In 2018, the average new car transaction price increased by 1.3% over 2017 to more than $37,000, according to Kelley Blue Book data. And prices continue to climb today. That's why, for many folks, buying a used car makes the most financial sense.
Automakers, unwilling to miss a potential revenue stream, offer a less expensive alternative: certified preowned vehicles. These vehicles can provide you with the same peace of mind new-car owners experience, but do so at 50% to 75% of the cost of a brand-new car.
What is a CPO car?
A certified preowned car is a used vehicle that shows hardly any signs of having been used before your potential purchase. CPO cars are typically off-lease units that have returned to the dealership where they were first sold new. Once the original lease is up, the original lessor returns that car oftentimes in exchange for a new lease or to purchase something else.
Usually, these off-lease cars are around three years old with fewer than 12,000 miles per year of previous service, but on the high end, many automakers won't consider a used car for manufacturer certification if it's more than six years old and has more than 75,000 miles on the clock.
CPO cars are often well-maintained, damage-free and come back to the dealer with relatively few miles on the odometer because of the mileage limits inherent with new-car leases. If a leased vehicle is returned in crummy condition, the original lessor is faced with steep fees to offset any damage or extra mileage.
The restrictions placed on the first possessor ensure that the dealer has a steady stream of top-quality used cars to resell, thus giving the dealer an opportunity to make a second-time profit. Of course, CPO cars can come from standard dealer trades, but many are derived from off-lease trades.
If a car, after an initial inspection, is deemed worthy of being put through the certification process, the dealer must send its identifying information, the car's VIN, a multipoint inspection checklist and a payment to the automaker in order to get the vehicle manufacturer-certified. Once any necessary repairs are made and the mandatory vehicle history report checks out, the manufacturer gives its approval, at which point the car can be listed for sale on the dealer's lot as a CPO vehicle.
Once you buy that CPO vehicle, you are then privy to a manufacturer-backed warranty similar to a new-car warranty. For most vehicle brands, that means zero-deductible repairs nationwide at any of the manufacturer's dealerships for a duration and mileage longer than the original warranty.
Also, just like with a new car, CPO shoppers have the option to finance or lease, usually at interest rates that are less than with a regular used car. Once the customer signs their paperwork and drives off, they'll have access to 24-hour roadside assistance as well as complimentary towing, trip-interruption coverage and a loaner car to use while the CPO car is being serviced or repaired. Speaking of service, Lexus is a standout among other car companies by including complimentary maintenance for the first 20,000 miles or two years you own one of their CPO cars.
And there's another perk. For any CPO vehicle that came with satellite radio from the factory, regardless of manufacturer, the new owner gets a free, three-month trial of SiriusXM.
How much more does CPO cost?
It's probably worth noting at this point that I've only mentioned luxury brands so far. That's because CPO is generally only worth it for luxury cars. Their higher complexity means a greater likelihood of repairs that will often cost more than with a mainstream car. CPO luxury cars commonly cost thousands more than their conventional counterparts, but if that ends up saving you thousands on warrantable repairs, you could end up coming out on top.
Those benefits fail to translate to mainstream, reliable transportation. If you're buying something that is unlikely to ever need a major repair during its first six years and 100,000 miles of service, get it checked by a mechanic and if she gives her blessing, drive away. At that point, shelling out even just $500 more for the CPO program or even an extended warranty is about as superfluous as one of those gadget store electronics protection plans.
Why is a CPO car better than a typical used car?
Yes, you'll have to spend more money, but for those extra Benjamins, you're getting a lot of extra peace of mind by knowing the car is in good condition and that it will be covered under a warranty that's comparable in length and milage with a new-car warranty.
How do you know it's in good condition? The multi-point inspection. On the low end, Porsche performs a 111-point inspection, while its cousins at Audi are more intensive with their 300-plus-point inspection. Regardless of how many points are checked, these inspections ensure that a car's major mechanical, electronic, emissions and safety components are up to spec. If any of them aren't, they're repaired, even if the issue is cosmetic.
Aside from differing inspection intensity, there are other aspects that make some CPO programs better than others. Expecting to rack up a ton of miles on your next car? Audi, Bentley, BMW, Infiniti, Lexus, Mercedes-Benz, and Volkswagen all offer unlimited-mileage warranties. Is complimentary maintenance a must? Looks like a CPO Lexus may be in your future.
Maybe you want the option to exchange your CPO car within the first few days if you're dissatisfied with it. You're afforded that opportunity with Buick, Chevrolet, GMC and Mercedes-Benz.
