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Has this ever happened to you (or someone you know)?  You've negotiated the best price you could get for the car that you want, you're ready to sign the papers, and then the finance manager says, "You need to buy this extended warranty because the bank requires it in order to get the loan.  It will cost an additional $2000, but it's worth it if you really want the car."

Surprises like this, you don't need.  Surprises like this, you don't want. Surprises like this, you don't have to take!

No bank, credit union, or other lending source will ever require a borrower to purchase an extended warranty-they have no interest whatsoever in whether you have warranty coverage for a vehicle.  Lenders are only concerned that they aren't lending more than a vehicle is worth.  Their need is to be able to recoup their investment should you default on the loan.

Dealers, however, have great interest in whether you have extended warranty coverage for your vehicle.  Dealers "sell" warranties to their customers because they make money well above their costs for the warranty providers-sometimes, very BIG money.  In Pennsylvania, dealers are limited (by state regulations) to a 100% "mark-up" on each warranty they provide. This means that most dealers make a profit equal to half the cost of the extended warranty that you "need" to purchase from them!  In other states, the mark-up amount may be even higher!  It should come as no surprise, therefore, that many dealers exaggerate the value of having an extended warranty (or lie about your "need" for one).

Some dealers will even include the cost of extended warranty coverage (at full mark-up) when they tell you what the monthly payment amount will be for the car you want, without actually mentioning that little tidbit during the discussion.  It is surprising how many people don't notice that extra expense until they get home (or some, not at all).  It is surprising how many people will spend more time analyzing the "cost vs. value" of a $4 watermelon at the grocery store than they will a sales contract for a $20,000 car!  It is also surprising how many people don't read contract
details; they just look at the bottom-line payment amount.

Many people are not comfortable with their knowledge of the car-buying process, so they trust the salesperson to take care of them through the process.  Car sellers are not surprised by this-they depend upon it to make a significant portion of their profits.

Some finance managers may surprise a customer who declines to purchase an extended warranty by claiming that the APR (annual percentage rate) for their loan will go up. The APR for your loan is determined by your personal FICO credit score as calculated by the lender, which has nothing whatsoever to do with warranty coverage (see above).  The dealership is betting that you won't catch them in their lie (relying upon their knowledge of "insecure" people).

If any of these surprises happen to you at a dealership, ask them to put it in writing (that the warranty "is required in order to get your loan, or to get a lower APR").   Whether they comply or not, notify the Office of the State Attorney General and the Better Business Bureau.  Reporting such practices may significantly reduce or eliminate these sales techniques as well as the "bad actors" who use them.

People with less than perfect credit are the ones who are usually scammed into buying something they don't need or want for a ridiculously high price, primarily because they are vulnerable.  They may not have many financing options, but they feel they must have a car, so they end up paying way too much, at a high interest rate, which makes it difficult for them to make the payment.  Defaults just continue the cycle.

If you have a low credit score, try to avoid dealer-arranged financing.  Try to arrange financing from a bank, credit union, or online lenders.  Banks, credit unions and online lenders won't "push" a warranty on you.  If you feel you need a warranty for the additional peace-of-mind it provides and to cover unexpected repair expenses, get one directly from a warranty provider (available online or via telephone).  Warranties are important, but only if you are getting the right one for the right amount.  Don't be surprised to find that dealing directly with a warranty provider can cut your costs in half.

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