'88 was a good year, wasn't it?
The questions that come to my mind are:
Why is the 420 only $5000? Why is he selling it? I'd certainly ask about the timing chain, if you can't get history on it, you should at the very least, pull the valve cover and check the rails and chain.
The first thing that you have to keep reminding yourself when buying a used car is that the overwhelming majority of people sell their car because something is wrong with it. They'd rather sell it than deal with it (or keep dealing with it as the case may be).
The 560 is at the top end of the price range, but it has several good things going for it. Your also paying for the records and the fact that the shop has probably already gone over it. See what they've done recently for a possible clue as to why the previous owner decided to sell it.
Budget an extra $2-3k for repairs in the first year, especially for the 420 since you have no records. But it's not like the 560 won't need anything done to it.
That said, you should also understand the differences in the two. The 560 has a different rear end: automatic level control and a limited-slip differential. The 560 also has several standard features that were optional on the 420, like sunroof, electric rear seat, heated seats (front and rear). It will also have a few features not available on the 420, like leather steering wheel, removable rear foot rests, and the rear suspension mentioned earlier. And then of course, is the more powerful engine.
All else being equal (meaning that an independent mechanic approves both of them), I'd probably take a chance on the 420 because of the huge price difference. Fully expecting to sink half of that difference into the car during the first year.
1988 560SL Black/Palomino
1988 300SEL Black Pearl/Burgandy
1984 500SEC Anthracite Grey/Palomino