Damian Morys / FlickrIt’s a busy morning at EuroMotorcars in Devon, Pennsylvania, along the Philadelphia Main Line, so it will be a few moments before a salesman can come to the phone. While we’re waiting on hold there’s a little message from the dealership; a piano plays a lilting melody in the background as a voice intones, “Many Mercedes-Benzes go out as leases. When they come in off lease it’s like they’re coming home, to the people who’ve taken care of them all their car lives.”
The mood is so genteel, the voice so plummy and cultured, that for a moment it is hard to remember that what they’re talking about is used cars.
It wasn’t always this way. Dealerships existed to sell new cars, vehicles displayed shiny and freshly waxed in the showroom. If you looked like a likely buyer, the salesman might invite you to slide in and inhale deeply of that most heady of parfums, the new car smell. Buying a new car was the American Dream in microcosm.
Used cars were different; they were shunted off to a side lot with desperate appeals like “Make me an offer” scrawled in DayGlo across their windshields while salesmen dressed like carnival barkers lurked nearby. When bought and driven home, the circumstances of their purchase was scant cause for jubilation; kids never poured into the driveway yelling: “Hurray! We got a used car!”
But by the early 1990s, consumers became increasingly aware that there was a third kind of car on the road: the Certified Pre-Owned Car, or CPO. For car buyers like Randy Knox, a diet counselor from Paoli, Penn., the appeal of the CPO was self evident. “It’s a great way to go,” says Ms. Knox, the happy owner of a 2008 Mercedes C300 she acquired last year. “I got a car that looks brand new, fully optioned, with only 20,000 miles on it and saved almost $20,000 of what the car would have cost new.”
It wasn’t just the car but also the process she found appealing. “Mercedes gave me five days or 500 miles to return the car if I changed my mind. I liked that. Best of all I have the peace of mind of knowing that if anything happens I’m fully covered by the same warranty I’d get with a brand new Mercedes.”
Still, she had one question: “How come they never came out with a deal like this before?”
The fact is, even if the car makers had wanted to, they probably couldn’t have. Or if they had, they would have gone broke backing up their warranties. Complain though we might that “They don’t build ‘em the way they used to!” according to J. D. Power & Associates, cars have never been so reliable, so well-engineered, and so defect-free as they are today. As a rule of thumb, a well-cared-for car that is two to four years old today will last longer, be more dependable, and be less expensive to maintain than a new car was 10 years ago.
To a large extent CPOs were the product of the era that gave us the Internet, speed dating, and federally mandated safety and environmental features like improved bumpers, safer seat belts, cleaner exhaust systems, and more environmentally benign fuel injection systems.
Alas, when it came time to trade in their old cars, owners expected to get a car with all the technology they’d been hearing about – automated brake systems, satellite navigation, and sound systems with dedicated tweeters and woofers. What they did not expect was the dramatic rise in price. Largely due to federal mandates, the average cost of a new car had soared from $7,530 in 1980 to $15,900 in 1990, an increase that was, percentage-wise, far greater than the average car buyer’s increase in income.
Customers who’d become accustomed to trading in their old cars every three to four years were horrified to learn that in order to keep payments on par with what they’d been paying, they would have to step down in class or extend the terms of their contract. At the same time, their old car had depreciated to the point that its trade-in value no longer put them into the newest version of the same car.
The high price of a brand-new car wasn’t the only factor discouraging consumers from buying a new car. In 1986, Congress began dismantling the provisions for deducting interest on installment loans and sales tax, making the purchase of a new car an even more expensive proposition in terms of real dollars. Even with the economy booming, more and more consumers could not afford to buy a new car.
But they could afford to lease one, especially given the freewheeling use of lease subvention. “Subvention was a popular tool of the 1990s,” says John Bulcroft, president of the Advisory Group, an automotive marketing consultancy in Cresskill, New Jersey. “It allowed you to lease a car for much less than you might otherwise. Say you’re leasing a $30,000 car for three years, after which the car will be worth $10,000. That dictates a payment of $349 a month. Then the manufacturer might say, ‘That’s too high. Nobody’s going to pay $349 a month for that car. Let’s pretend the car will be worth $15,000 at the end of three years, not $10,000.’ So now your payments will be based on a residual value of $15,000, not $10,000.”
Of course, says Bulcroft, the manufacturer still had one problem. “How could he make up that imaginary $5,000 when the car came back off lease?”
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