(MoneyWatch) Savvy new car shoppers know that bargaining for the best price is only part of the battle. Now dealers have a new, overpriced product that could wipe out the price savings you just negotiated. It is called a "dealer service contract."
Like many dubious deals, these contracts are sold through the the dealer's finance office. The pitch is that you will save by prepaying for maintenance so you will have no bills in the future when you come in for an oil changes or other routine procedures.
But the price of the service contract often is twice what you would pay for a typical round of maintenance over three or four years, says Pam Oakes, author of Car Care for the Clueless and the owner of an independent repair shop in Fort Myers, Fla. Even worse, the cost of that contract is often wrapped into your financing or lease so that you wind up paying interest on the already overpriced item.
Consumer Reports also has sounded the alarm about service contracts, saying that some of them fail to pay even for supposedly covered items -- especially if they are backed by outside companies rather than auto manufacturers.
But even manufacturer contracts are likely to be overpriced. Oakes cited the example of a customer who came to her shop, then discovered that he had paid $2,800 for a dealer service contract backed by Ford that also commited him to have all repair and maintenance work done at the dealership. Oakes estimates that using typical dealership labor rates and recommended maintenance intervals, the actual cost of that maintenance billed individually over four years would be $1,400 to $1,500.
Unlike the dealer service contracts, routine maintenance visits really are free with some brands. For instance, luxury brands BMW and Cadillac provide free maintenance for four years or 50,000 miles with each new car. Toyota has a two-year, 25,000-mile free maintenance plan - the only mass market brand to do so.
Perhaps following the example of the airlines, dealer service departments recently have found new ways to add on fees. In winding up a new-car deal or going to the dealership later for service, be vigilant against these grabs for your wallet:
- Just say no to the finance department. Almost no add-on being pushed after you have negotiated the car price is a good deal. For instance, with basic warranties for many brands now extending beyond the traditional three years or 36,000 miles, buying an extended warranty when the car is still new makes absolutely no sense. Dealerships make more money on these items than on the cars themselves.
- In the service department, watch for suspicious fees. If you see an item beyond the itemized parts and labor rates that says something like "shop fee" ask what it is for and see if you can challenge it. It is likely no more than add-on profit.
- Charging an oil disposal fee is especially outrageous. Oakes points out that in fact, companies that recycle waste oil pay dealerships and independent shops for the right to pick up that oil. So if they charge you, the dealership gets paid twice.
Not all dealerships are playing these games. And indeed, if an item on your car is covered by warranty or is involved in a recall, you will need to go to a dealership for a free repair. But for other items, take care that you are not overpaying.