This Week in Car Buying: Certified Pre-Owned Edition

Recently, a friend emailed seeking some advice in buying a Certified Pre-Owned (CPO) car. Jim had found two Infinitis for roughly the same price. One was a 2013 Infiniti JX35, the other, the 2014 QX60 (the JX had been renamed the QX for the 2014 model year). Here’s what he was considering: 

Infiniti JX35

-2013 model year

-22,000 miles

-Upgrades, such as navigation, Bose stereo, park assist, memory seats (options totaling $6,800)

-Just under 2 years left on the warranty

-Originally sold for around $49,000

Infiniti QX60

-2014 model year

-15,000 miles

-Base model, no upgrades

-3 years, 3 months left on the warranty

-Originally sold for around $41,000

Jim wrote, "Needless to say, the one with the upgrades is a nicer ride, but those upgrades aren’t essential. So my question is what’s more important or what value should be applied to the extra year of warranty; being a model year newer; about 7,000 less miles; add-ons such as navigation, Bose stereo and video screens?"

First off, as Jim has discovered, CPO cars can be a tremendous value vis-à-vis the sticker price of the original car. Even the base vehicle in this class was more than $40,000 and the CPO price for both according to KBB is around $38,000-$39,000.  Especially in the case of the JX35, by shopping dealer used car lots, you can save a lot of money for a car that doesn’t have many miles on the odometer.

But the question Jim has to ask is whether or not he plans on keeping his CPO car for the long haul or is perhaps looking to trade it in two or three years down the road on either a new car or another CPO unit.

If that’s the case, the QX60 might be the better deal for two reasons, the first the change in model designation means that this 2014 version will still be contemporary to the Infiniti lineup down the road, whereas the JX badge won’t. The second is that from a model year standpoint, the 2014 Infiniti QX60 will have a year less depreciation on it than the 2013 JX35. While mileage can have an effect on the value, at this point the 7,000-mile difference between the two is negligible-given that most cars are driven between 12,000 and 15,000 miles a year, there’s about a half year’s difference in the mileage rate, which will probably serve the JX35 well if the vehicle sees ordinary use.

Also: The Class of 2015 — New Vehicles Ready to Roll

If Jim plans on keeping the car for a while and maybe passing it on at some point to a family member, then the JX35 is the obvious choice. There’s marginally more wear on it than the QX and the warranty may be a bit shorter, but the level of equipment more than makes up for it. Plus, Jim will get the benefit of a good sound system, navigation, and the other goodies which will in the out years depreciate at a slower rate than the QX60, especially if he keeps the mileage in the 12,000-15,000 miles per year window. All bets are off if he plans to rack up a lot of miles, then resale value is off the table and while the QX is newer, he’s better off living with the vehicle with more options over the long haul.

CPO comes to Costco

New car dealers aren’t the only ones jumping on the certified pre-owned bandwagon. Warehouse retailing giant Costco has sold about 200,000 vehicles through its Select Pre-Owned sales program over the past 5 years. It’s increasing its presence in the market and is on track to move more than 50,000 pre-owned units this year. Like dealerships, Costco inspects the vehicles to see if they meet their eligibility criteria and the company offers a warranty that allows the vehicle to be repaired at franchised dealerships.

Costco’s SPO guidelines certify vehicles that have at least 12 months and 12,000 miles on their original warranties. According to an article in Auto Remarketing, Lori Grone, field director for Costco Auto Program’s remarketing division, said that dealers have accepted their program and some participate by providing high quality trade-ins to Costco for the program if the vehicle is different from the brand they represent. Costco is looking to expand its SPO program to take advantage of some 400,000 additional off-lease units that are expected during 2014, the trade journal reported.

Manufacturers police CPO guidelines

Meanwhile, Automotive News reports that some manufacturers are closely monitoring their franchised dealers to ensure that they are complying with certified pre-owned requirements, some going as far as to temporarily suspend a store’s participation if irregularities are detected. American Honda and GM are among the makes that are looking closely at dealers’ certification processes. Tighter enforcement of the rules is attributed to Honda’s 7-percent drop in CPO sales this year, although a company official also said that the cut in production after the 2011 earthquake and tsunami in Japan is translating now into fewer off-lease vehicles available for the program.

GM said it has been looking closer at CPO practices for about 18 months and inspecting dealers from one to four times per year grading each on compliance. The better the compliance, the fewer the visits and vice versa. GM Certified, the company’s CPO program, has seen a 10 percent growth in sales year to date over the past year to 255,077 through August.

CPO to grow

Manufacturers and their dealer bodies are bullish on the number of certified pre-owned cars they will sell, with the industry looking at 9 percent growth so far this year on top of last year’s 15-percent bump, according to Automotive News. Last year’s sales exceeded 2 million units for the first time and through August, the trade journal said that more than 1.5million CPO vehicles were retailed. Most makers have reported double digit gains.

The leader in CPO sales last year was Toyota, which sold 442,659 certified used cars this year, a number that includes 72,988 Lexus models.  The next closest brand was General Motors with 2013 sales of 362,435.  In third was Honda with 288,929 including 41,978 Acuras. On a percentage basis, Ford saw its CPO sales grow by 32 percent from 2012 to 2013 to 227,755 units. It’s likely these numbers will continue to grow dramatically as a large number of vehicles will start coming off lease over the next few years.

Used Car Interest Rates Stable

If you’re looking to finance that CPO purchase, rates have remained stable with 36 month contracts averaging 4.73 percent nationally, while 48 month used vehicle loans clocked in at 4.79 percent, down one basis point from a week ago. The average new car loan is 3.94 percent for 36, 3.97 for 48 and 4.02 for 60 months, all unchanged from a week earlier.