The Hidden Cost of Dealership Car Warranties
 Sometimes called an "extended warranty", a service contract is a promise to perform (or pay for) certain repairs or services. Although technically not a “warranty” as defined by federal law, service contracts may be arranged at any time and always costs extra. Warranties, on the other hand, ONLY come with a new car and are included in the original price. Vehicle service contracts are popularly referred to as "extended auto warranties" or "extended warranties". Use of the term "extended warranty" or "warranty" on this site is intended to refer to vehicle service contracts and not manufacturer's warranties.
Unless you are fortunate enough to be able to pay cash for your cars, you probably finance. Depending on the lender and your credit score, interest rates for vehicle loans range from 6% all the way to 20% (more in some states). Many buyers opt for a car warranty during the purchase process through a dealership, because it only raises their payments $15-$20. For less than $1 a day, that’s a bargain for the security an auto warranty offers. The hidden cost, though, is that since the warranty price is included in the car loan, the customer is paying interest not only for the vehicle price, but for the car loan.
Not only that, but sales tax applies to the auto warranty price, too. That means that a $2000 warranty, plus tax and interest, may end up costing nearly $3000 by the time the loan is paid off. Dealerships have a huge incentive to raise the loan amount as high as possible. The higher the loan, the more the lender profits, and the more bonus and perks the lenders pay the dealerships. For a dealership to sell an extended warranty not only brings the dealership profit from the warranty itself, but also from raising the loan amount.
Brokers such as AA Auto Protection offer payment plans for as long as 15 months – interest free. That means a $2000 warranty will cost exactly $2000. That’s a nearly $1000 savings over the dealership warranty being financed for 5 years. And that’s assuming a moderate interest rate. The savings would be considerably higher for a higher interest rate.
Installment payments are naturally easier to make. But the convenience of smaller payments should not cost $1000 or more. Rather than opt for the dealership-financed car warranty, it is worth investigating brokers who specialize in extended warranties, and that offer interest-free payment options.
7/11/2010 9:32:52 PM
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