Dealers are being aggressive with new-car pricing. Is CPO still viable?

If you've been following the state of the U.S. auto industry, you know the past few years have been volatile if nothing else. Post-recession new-car sales recovered in a manner that could be described as "explosive" at times, with some automakers in particular experiencing growth unlike anything they've seen in this country in decades. And now, after two years of record volumes, the industry appears to be stagnating--even shrinking--despite strong indicators from Wall Street that consumers are willing to spend money. Used-car sales in a new-car world
Analysts warned that the growth of the previous three years was fundamentally unsustainable. Dealers and financial institutions pursued volume with aggressive financing and lease deals, stretching terms of the former out as far as 84 months--seven whole years.

It's the latter that makes a bigger difference in the world of certified pre-owned (CPO) vehicles. The bulk of certified inventory is built from lease returns. Thanks to their low mileage and low age, they make excellent candidates to pass the rigorous inspection process required for a pre-owned car to be certified.

The shifting landscape of CPO
More and more, however, old-fashioned trade-ins are representing a larger proportion of CPO inventory. Buyers are trading in late-model vehicles for new cars with longer financing terms to reduce their monthly outlays, for example. While this approach may be penny-smart and pound-foolish for the buyer in question, it's good news for dealers and secondary-market buyers, both of whom will benefit from a glut of nearly-new models whose worst depreciation is already behind them.

After all, cars lose a huge chunk of their initial value the second they are sold to their first owners. Beyond this point—whether five seconds or five years pass—it is a "used" car. This is what makes CPO vehicles decent "like-new" alternatives for customers who want to spend less money up front and are willing to sacrifice the new-car smell in order to achieve it.

(If you're curious about the benefits and drawbacks of CPO programs, check out our previous article.)

There's more to it than that, of course. Some manufacturer-backed CPO programs allow for candidates as much as five years old, provided of course that they have low miles. This allows for two additions to the CPO pool: longer-term lease turn-ins and low-mileage used-car trade-ins.

More choices for the customer
There are some upsides to this expanding pool. First off, there are more CPO cars to choose from, and choice is good. Also, with slightly older cars becoming more commonplace, there are more low-cost options available under a CPO guarantee. They'll still be more expensive than comparable used cars with the same mileage, of course.

CPO vehicles carry a premium, no matter how you slice it. In some cases, a one- or two-year-old CPO vehicle may even cost nearly as much as a brand-new equivalent if the manufacturer is offering heavy incentives--a very real concern right now given the state of new-car sales.

That alone may make older CPO options more appealing, but keep in mind that there are compromises. An older car is an older car, after all, and there are consequences to age. Financing terms may not be as favorable (expect to pay a higher interest rate, at minimum) and older cars are likely to have more wear and tear. No matter how good the manufacturer's CPO warranty may be, wear items are very, very rarely covered unless you purchase special protection plans--effectively insurance policies--to address any such issues.

Also, be mindful that older vehicles are going to have less (or maybe even none) of their original factory warranties intact, and there may be issues that could come up which will not be covered. Inspect the CPO agreement before you commit, and make sure to ask about any reconditioning that has been done so you can see what is likely to need attention after you purchase the vehicle.

Leftlane's bottom line
As always, before buying CPO, do your research. Whether it's worth it is really up to you. Don't worry: your dealer will be equally happy to sell you a brand-new car. But on the flip side, vehicles that are selected for CPO status are likely to be in better shape than those that are not—the better to ensure that the manufacturer will not have to incur the costs of repairs—but a new car for the same money is almost always going to be a better deal.