Scam Alert: Variable Extended Warranty Pricing
Published February 19, 2016
We always reinforce the importance of paying attention to every part of your car deal. If the dealer is able to get one thing past you, a good deal can go south very quickly. One particularly immoral trick that has surfaced a lot recently relates to the pricing of extended warranties.
How the Scam Works
The scam starts when you apply for financing at the dealership. They will run your credit and find out the maximum loan amount that you are approved for. This information becomes very valuable to them in taking advantage of you. The same thing applies if you are pre-approved, once you let them know the maximum loan amount.
As an example, let's say you are buying a $16,000 car and putting $2,000 down. You have good credit and you are approved for a $20,000 loan. You only need a loan for $14,000. Now is when the sharks start to circle around you.
The Finance and Insurance (F&I) person will convince you to buy an extended warranty. Once you agree that you should have one, he will reveal the cost. The first thing to watch out for is that they will tell you the price in terms of how much it will add to your monthly payment instead of giving you the total cost.
Don't Be a Monthly Payment Buyer
You have reached the first point where a big red flag should go up. We preach in our buying guides to never buy based on monthly payment. You should always negotiate the price of every single item in the deal (including the interest rate) separately and then see what the monthly payment works out to.
Using our example, they will probably tell you that the extended warranty will add $132 per month to your payment but that it is well worth it because of all the protection you will get. What they don't tell you is that they are charging you $6,000 for the warranty. The $132 is based on a 48 month loan at 2.79%.
Where Did the Price Come From
Most people assume that the price of the warranty is based on the make, model, age and mileage of the vehicle. It should be based on these factors but, at some scummy dealerships, it isn't. What they do is set the price at whatever you don't need to use from your maximum loan amount. You had $6,000 that you didn't need so they made the price $6,000. If you had only had $5,500 left, that would have been the price.
If you balk at this cost, they will "work with you" because they "don't want you to be unprotected." After talking to a manager to "see what they can do," they might come back and say they can lower the price to $99 per month. This reduction gets the cost below the psychological $100 threshold and makes you think they are really giving you a bargain. They are "saving" you $33 a month.
Of course, they are still charging you $4,500 for extended coverage.
How to Avoid the Scam
If you want to buy an extended warranty for your car, we recommend that you do not buy it from the dealership. A high quality, third party company like CARCHEX will sell you the same coverage for much less money. The dealership will try to convince you otherwise, but there is nothing better about buying coverage from the dealer. Well, it is much better for them because they are overcharging you and making a huge profit!
You should read our entire chapter on extended warranties to learn about everything to look for, so that you save money and get great coverage at the same time.
About The Author: Lyle Romer is a consumer advocate, Founding Contributor and Vice President of CarBuyingTips.com. A 20 years veteran of the auto industry with a high level of expertise, Lyle has been researching all aspects of the automotive sales industry.
Lyle's expertise and research played a vital role during the creation of CarBuyingTips.com in 1999 after years of industry research. He carefully observed every aspect of his own car buying experience as the internet began to take a foothold in the process. He also designed the site to make sure that consumers had easy access to the best consumer advocate education.
Lyle has been an auto industry insider since 1999. He also has worked with other automotive websites to help improve their offerings based upon feedback from CarBuyingTips.com users. He covers important industry events and gathers off the record sources while attending industry conventions.
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