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Buying Former Rental Cars: Good Deal or Big Headache?

Car rental companies owned nearly 2 million in 2013, and most of those rentals will be resold on the consumer market. Some rental companies have retail divisions that sell former rentals directly to consumers. Many of those cars can be a good deal, and many rental companies offer a decent warranty.

But, most former rental cars, including many that are in questionable condition, are sold at auction, and they wind up on dealership lots. These cars have a significantly lower value than other cars. The main reason that rental cars are worth less than other cars is because of the "moral hazard", which is the tendency for people to take risks because of the lack of consequences. In other words, because some drivers of rental cars do not have a long-term interest in the cars, they may not drive them as carefully as they would drive their own car.

For example, someone on vacation may not be as concerned about taking their rental car off road in order to reach a hiking trail as they might be with their own car. And, since this person is on vacation, he might have an extra drink or two and drive the car over a curb. If the vacationer is worried about getting to the airport on time, he or she may not think about the long-term impact of aggressive acceleration and braking on the ride back to the dealership. A typical used car will have dozens, perhaps hundreds, of different drivers - and some of them may not be particularly concerned about the long-term condition of the car.

The poor reputation of rental vehicles is memorably reflected in our popular culture in the television series Seinfeld. In one episode, Jerry Seinfeld learns that the rental company has not honored his reservation for a larger car and he has to accept a compact car instead. The rental company employee asks if he wants the optional insurance coverage, and Seinfeld responds "Yes, because I'm going to beat the hell out of this car." See http://yadayadayadaecon.com/clip/23/. One study found that rental vehicles depreciate by 10-13% more each year than other comparable used cars, mostly because of the moral hazard. So, if a $25,000 new car is worth $19,000 after 3 years, a comparable rental car might be worth only about $17,200.

Some consumers will think that it is a good deal to get the car that cheaply. But, although dealerships might save when buying rentals at auction, many do not pass the savings on to the consumer. We have seen many rental cars sell at or even above "book values."

Worse yet, although Connecticut law requires dealerships to disclose rental histories in any advertisements for a car, many dealerships ignore this requirement. Some dealerships will even lie to consumers about a former rental car's history. For example, many of our clients report that dealers told them that former rentals were previously owned and driven by dealership customers who traded them in for a newer model. Consumers can protect against this scam by checking Carfax or Autocheck reports, which include rental histories.

Our advice: A savvy consumer can get a good deal on a former rental. It is especially important, however, to get an independent inspection in order to avoid serious problems. And, if a dealership lied about a vehicle's history, then it would be a good idea to speak with a lawyer experienced in handling auto dealer fraud cases.

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