Originally posted on May 14, 2020
You have three choices: a new car, a used car, or a certified pre-owned (CPO) vehicle. Today we’re breaking down the differences.
If money didn’t matter a new car is the best choice. With new cars you have the latest features, don’t have to worry about how the previous owner treated it, and receive a basic warranty. Unfortunately, money does matter and new cars are both the most expensive and lose value quickly- often 15-20% in just the first year! That means if you bought the car for $20,000 and sold it one year later you might only receive $16,000. That’s a $4,000 loss.
Purchasing and Leasing
If you are considering a new car there are two basic ways you can receive one: purchasing and leasing. Purchasing is what you normally think of when you buy a car. You go to a dealer, agree to a price, and either pay in cash or with a car loan. Once you drive it off the lot you may do with it as you please (Note: if you have an auto loan the financial institution may have some requirements). It belongs to you.
When you lease a car you really are just renting it.. You pay some money right away and then pay a monthly payment. Most leases are 36 months long. Leases often have requirement s like how many miles you are allowed to drive (usually 10,000 miles a year) without paying fees and service checkups. Why? You don’t actually own the car! While you often can buy the car after the lease ends, you will have to cough up another few thousand dollars for a down payment without a car to use as a trade-in.
So why do people lease a car instead of buying a new one? The monthly payment on a lease is often lower and you don’t worry about the depreciation (losing value) during that time. Leases sometimes make sense if you drive less than 10,000 miles a year. However, for most people they are not the best option.
If you are concerned about costs and need to get from point A to point B as cheaply as possible then used cars are often the best option. However, the lower price has trade-offs. There are much higher risks of it breaking down, so you need to inspect the car prior to buying it. Tools like CarFax can give you a lot of information about the car’s history but you can never know anything about the car for certain.
We all have heard the story of so-and-so’s uncle that got a super cheap used car and drove it for years without any problem. We’ve also all heard the stories of people who had nothing but problems with their used car. Used cars can be a risky endeavor if you are not careful. However, if you are thoughtful about your purchase it can be your ticket an excellent car at a rock bottom price.
Certified Pre-Owned (CPO)
Striking a balance between new and used cars are CPO cars. CPO vehicles often are vehicles that were returned at the end of a lease and are in good condition. Typically, they are 4 years old or newer and are available in a variety of price ranges. To be ceritied CPO, they have to meet strict manufacturer requirements- this means you know that you’re buying a car in good condition. Most also warranties, so if something turns out to be defective you can get it repaired by the dealership (often for a small deductible). A dealership manager we spoke to estimated that it costs dealers $2,000 on average to get a car up to CPO standards.
However, CPO cars are still used cars and have risks of there being an unknown problem. They also tend to be a bit more expensive than a non-CPO used car. Some shady car dealerships are known to call a car “Certified” with their own warranty; this is not the same as CPO. Always check that the car is “manufacturer certified.” This means the warranty is backed by the maker of the car, not the dealership you purchased it from.
Since CPO cars are typically a few years old, most of the depreciation in value has already taken place, meaning your car will not lose value as fast as a new car. For many people, CPO vehicles strike a balance between the used and new markets, giving them peace of mind when buying a vehicle without breaking the bank.