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Certified Pre-Owned vehicle programs – How do they work?

A basic overview of Certified Pre-Owned (CPO) programs and why they make sense.

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Certified Pre-Owned (CPO) vehicles offer great value, a worry-free ownership experience, and a way for owners to avoid the dreaded first couple of years of steep depreciation. All major automakers now offer CPO vehicles, and we would like to offer this story as a primer or basic overview of what the programs are all about.

Certified Pre-Owned – By the Automaker, Not the Dealer
A certified pre-owned vehicle is a vehicle that the manufacturer (not a dealership) has certified to be in good condition. Manufacturers back up their CPO vehicles with a warranty that can be as good, or even better, than some new car warranties. Although the cars are sold by dealers, and even though the dealer’s service department does the required CPO inspection for the manufacturer, a CPO vehicle can be brought to any of the brand’s dealerships for warranty coverage. In other words, the cars are backed up by the brand (Lexus, Ford, Hyundai etc.) not just the dealer that sells you the CPO car.

Using Lexus as an example, the warranty for a CPO vehicle runs for three years from the date the CPO car is bought, or up to 100,000 miles. Covered items are just about everything that does not have a normal maintenance schedule. Quoting Lexus’ website the warranty “…offers the same coverage and privileges new-car buyers receive. To see what is and isn't covered, view the list below or visit your Lexus dealer for complete details.” Look closely at the program offered by the brand you are shopping as the terms are different for all manufacturers. Note that most CPO programs do not include scheduled maintenance.

Interestingly, many CPO cars are still covered by the car’s new car warranty. For example, a 3-year-old Lexus is still under the new car’s bumper to bumper warranty. So if you bought a Lexus that was exactly three years old, it would only have 2 CPO warranty years. Be sure you understand the length of the warranty, so you are not surprised later. Your shopping may lead you to buy a car just coming off the new car warranty, with more depreciation, as opposed to a newer car. There may be more value. As a contrast to Lexus' CPO warranty, Toyota only offers a 1 year bumper to bumper warranty, but has a 7 year drivetrain warranty.

Certified Pre-Owned Vehicle Owners Avoid Initial Depreciation
Most mainstream cars lose value the fastest in their first year. That loss of value continues to be steep in years two and three. CPO cars are relatively young, two to five-year-old vehicles. They have already suffered their initial depreciation during the first owner’s time. That means that both the dealer selling the CPO car and also the new buyer can do a transaction on a vehicle that is close to new, but at a substantial discount compared that same model new. Furthermore, that CPO vehicle will hold its value over the CPO owner’s time with it better than a new car does. So the CPO buyer wins financially when they first buy, but also when they trade in the car or sell it on.

Where Do CPO Cars Come From?
Certified Pre-Owned cars come to new car dealers in three basic ways. First, many come from leases. When the lease is up owners turn them in, and dealers sell them after the CPO certification. Second, new car owners turn them into dealers as trade-ins. Third, dealerships may buy the cars from wholesalers (auctions).

Since you’re getting the full warranty, you should not fear any specific one of these. However, many CPO cars have the added benefit of having been serviced by the same dealer selling it, and they can show you the maintenance done. That is always a benefit. Be sure to look to see if a major maintenance is coming up soon. Given the choice buying a CPO car that has just had a major maintenance performed is better than one that has one upcoming (due to the cost obviously).

Most dealers will include a CarFax report on the vehicle. You should also ask the dealer if the car has been in an accident that they are aware of and document that in an e-mail or on your purchase agreement. They will never say “No absolutely not.” Usually, they will say “not that we know of.” That is a valid answer since they have closely inspected the car, and any major repairs would be obvious.

Certified Pre-Owned cars can be a great way to get into a fancier car than you can afford new while still having a full warranty. TrueCar says that 75% of CPO owners report being satisfied with their CPO purchase.

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