Certified Pre-Owned Used Cars May Not Make Sense

It’s Getting More Expensive To Own a Certified Used Vehicle

Certified pre-owned vehicles are becoming more and more expensive. Photo © Austin/Getty Images

In the market for a certified pre-owned car in 2015? Expect to pay a lot more than a comparable used car. It’s reached a point where it might not make sense to buy certified pre-owned under certain circumstances.

“Because many in the middle class are being squeezed out of the new-car market because of higher prices and soft wage gains, CPO becomes a solid alternative,” CNW president Art Spinella said in January’s Special Forecast Issue of the company’s Retail Automotive Summary.

(His comments were reported at AutoRemarketing.com.

“And it’s one that consumers believe provides the new-car smell without the new-car payment,” Spinella added. “That said, in 2014 consumers paid about $2,800 more for CPO models than comparably aged non-CPO used cars.”

As reported by me in the article, Understanding Certified Pre-Owned, “Manufacturers love certified pre-owned for two major reasons: they maximize revenue from vehicles they have sold once already and it creates brand loyalty. Once you buy certified pre-owned, the thinking goes, you'll come back for a new car if your pocketbook permits and you've had a good experience. Dealers love certified pre-owned for a couple of reasons, too. The profit margins are greater on certified pre-owned and are borne by the manufacturer.”

There comes a certain break-even point where certified pre-owned may not make sense. It depends on how you plan to use the car and if you are financially disciplined.

(Not everybody is, including me!)

Let’s address the latter point of financial discipline first. The big appeal of certified pre-owned is the extended warranty provided by the dealership. You are protected if something goes wrong (depending on the warranty offered).

If you never use the warranty, you have gambled away, on average, $2800 and that amount is expected to rise to $3100.

It’s actually more than that in real dollars once you factor in financing.

Instead, if you can, find a comparable model and put the $3100 away where you can’t touch it. Maybe the solution is a short-term CD or a money market account that isn’t easily accessed. That way if you need the money you can get to it.

If you don’t need the money, it’s there when the warranty expires. You will be ready to use it for necessary repairs that might come down the road.

This scenario also makes sense if you have a good relationship with a local garage where you bring your car. It should be able to do routine repairs that would have been covered by your certified pre-owned warranty.

Another situation where it makes no sense to purchase certified pre-owned is if you don’t plan to hold onto the car beyond the certified warranty period. Say, for example, you buy a two-year old Audi. As we report in our article on the Audi Certified Pre-Owned Program, an Audi can be certified pre-owned if it's 5 years or newer and has less than 60,000 miles. If you’re planning to turn the car in before it hits 60,000 miles, it should still be covered under its new car warranty. Also, you shouldn’t have any trouble finding an Audi dealer willing to take it off your hands if it is still in certified pre-owned condition.

So, when does certified pre-owned make sense? With used cars that don’t have good reliability records. You will want the additional protection of an extended warranty. Otherwise, with the price increasing, now might be a good time to skip buying certified pre-owned.

It could also make sense to pay the premium price if you are buying a used car away from the original dealership. (Say, for instance, you are moving soon or can’t find the car you want within 100 miles of your home.) A certified pre-owned warranty is going to cover you around the United States. That peace of mind is also important if you are a person who splits time between a winter home and summer home - like the snowbirds of the Northeast who head down to Florida.

One caveat to keep in mind: if not buying a certified pre-owned, you do need to have a pre-purchase inspection done.

  A used car is too big of an investment not to have one completed.