Used cars have historically been a smart alternative for those in need of transportation during an economic downturn. They don't depreciate as much as new cars and are less likely to overburden a buyer with a large loan at a time of uncertainty.
Over the past four years, inventory of vehicles returned to dealerships after being leased has increased by 33%, according to Edmunds data. This stands in contrast to new car inventory, which has been constrained by the slow reopening of factories amid the coronavirus pandemic.
Many of these used vehicles, which are typically 2 to 3 years old, will be reconditioned by dealerships into certified pre-owned vehicles. These CPO vehicles present a choice opportunity for shoppers who can take advantage of record-low interest rates and greater savings than if they were to buy new.
In fact, the price gap between new and used vehicles has never been greater. On average it costs about $15,471 less to buy a 3-year-old used vehicle than a new one. For example, the average savings on a 3-year-old Honda Civic is $6,670, according to Edmunds data, while buying a 3-year-old Ford Explorer saves you $21,098 on average.
Why buy a CPO vehicle as opposed to any used vehicle? A CPO vehicle is typically newer and in better shape than other used vehicles on the dealership lot. It has been given a more thorough inspection and reconditioned if any items needed to be replaced. If the vehicle has any of its factory warranty remaining, that carries over and an additional one to two years of a limited warranty is provided as well. Finally, it comes with other benefits, such as roadside assistance or the ability to borrow a loaner vehicle if yours is in need of repairs.
In recent months, many automakers have made CPO vehicles a more appealing choice to encourage car shopping. In particular, they've offered deferred payments and interest rates between 0% and 3% on CPO vehicles for shoppers who qualify and finance through them.
Here are a few things you need to know to make a more educated decision as you search for a CPO vehicle.
BENEFITS AREN'T FREE
The dealership pays for the certification process, and that's reflected in a CPO vehicle's higher price. Expect to pay an average of about 6% to 8% more for a 3-year-old CPO vehicle compared to a non-certified vehicle. But, as with any used vehicle, know that prices are negotiable. Make sure to research the market value to know how much to pay.
The certification costs will always be factored into the vehicle price. If you see them listed as a separate fee, this is a red flag and the vehicle might not be a genuine CPO vehicle.
THE TERM "CERTIFIED" IS OFTEN USED LOOSELY
To further complicate matters, some dealerships will call their used vehicles "certified" because they've put them through a basic inspection and reconditioning and given them a third-party warranty.
Those benefits can vary wildly depending on who is backing the warranty. Plus, the low APR specials we mentioned earlier won't be available since these aren't genuine CPO vehicles. As such, we cannot recommend these types of certified vehicles.
How do you know if it's a genuine CPO offer? A good rule of thumb is to examine the window sticker to find out who is providing the warranty. If the name of the warranty provider is the same as the make of the vehicle, it is the real deal. Your chances of finding a genuine CPO vehicle are significantly increased if you shop at the brand's corresponding dealership. In other words, if you want a CPO Volkswagen, don't look for one at a Mazda dealership.
KNOW WHAT THE WARRANTY COVERS
Warranty coverage varies by automaker and the age and type of vehicle. Know the difference between a powertrain warranty, which only covers items such as the engine and transmission, and a new vehicle limited warranty, which covers most other items in the vehicle. Most CPO warranties extend the limited warranty for one to two years. After that, you can either purchase an extension or handle repairs as they come. Items that commonly wear with time, such as brake pads and tires, are not covered by a limited warranty.
EDMUNDS SAYS: Certified pre-owned vehicles reduce the risk of buying a used vehicle. They offer numerous benefits and provide superior value when compared to buying new. In uncertain economic times, taking on less debt is always a better financial move. Take a look at the offers in your area to get the best interest rates.