Certified Pre-Owned Cars vs. Used Cars With Warranties

If you're shopping for a car and your budget or your sensibilities keep you from purchasing something brand-new, then you might be considering either a certified pre-owned vehicle or a late-model used car with an extended warranty. Both have their benefits and drawbacks, and we're here to make sense of the seemingly slight, but actually very important, differences between the two.

What does certified pre-owned mean?

Many manufacturers offer a certified pre-owned program, or CPO for short. The details vary from company to company, but typically a CPO car is between 1 and 5 years old, meets certain mileage and condition standards, has been thoroughly inspected with any necessary repairs completed, and is given a warranty extension. The CPO warranty often kicks in once the new-car warranty has expired and typically adds one to two years and a few thousand extra miles of coverage. Certified pre-owned programs may also offer additional benefits, including roadside assistance, free maintenance, a satellite radio subscription and trip interruption coverage.

Finally, some CPO vehicles might even qualify for better manufacturer-backed financing, bringing interest rates closer to those for new cars than used cars. These benefits come at a cost, however, as certified pre-owned vehicles are typically more expensive than equivalent non-CPO vehicles.

What does "certified" really mean?

Because the term "certified" lends a perception of higher quality, some dealerships or car buying websites use the term for their own used cars, slapping on an official-looking sticker or label after they've put them through a basic inspection or reconditioning. Those cars are not actual CPO vehicles. Some include a warranty, but it may only be good at that dealership and has likely not met the manufacturer's criteria for inspection. Additionally, only a genuine CPO vehicle can qualify for the additional perks of a CPO program.

The cardinal rule is this: Only a manufacturer's franchised dealer can sell that manufacturer's certified pre-owned vehicles. This means that, for instance, if a dealership can sell new BMWs, it also can sell BMW CPO vehicles. Any other brand that isn't sold new at the dealer won't be sold through an official CPO program.

If a salesperson tells you he or she will "certify the car" for you if you decide to buy it, or if you see a "certified" listing online with the dealership's name rather than the automaker's, we recommend that you say no. What you're actually being offered, in most cases, is a service contract or extended warranty with limited usefulness.

What is an extended car warranty?

An extended warranty is offered by a third-party company rather than the vehicle manufacturer. Buying a cheaper used vehicle and then adding an extended warranty might seem like a logical alternative to a genuine CPO car, but it can be extra work and the benefits may not be comparable. The onus will be on you to have it inspected and determine if the used car you're considering is in good condition, whereas with a CPO vehicle, that's taken care of already. Plus, it's possible that the non-CPO used car was disqualified from a manufacturer program, perhaps due to mechanical or cosmetic problems, vehicle age or excessive mileage.

Things get more complicated when it comes to the warranty. You'll likely be choosing a warranty offered by a third-party company. Some of these companies have solid reputations, while many do not. You'll need to do your homework on pricing and coverage, especially when it comes to a deductible. Most extended warranties require a deductible to be paid if something goes wrong, while most CPO warranties do not.

The extended warranty also might not be as comprehensive or offer coverage that's as flexible as a certified pre-owned warranty. For example, if the car needs repairs, your only option might be the dealership that sold you the car. With a manufacturer's extended warranty (and/or a maintenance contract), you can take your vehicle to any of the brand's dealerships nationwide.

Certified pre-owned versus used cars with warranties: Which is better?

A certified pre-owned car is typically a better value than a used car with an extended warranty. According to Edmunds research, a certified pre-owned car from a non-luxury brand is around $1,300 more expensive than its non-CPO equivalent. In luxury brands, that difference is closer to $2,100. While these aren't insignificant sums, they're likely less than a buyer will pay for an extended warranty.

Consider that a CPO vehicle will usually have a year or two of added coverage once the factory warranty expires, then do a little research. You'll learn that a third-party warranty costs between $800 and $2,000 per year, with coverage for some premium models costing even more. That means that on a typical family sedan or SUV, you'll have spent more on an extended warranty after a year and a half than you would've if you'd bought a certified pre-owned vehicle. The math is similar for a luxury car.

Furthermore, a certified pre-owned warranty is sometimes transferable, meaning if you only intend to keep the car for a year or so, you might be able to offer its new owner some additional peace of mind — handy when it comes to resale values or private-party negotiations.

And when you consider that the certified car you buy is possibly in better condition — having passed an inspection and met certain eligibility criteria — than an equivalent used car, the added upfront expense of purchasing CPO seems well worth it.