You should probably avoid a CPO program that includes a deductible with warrantable repairs. Chrysler, Dodge, Ford, Jeep, Lincoln and Ram all come with a $100 deductible, while Hyundai, Mini and Nissan carry a $50 deductible.
Regardless of what you're looking for in a CPO program -- and this applies to any instance you're making a large monetary expenditure -- be sure to check the fine print and make sure the CPO deal you're considering is suitable for your needs.
If you're irked by the thought of having to shell out a few hundred to a few thousand dollars more for a CPO car versus a comparable used vehicle, remember, you're still paying thousands less than what the equivalent new set of wheels would cost. Also, CPO may add a bit of money to the price of the car, but that also leaves a bit more negotiating room, so keep that in mind when you're crunching numbers.
Living with a CPO car
On top of the dealership's assurances that you're getting a like-new car for what is hopefully a reasonable premium above a used-car price, CPO cars come with their own manufacturer-backed warranty that extends the life of the original new-car warranty.
Let's look to the case of a Roadshow staffer who last December bought a 2014 Audi TT with 21,000 miles on the clock for $18,000 less than the original MSRP. At acquisition, he had about a year and 29,000 miles remaining on his TT's original factory warranty. As soon as that ends, the CPO warranty will take over, extending the original warranty by a year and with no mileage limitation.
So, in essence, my colleague saved almost 20 grand buying a like-new car with a two-year, unlimited-mileage warranty ahead of him. That's a spanking deal.
The average person can't afford a new car
As we noted in our recent Car Loan Calculator , that $35,742 average new vehicle translates to a $518 monthly payment after accounting for 20% down on a 72-month term with 5% interest. (For those who haven't shopped for new vehicles in a while, 72 months may seem like a very long term -- it is, but it's also the new normal).article, it's best to budget no more than 10% of your monthly take-home pay for a car payment. Working with Roadshow's
Going by the "10% of monthly take-home" guideline, that means someone clearing $5,180 per month can comfortably afford the average new car. If that $5,180 net income per month is 75% of gross income, then that person's annual salary would have to be $82,880 -- much higher than the Census Bureau's latest reported average median incomes of $50,135 and $39,923 for males and females, respectively, working full-time and year-round.
The average person can afford a used car
According to Edmunds data, for the first quarter of this year, America's used-vehicle average transaction price was $19,657. That's 55% of what the average new car costs. According to Consumer Reports, it's not uncommon to spend $3,000 more on a CPO luxury car versus its non-CPO counterpart, so let's add $3,000 to that used average transaction price and repeat the Roadshow Car Loan Calculator math quoted above to determine how much a person needs to earn in order to afford an average CPO luxury car, truck or SUV.
Our magic math machine says that's a $328 payment, which is just right for someone with a net monthly income of $3,280 whose annual gross earnings are $52,479. That's much closer to the average incomes for men and women working full time and year-round in the US. (If you're curious, you only have to make $45,600 per year to afford the average used car.)
According to Automotive News, in 2017, there were 2,646,295 CPO cars, trucks and SUVs sold in the US -- the highest annual CPO sales on record for the seventh year in a row. The publication also says that for the first half of this year, CPO sales are up by 3.3%, so 2018 is poised to beat last year's numbers. It appears more car shoppers are catching on to the benefits of CPO programs.
CPO programs aren't perfect
If you choose to buy certified preowned, always keep these two tenets in your mind: First, you get what you pay for. Second, with used cars, you run the risk of buying someone else's problems.
While you most likely will end up behind the wheel of something that's downright dependable, a used car generally isn't as reliable as a new one. So you're saving money, but at the likely expense of slightly inferior longevity and the lack of the euphoric new-car smell.
But CPO multipoint inspections and their associated extended warranties lessen your risk of hassling with a car in the event it turns out to be a reliability nightmare. Furthermore, car companies working in conjunction with dealerships will oftentimes finance CPO vehicles at a lower interest rate than what they would've for a regular used car, so some of the extra money you spend upfront can end up being saved with lower-cost financing.
But CPO isn't for everyone. It's best for people who want to save money on luxury cars from brands that are synonymous for high repair costs and less-than-stellar reliability. CPO programs, on the other hand, likely won't make financial sense for buyers who want to save money on a like-new Honda Accord or Toyota Camry.
But for those looking for something flashier, the advantages can outweigh the disadvantages. A CPO vehicle can come close to providing all that a new car offers, but for a lot less. With the inherent savings you'll enjoy compared with a brand-new car, in many cases, the numbers just make sense.
Originally published last year. Updated with new information.