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The secret history of used cars -- and how to uncover it

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Gas-guzzlers, lemons and otherwise subpar vehicles lumber over American roads every day. Federal "Cash for Clunkers" guidelines required dealers to junk vehicles that were traded in under the stimulus program, just as most car insurance companies require wreckers to dispose of vehicles that have been declared "totaled." Most state motor vehicle departments dutifully record damaged status on title records, often preventing such vehicles from being resold. However, not every junked vehicle gets taken off the road, according to used-car industry insiders.

A "gray market" exists for vehicles with flood titles or salvage titles. Safety experts warn that cars with salvage titles could easily buckle in a crash if repaired incorrectly. Flood titled cars could fail or rust quickly, according to consumer advocates. Some buyers and sellers, especially in states with no formal inspection program, knowingly trade used cars with such titles because they're cheap. Many junked cars make their way onto used car lots and into classified ads, where they are sold as if nothing bad ever happened to them.

How cars get amnesia

Most of us buy cars only a few times in our lives. Therefore, it's easy to remain ignorant about the ways that unscrupulous sellers can try to trick us into believing that a formerly junked car is as good as new:

  • Title washing. Because some states track only certain kinds of damage, an unscrupulous seller can cycle cars through a series of titles that wash away a history of flood or salvage status.
  • Curb stoning. According to federal officials, some car dealers "give" junked or salvaged vehicles to salespeople who then advertise cut-rate "private party" sales.
  • Clean titling. As with title washing, a vehicle that has recently been relocated across state lines might not have a comprehensive title record. Honest sellers might disclose previous damage but are not always obligated to do so. In the worst cases, a stolen car can be assigned a clean title to a new owner by using a forged vehicle identification number (VIN).

Despite consumer-protection laws, fly-by-night sellers and cash sales can make it hard for buyers to find recourse after a used-car purchase turns out to be a bad deal. Buyers relying on government protection might be disappointed that gray-market dealers often operate one step ahead of state agencies.

How to uncover a car's hidden history

Fortunately for car buyers, technology and the marketplace move more quickly than state laws. Independent title-research companies and consumer-advocacy organizations can help you learn the real history of a used vehicle.

  • Carfax. One of the best known names in automotive research, Carfax uses VINs and public records to maintain comprehensive vehicle profiles.
  • AutoCheck. Operated by Experian, one of the country's largest credit bureaus, AutoCheck matches state records to purchasing histories and service notes.
  • CarChex. A network of mechanics offers affordable, targeted inspections of used vehicles to uncover flood damage, evidence of past accidents and other abuse. You can review a car's previous inspection or request a fresh look at a prospective purchase.
  • National Insurance Crime Bureau (NICB). NICB maintains records of auto thefts and false vehicle identification numbers. Vehicles on the NICB's watch lists also include damaged vehicles stolen from junkyards before they could be destroyed.

Edie Hirtenstein, senior product manager for AutoCheck, emphasizes the importance of thorough research before buying a used car. "Without purchasing and reviewing a vehicle-history report," Hirtenstein says, "a used-car buyer may unknowingly buy an unsafe vehicle that had been in an accident, possibly rebuilt due to problems, or ordered to be scrapped."

Even if a once-damaged car looks good and operates safely, purchasing a vehicle with a flood or salvage title can lead to major problems with state inspectors, law enforcement officers and car insurance companies. In many states, the discovery of damage evidence can require you to take your car off the road and pay significant fines. Because no single group or database can access records from all 50 states, most car-buying experts recommend checking with at least two of these groups.

Car insurance companies wary of flood and salvage titled cars

Protect yourself from the "gray market"

In addition to checking with two or more title-research companies, automotive industry experts offer these buying tips:

Carefully examine classic cars or any vehicles built before 1981. While announcing the results of an auto fraud investigation, Texas state police reminded consumers that consistent VINs didn't become an industry standard until the start of the Reagan Administration. Classic-car buyers should look for signs of VIN tampering, such as scrapes around the VIN plate or a vehicle identification number that doesn't match up with similar models.

Request an in-person, physical inspection of any used vehicle. "Consumers should always inspect and test-drive the vehicle in person if at all possible," says AutoCheck's Hirtenstein. "They should also have the vehicle inspected by a licensed mechanic." A physical inspection by someone who specializes in uncovering flood or accident damage can highlight problems that standard VIN checks could miss.

If it seems too good to be true, sleep on it. NICB warns consumers that a low price on Craigslist or eBay that comes with a compelling sob story could be the work of a seller involved in curb stoning or title washing.

Most used vehicles on the market today are safe, reliable, economical buys. Taking extra precautions will help you avoid getting ripped off while discouraging crooks and thieves from operating in your area.

Nicole Farr, spokesperson for the Arizona Insurance Council, notes that insurance coverage on vehicles with salvage or flood titles can vary from insurer to insurer and advises that consumers check with an agent or carrier before they knowingly buy a car with a flood or salvage title history.

"Some insurers will not write collision or comprehensive coverage on a vehicle with a salvage or flood title but may write liability coverage," Farr says. "If a vehicle with a salvage title has not been repaired, it is unlikely that the consumer will be able to obtain coverage at all."

Because relocating a car to a "clean title" state can erase both the positive and the negative information on the vehicle's history, insurers rely on third-party registration-tracking services and physical vehicle inspections to determine eligibility for coverage.

Specialized car insurance for damaged vehicles

Insurance company representatives who declined to be named reveal that a handful of insurance companies have opened special departments staffed by experienced title investigators. At those insurers, researchers can more carefully review applications for coverage to determine whether a clean-titled car has been successfully repaired or whether it has been involved in a title-washing operation.

At companies that write liability coverage for vehicles with salvage titles, premiums tend to be about the same as those for similar used vehicles. Farr says, "If a consumer is able to obtain coverage, the [liability] premium is typically not affected, especially if the vehicle has undergone extensive repairs." However, according to insurance industry sources, if an underwriter later discovers fraudulent information on a title, the insurer can cancel your insurance policy and report you to law enforcement officials.

If you want collision coverage too, be prepared to pay a higher premium. "Some insurers offer a nonstandard auto policy for physical damage in this case," Farr says. Nonstandard policies indicate higher risk and are accordingly more expensive. "It is likely that the insurer will conduct an investigation on the vehicle and any repairs to see if the vehicle is insurable."

If you unwittingly buy a gray-market vehicle and its history is revealed, you might be flagged as a high-risk driver, causing your premiums to skyrocket regardless of insurer. However, if you tried to deliberately sneak a salvage titled car onto your policy, state insurance officials could charge you with fraud.

About the author: Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.

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