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Scam Alert: Variable Extended Warranty Pricing

By | 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.

money vacuumed out of wallet

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.

used car lot

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 or WarrantyDirect 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.

Author Lyle Romer

About The Author: Lyle Romer is a consumer advocate, Founding Contributor and Vice President of CarBuyingTips.com. For over 17 years, he's been researching all aspects of the automotive sales industry. The findings of his research are incorporated into the main content on CarBuyingTips.com. He has been an auto industry insider since 1999. Lyle also has worked with other automotive websites to help improve their offerings based upon feedback from CarBuyingTips.com users. He can be found on Google+.

Connect with the author via: Email | Google+

CarBuyingTips.com has affiliate referral relationships with multiple web sites. This means that for many of the links you see on this site, we are paid referral fees for leads generated from visitors that click on links or fill out forms on this site. In some cases we are paid a commission for a purchase made on a site that is linked to from CarBuyingTips.com. Please view our advertising policy page for more information.