Dealerships Making More Money Selling Warranties and Service Plans

Not long ago I wrote a piece called ,"Back Room Deals: Extended Warranties, Service Plans, and Other Extras." For the first time I started to get some nasty messages from car-dealers, specifically "finance managers." I was accused of "deceiving customers" and "giving bad advice." Now let me reiterate that at no point in my article did I say car-buyers definitely should not get an extended warranty. I did say they should do the math and shop carefully. Sometimes these products are worth it, and sometimes they are not. A recent report published by NADA, has revealed that F & I (Finance and Insurance) departments are bringing in more profits for dealerships. It's no surprise why some folks were not happy about my article.

"F&I accounted for 38.8 percent of gross profit for dealership new- and used-car departments combined in 2013, up from 36.9 percent in 2012, according to "NADA DATA 2014"....That was the fourth yearly increase in a row. It was also part of a gradual increase that has lasted nearly all of the past decade."

Consumer Reports conducted a long-term study on customer satisfaction and value regarding extended warranties purchased from dealerships and found that the majority of car-buyers either did not use their warranty at all or did not get the full value from it-

"55 percent of owners who purchased an extended warranty hadn't used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.

Among survey participants who used their policy, the median out-of-pocket savings on repairs covered by extended warranties for all brands was $837. Based on a $1,214 average initial cost, that works out to a net loss of more than $375. Factoring those who didn't use their policy, the median savings was zero."

The study also states that customers who bought warranties for brands that have poor reliability histories or luxury cars with a reputation for high repair costs had high levels of satisfaction regarding their purchase. So again it depends on the car, the coverage, and the cost.

If you are buying an 8 year old Range Rover from CarMax, you should probably splurge for the warranty. If you buying a brand new Camry, you are probably safe by keeping that cash in your pocket. Every car and every buyer is a case-by-case basis. Cars are expensive, machines break-down, it is all about managing risk. So here are some great tips from CR if you are considering getting some type of extended coverage-

    • Don't buy under pressure. Dealers often try to sell the convenience of rolling coverage into a new-car loan, but that means you may be paying up front for coverage that you already have with the factory warranty. You can purchase an extended warranty after buying the car, although you may find the cost increases as the vehicle ages.
    • Don't be afraid to bargain. Among those who purchased an extended warranty, only a third of our survey respondents tried to negotiate a better price for their contract. Most of those who did haggle were successful, saving about $325 on average.
    • Shop around. You don't have to buy an extended warranty through a dealership. In fact, you may find a better deal through your auto club or insurance company. But consider this: Satisfaction in our survey was highest among those who bought an automaker-backed warranty.
    • Go all in. Our survey found little difference in cost between limited and bumper-to-bumper coverage, which is more likely than powertrain plans to include reimbursement for towing, travel expenses, and a rental car. If you're going to buy, get the full protection.
    • Read the small print. Before signing, be sure you understand what is covered and where you can take your car for authorized service. Third-party warranties, especially, may have notable restrictions on approved shops. Given how many dealerships have closed in recent years, the availability of participating repair shops is a particular concern.
    • Consider an extended warranty for the long haul. All cars tend to become less reliable over time, so an extended warranty might be worth considering if you're planning to keep your vehicle long after the factory warranty runs out.

    Car-buyers are getting smarter; with online tools and research at your fingertips, it is more difficult than ever for dealerships to overcharge for a vehicle. Therefore, as vehicle profit margins go down, the dealers will find away to make up for that loss and they find those dollars in the F & I office. So when you go to sign the papers, don't let your guard down.

    (image credit iStock)

    I'm Tom and I run AutomatchConsulting.com; I also write articles about car buying. If you have any questions about the car-buying process feel free to drop me a line in the comments or find me on Twitter @AutomatchTom and Facebook.com/AutomatchConsulting