Skip to content

How to Throw Away $75,000

Posted in Posts, and Syllabus Schedule

When it comes time to buy a car, one of the key decisions one has to make is whether to buy new or used. To me this is a no brainer. Cars tend to depreciate massively, so why not try to avoid some of that cost? Take the Volkswagen Phaeton, for instance. Albeit an extreme example, the 2002 Phaeton retailed in base trim for $94,600 and now can be had for about $18,000, a $75,000 drop. Are there any prohibitively bad downsides to purchasing used?  I can only think of three reasons and they are largely avoidable.

It is true that it can be difficult to tell if the previous owner(s) took care of the vehicle. While one can ask for maintenance receipts, or use a service such as CarFax to see if the vehicle was ever in an accident, these sources doesn’t reveal if the car was taken to a race track, or just simply abused. Would you like this man’s vehicle, for example?

There is an easy solution to this issue, however, called Certified Pre-Owned. If a car meets certain criteria, then a manufacturer or a dealer labels it CPO’d. Essentially, it has a stamp of approval stating that the manufacturer or dealer believes that it is a “good” used car. This raises the price slightly, and it also means that the car is likely fairly new, mitigating some of the money one can save by buying an older car, but it also means that it is likely a solid used car. There are also usually special warranties which come with Certified Pre-Owned cars, so there is less risk of losing money on costly repairs.

People also tend to want the latest and greatest cars. With a CPO’d car, however, the car is pretty much the exact same thing as would currently be on showroom floors. There are even some CPO’s which are the current model year – cars which a person bought and then promptly sold back. Or perhaps someone is interested in purchasing a very specific vehicle, with a rare color scheme. Given the wealth of used vehicles, if one searches long enough, it seems that such a car would have to exist as a used car somewhere. If there aren’t many used examples available, such as with exotic sports cars, the buyer’s main concern would likely not be with the cost of the vehicle.

Stacking the negatives up against the positives should reveal the obvious: buy used.


  1. gjeong

    I assume what most people really care about is the price when they purchase cars (and safety second). This is the biggest factor taken into consideration when people buy used cars. Used cars are cheaper and affordable to many people. However, as mentioned in this post, the record of the car can be a big concern to the customers. I hope CPO can be used wisely so that people who buy used cars can both enjoy the lower price and safer driving. Quick question: Is CPO widely used in the current market?

    May 3, 2013
  2. oliver

    Certified Pre-Owned has a premium associated with it. When I went to BMW of Peabody in Massachusetts, their CPO offerings were substantially more expensive than comparable used BMW’s found at used car dealerships. I think that CPO is a gimmick. Sure, the cars may come with some sort of extended warrante, but again there’s where the premium comes in. The dealer isn’t some magical, infallible entity. What can they do to inspect a car that a good independent mechanic can’t do?

    May 3, 2013
  3. gradyb13

    I assume the difference is that the dealer is willing to put a hefty warranty on the car, because they are confident that it won’t constantly break down. Sure, an independent shop could take a look at a car, but I find it hard to believe that they would be able to put as much time and effort into inspecting the vehicle as, say, BMW would.

    I agree though that there is a definite premium associated with the program, but it seems like this is a case of getting what you pay for. One also has to wonder why a company wouldn’t CPO a car, i.e. would you want to buy a car that Ford didn’t think was “worthy” of being labeled CPO?

    May 4, 2013
  4. First, while we’ve not discussed this so far, the economic collapse in 2008-10 including the “cash for clunkers” program depleted the stock of used cars, driving up prices. That’s why I bought a new Honda rather than some sort of recent-vintage used vehicle.

    CPO does cost more, to my knowledge all CPOs have a warranty, so you pay in part for peace of mind. But only recent-vintage, low-mileage vehicles qualify for CPO status. Furthermore it’s a brand controlled by the OEM, not the dealership. If you recall Valley Honda chose not to participate in the Honda CPO program, preferring to do their own (and hence potentially covering a wider array of vehicle in terms of age and mileage, plus letting them dealer-certify non-Honda vehicles).

    Now can a dealer inspect a car better than an independent mechanic? Yes. There are two components. One, they know the brand better and will have better diagnostic equipment and a better knowledge of what might present problems. Second, they have skin in the game. If you pay a local mechanic $50 to look a car over, will they then fix it for free if they miss something? Fat chance.

    Now with a Ford Fusion, driver abuse? Ah, but for a BMW, you run a very real risk that the previous owner was an enthusiast who would push the car, perhaps even take it to a track. In addition, the little things cost a lot to repair. Compounding that (which would make it hard to test empirically) BMW purchasers may have a high opportunity cost for their time. Yes, they could buy used from an independent. But in all likelihood many want the bundle, the intervention of a local dealer who might pick up and drop off the car and provide them a loaner, and so on. So with a lower price elasticity a dealer could charge more for a CPO.

    May 4, 2013

Comments are closed.