Not Just the Scams: All Extended Auto Warranties Are a Bad Deal

Last Updated Jul 6, 2011 3:04 PM EDT

Think you need an extended warranty with that used car? Think again.
It's a no-brainer that the high-pressure telemarketers who peddle third-party extended auto warranties are scam artists. But they're not the only ones putting it over on us -- even the legitimate extended warranties offered by automakers and dealers are usually a lousy bargain for consumers.

The contracts offered by above-board vendors may be better deals than those offered by the crooks, but that doesn't mean you should buy them. Consumer Reports describes extended warranties as "cash cows" for their vendors because they bring in far more money than is ever paid out in claims.

According to Eric Evarts, associate autos editor at Consumer Reports:
Dealers and automakers sell extended warranties to make money. The consumer is only at a disadvantage with these things. They have to pay out less than they're earning or they don't make profits.
Evarts speaks from experience. Before he worked at CR, he bought a used all-wheel-drive Chrysler minivan and paid $1,800 for a legitimate extended warranty. A claim for a broken air conditioner was paid for $900, but because nothing else went wrong he was ultimately out $900. Warranties like that put owners in the perverse position of actually wanting their car to fail so the policy will turn out to be a good buy.

A cautionary tale
Extended warranties are bad enough as a concept, but the quick-buck artists make them infinitely worse. When the brothers who ran bankrupt U.S. Fidelis, which claimed to be the country's largest marketer of vehicle service contracts, were indicted in Missouri for 14 counts of fraud last month it exposed the seamier side of the warranty business. Among the company's many sleazy practices, according to the indictment, were:
  • Misrepresenting itself as affiliated with auto companies
  • Falsely claiming that a consumer's warranty had expired
  • Keeping refunds that were due customers and charging excessive fees
The company was being investigated in 40 states, and the Better Business Bureau had fielded more than 1,100 complaints about its operations. Fidelis was undoubtedly lucrative -- co-owner Darain Atkinson lived in a 20,000-square-foot mansion with 12 bathrooms.

Widespread fraud
That was just one bad apple. Plenty of similar companies still operate out of boiler rooms, often in Florida or Missouri (which has more than 40 extended warranty companies). Typically, they ignore "Do Not Call" registries and give car owners the impression that they represent auto dealers or manufacturers.

Through robo-calls to millions, these companies peddle the message that your warranty is about to expire and that you'll be "at risk" if you don't sign up for their product. When they use the mails, scam artists make their solicitations look like official documents with scary messages like, "Final Notice: Expiring Auto Warranty."

The Federal Trade Commission warns:
Be alert to fast talkers. Telemarketers pitching auto warranties often use high-pressure tactics to hide their true motives.... If you buy a service contract, you may find that the company behind it won't be in business long enough to fulfill its commitments.
An appetite for reform
Aware that companies like U.S. Fidelis are tainting the whole extended warranty industry, the Service Contract Industry Council says it's on a mission to clean out the rats. It wants to draw a bright line between it and the scam artists, but that might be hard to do. According to Tim Meenan, executive director and general counsel:
We worked with the National Association of Insurance Commissioners to develop a model service contracts act, and have pursued enactment in many states over the past several decades.
Among the reforms are ensuring that consumers have a 45-day "free look" period in which they can get 100 percent of their money back. And some states are clamping down on scams that sell car owners useless $1,000 oil additive packages (with "manufacturers' warranties") as part of the deal.

The reforms are a good thing, but shouldn't obscure the basic flaw in extended warranties, which is that paying for repairs yourself is likely to be cheaper than shelling out for the policies. Meenan's argument is that people are keeping their increasingly complex cars longer, and automaker warranty periods are getting shorter. Plus, the used cars that many people bought in the economic downturn often come with only 90-day guarantees. "With many repairs now costing into the thousands of dollars, many consumers simply cannot afford it without this added protection," Meenan said.

I'm not buying it. The best thing you can do when anyone calls with an extended warranty to sell is just hang up.

Related: Photo: Flickr/John Lloyd
  • jim motavalli

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