Eyeing a 'Pre-Owned' Car? What You Should Know

Call it used-car chic. “Certified pre-owned” cars—the industry’s well-known euphemism for low-mileage, used vehicles that are inspected by dealers and backed by warranties—are on a roll.

Since 2000, sales have more than doubled, to 1.7 million units, says J. D. Power. In fact, it’s the lone bright spot in today’s sputtering auto market: While new-vehicle purchases plunged 37.2 percent in March, certified sales jumped 9.2 percent over a year earlier, according to CNW Marketing Research. And for luxury brands like BMW, these cars now account for more than 40 percent of total sales.

New-car smell is far less of a factor these days for buyers like David Backman of Minneapolis. For decades Backman avoided used cars, figuring he’d be “inheriting other people’s problems.” Then last year, he found a deal on a certified pre-owned 2005 Volkswagen Jetta with 47,000 miles. The car cost $10,000—about $8,000 less than a new one. It was inspected and refurbished according to VW’s 112-point checklist. And in this economy, Backman feels no shame about his secondhand car. “A lot of people I know are buying them,” he says proudly.

Indeed, more buyers are forgoing new for “gently used.” According to CNW president Art Spinella, certified buyers are virtually identical to new-car ones—in age (mid-40s), income (mid-60s) and creditworthiness (720s). But with the economy biting down, the number of new-car consumers downshifting into certified jumped nearly 60 percent from January ’08 to January ’09. “They’re stealing from that core,” says Spinella.

It doesn’t hurt that these already modestly priced vehicles were helped along last year by low-APR financing. But the bargain bonanza won’t continue, says Edmunds analyst Joe Spina, since demand is spiking and supply, dwindling. Owners are keeping vehicles longer. Production cutbacks are reducing backlogs. And lease financing has significantly dried up. The upshot: Fewer low-mileage cream puffs will be boomeranging back onto the lots, ready for gold-star status.

Which is why manufacturers (surprise!) have begun to stretch the boundaries of vehicle eligibility. Many now accept corporate-fleet cars. Others are extending the long-held five-year or 50,000-mile cap; Ford, for one, now considers cars up to six years old and with up to 80,000 miles. Glenn Burke, manager of Ford’s certified pre-owned program, says the company can certify a greater spectrum of vehicles because “quality has improved so much.” Still, such moves open the market to more grizzled trade-ins, likely to develop wear-and-tear problems not covered under warranty.

And just because a car earns a diploma doesn’t mean it won’t be a problem child. The term “certified” isn’t regulated by the government and means different things, depending on who’s holding the clipboard. While experts caution buyers to stick with cars that are manufacturer-backed, some dealers are confusing tire kickers by certifying cars independently and offering third-party warranties that won’t necessarily be honored at other authorized dealerships. Indeed, both those and the makers’ own warranties—which range from three months to three years—can be packed with pricey loopholes.

Carmakers say their certified vehicles have to pass rigorous tests, with long checklists that cover everything from engine fans to the glove-box lamp. “Even a small squeak or faint odor may disqualify a vehicle,” according to Lexus. But industry insiders say those laundry lists may give buyers a false sense of security—as New Jersey–based Scott De Lello learned firsthand when he recently bought a certified BMW. While the 2006 sedan wasn’t officially certified when he first saw it, he says the salesman promised that, after undergoing BMW’s exhaustive inspection process, it would be shiny, smooth-running—and certified. But he says that when he drove it off the lot, the sunroof didn’t work, the brakes squeaked, and it even had a bum headlight. De Lello says he took it to another BMW dealership, which fixed the problems under warranty, but he and the original dealer, JMK BMW of Springfield, N.J., say that JMK has since compensated De Lello for the inconvenience with a $400 check and a $500 gift certificate.

Even properly administered, checklists can be “very superficial,” says Bill Bates, head of BMW’s pre-owned sales. A mechanic might check the radiator coolant but not the quality and consistency of the fluid—a red flag for other problems. And manufacturers seem to be in a checklist arms race, adding dozens of minor items to the roster. In 2005, Audi hiked its inspection list from 150 points to over 300; it now includes four check-boxes for the seat belts, two for the ashtrays, even one for the cupholders. “It’s the devil that’s in the details,” says Mark Ilijanic, Audi’s head of pre-owned sales.

Okay, so the inspections aren’t infallible. But at least you can bank on a clean CarFax report, right? Most manufacturers use the service to check a vehicle’s title and accident history, but even an unblemished CarFax can’t guarantee a hassle-free car—since accident data and other problems may slip through the reporting system. The company says it offers a buyback guarantee for those “incredibly rare” occasions when it gives a clean bill of health to a vehicle that’s actually had a major accident or once been designated a “lemon” (only to make it back into the market). Still, before you buy, it pays to bring an independent mechanic to do his own inspection. Just don’t expect him to find any new-car smell.