink classifying the vehicle as a loss. If you insure all of your vehicles and your home with the same insurance company, threatening to switch providers could give your insurance company the incentive it needs to work with you and repair your car, rather than totaling it.

Buying at Auction

If your insurance company has already totaled your car and refuses to sell it to you, it will often run the car through an auction. Consumers and car dealers can then bid on the car in an attempt to purchase it. Ask your insurance provider where and when it plans to auction the car. Keep in mind, however, that while no law prevents you from buying back your previously totaled car at auction, not all car auctions are open to the public. Some auctions are for dealers only. Should you succeed in purchasing your car at auction, your insurance company is not responsible for the vehicle's repair costs. You must bear the burden of repairs on your own.

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