What is a Certified Pre-Owned Vehicle?

Car shoppers used to be limited to just two types of vehicles — new and used. The former was brand-spanking new, straight from the manufacturer along with a warranty and that coveted new-car smell. Of course, it also came with that new-car price tag and the knowledge that the vehicle could lose up to half of its value in the first few years of ownership. The latter category was a heck of a lot cheaper, but there was no telling where the used car had been, there was no warranty and the only added features it came with were things like a sagging hood liner or cigarette burns on the upholstery.

But in the late '90s, a third option opened up for car buyers that straddled the new-car vs. used-car fence — the certified pre-owned (CPO) vehicle, automotive-speak for “reconditioned used cars.” Manufacturer CPO programs were pioneered by luxury nameplates like Lexus and Mercedes-Benz as a marketing tool to sell off-lease vehicles. As leasing programs continued going strong, creating a glut of two- and three-year vehicles on the market throughout the decade, more manufacturers jumped on the CPO bandwagon, even pouring money into marketing programs and buyer incentives to attract consumers to this other auto-purchase option.

Today, the certified pre-owned car is officially a third category of vehicle. Auto leases have been on the downturn after hitting an all-time high in 1999 — when 24.4 percent of all new-car deals were leases — limiting the number of off-lease vehicles available for certification. But today, CPO vehicle are here to stay.  About half of all CPO programs offered are for luxury vehicles.

CPO Sales on the Rise
Auto manufacturers, many of whom have been struggling in recent years, have come to rely on CPO sales to boost revenues. “Some manufacturers are not doing that hot overall,” says industry expert Art Spinella of CNW Marketing Research in Brandon, Ore. “And all the car companies are scrambling for anything that they can do to boost their revenues and generate some kind of sales.” Even without the oversupply of nearly new vehicles to sell certified, nearly all car makers reported year-over-year growth in their 2005 CPO sales, according to Auto Remarketing News. And manufacturers are pushing their lease programs once again, in part to keep the supply chain of potential CPO cars humming, says Spinella.

Related Story: What About Leasing?

Many car shoppers have embraced the certified pre-owned programs. Approximately 1.6 million CPO vehicles were sold in 2005, amounting to roughly 10 percent of the total automotive sales market, according to consumer automotive information provider IntelliChoice. J.D. Power and Associates’ 2005 Used Vehicle Sales and Certification Study reveals that 38 percent of late-model used-car buyers purchased a CPO model, up from 35 percent in 2004.

Though the auto industry environment has shifted over the years, the basics of manufacturer-certified CPO programs have remained largely the same. Carmakers take their late-model used vehicles (usually less than five years old), put them through a fairly rigorous inspection process, attach an extended warranty and other perks and sell them at a premium to the used-car buying public. In the best-case scenario, the manufacturer ekes out a decent profit margin on the resale and the consumer gets a like-new car with a limited warranty for some extra peace of mind.