I'm new to the game, but plans to buy S3 soon after getting a new PC. I recall seeing the game has a built-in mod browser where custom cars are being made, can these be used on the AI opponents for single player racing or they are locked to just the default cars?

Yes - add them normally just like default cars,then LFS will generate path files for them and you're good to go.

Also there is a nice side effect of letting AIs run a particular vehicle mod - once the system generates the path files AIs can drive on, you can also use the racing line aid by pressing 4 (which unavailable for mod cars in normal circumstances)