Monday, November 21, 2016

Aftermarket Auto Warranty Scams

Legitimate Extended Warranties are just a bad bargain.  The crooked ones are an utter ripoff.

I wrote before about extended warranties and why I think they are a bad bargain.   Legitimate extended warranties (from the manufacturer, for example) at least have the prospect of paying out a claim.   But they do tend to cover the portion of the car's lifetime where the fewest problems would be encountered.

Cars, computers, cell phones, toasters - you-name-it - they all tend to follow the Weibull curve, in that they fail early on, due to manufacturing defects or what we call "infant mortality" or they fail toward the end of their service life.   In-between, where the extended warranty kicks in, is the least likely place to have problems.   So these warranties, which are usually wildly overpriced, are just a bad bargain.

People buy them for "peace of mind" but whenever someone tries to sell you "peace of mind" keep one hand on your wallet, chances are you are being ripped-off.

But there are crooked extended warranties as well.   These are not merely bad bargains, they are utter rip-offs.   If your car or whatever breaks, they will never pay you a dime as they likely will be out of business by then.   Even if they are in business, you really have no realistic recourse if they refuse to pay out.

In order to enforce any contract (and an extended warranty is a contract) you have to be willing to sue the other party to force them to perform.   However, lawsuits costs money - about $10,000 minimum to hire an attorney and sue someone.  Even a "small claims court" case costs your time, and as we shall see, they often don't result in justice.

If you paid $4000 for an extended warranty on your car, and the transmission breaks, costing $3000 to repair, is it worth spending $10,000 or more on a lawyer to be made whole?   If you are smart, you'll realize that spending $3000 on the transmission is better than spending $10,000 on litigation and possibly losing.  A better bet is just not to buy the extended warranty and just budget for repairs.

Even assuming you could find out where the people who sold the warranty are located (which may be overseas) and you can successfully sue them, collecting could be a nightmare.  You are an unsecured creditor, and they can declare bankruptcy and re-incorporate under a new name, or just disappear like the wind.

As you can see, selling fraudulent extended warranties is a pretty sweet deal.

And it is not a hard "business model" to work:
1.  Buy the names and addresses of new car owners from the State DMV.  Some States such as Florida sell this information.   You can also buy the data from the carmakers themselves.
2.  Send out postcards to consumers with dire warnings that their warranty is about to expire.  Imply that you are from the manufacturer.
3.  Or just robo-call with an auto-dialer to every number in the world.
4.  Sell an "extended warranty" for thousands of dollars.
5.  Never pay out a dime.  Use excuses such as lack of "preauthorization" and know that most consumers won't spend $20,000 in attorney's fees to recover a $4000 bogus extended warranty.
6.  When you've made a few million (which you paid yourself in salary) declare bankruptcy, listing all the warranty claims as liabilities and then walk away.
7.  Reincorporate under a new name.
8.   Go to step 1.

Pretty lucrative business.  Most crime is!

How do you avoid this trap?  Well, the easiest way is just to avoid extended warranties, period.   Odds are, even a "legitimate" one is not going to pay out more than you paid in (and if you understand basic business practices, economics, and probability, you understand why).   Many folks are shocked to discover that the "bumper-to-bumper" coverage covers very little in real-life, and that if procedures set forth in the contract are not followed to the letter, claims will not be paid.

You can call a lawyer or call an auto mechanic - only the latter will actually fix your car.  Signing a complex contract to avoid auto repair bills seems to me like an odd way of keeping your car running.  The more complicated you can make any financial transaction, the easier it is to rip-off the consumer.

But if you must, really must, buy an extended warranty, buy one from the factory - the company that made your car.  And be careful about this, as the people who send you postcards and call you on the phone will say they are selling a factory warranty, but they are not.  Even auto dealers will imply they are selling a "factory" extended warranty when in fact they are selling a third party warranty (which is far more profitable for them to sell).

Bear in mind that for a factory extended warranty, you usually have to buy it when you buy the car, or before he original warranty expires.  An inspection may be required if you don't buy the warranty when you buy the car.  I've seen more than one person buy a five-year extended warranty, paying thousands of dollars for it, and then trading in the car long before the warranty expires.   In some cases, these warranties are transferable, but not all. Don't expect an extended warranty to add resale value to your car - it won't.

And not all car companies sell extended warranties.  BMW, for example, tries to sell you "peace of mind" (right there on the front page of the website!) with a factory extended warranty.  I have been told that this warranty works well, in that if you do have a claim (which is unlikely) the dealer handles it without a lot of paperwork or sending off bills to third parties or getting pre-approval before work is done. 

GM has a plan as wellNote that both company's "financial" divisions are the ones selling these contracts, which should tell you a lot right there.   It is a financial instrument, like an insurance policy (which it is) and a contract (which an insurance policy is).   You are buying insurance, to insure a very trivial asset (parts of your car).   Is this really a good bargain?

There are also warranty companies that will warranty used cars.  All I can say is, be careful.   Only an idiot would offer any kind of extensive warranty on a used car.  As a result, these kinds of companies tend to be the fly-by-night variety.  Even the "legit" ones are going to play lawyer with you when you file a claim.   Verbal promises made by the salesman are not enforceable so regardless of whether he said it "covers everything" it only covers what it in the contract.

Most of these contracts I've read cover very little - things that never break, like crankshafts and axles.  Yes, they are expensive to repair, but they rarely, if ever, break.

Compounding this is the procedures you have to follow to the letter.   You must get pre-approval for repairs from 3rd party warranties.  Most mechanics are not willing to do the paperwork on this, and won't help you get pre-approval.  Or the warranty company wants you to have the vehicle towed 100 miles to a repair depot of their choosing.  You end up stuck with a huge towing bill.  Or the delays involved make you say "to heck with it" which occurs regularly with RV extended warranties.  More than one RV owner just bit the bullet and paid for repairs when the warranty company made them wait days or even weeks for "approval" to commence repairs.  When you are on the road and on vacation, you don't have time to waste.

People buy these things out of fear.  And fear is never an emotion to be trusted.  They buy an expensive car and are afraid that all its fancy gadgets and doo-dads and eight-speed transmission will break down.   And the car is so expensive and they owe so much money on it, they fear they may lose their "investment" or end up upside-down on the loan.   They are also so thinly financed (because in part of car loan payments) that if the car did break down they literally could not afford to repair it.  That's pretty sad!

A cheaper way, I think, is to simply buy a cheaper car that you can actually afford - and afford to walk away from.   One reason BMW sells a lot of extended warranties is that people really can't afford to pay $50,000 to $100,000 for a car and they are paranoid about it breaking down, which they do, as they are complex cars with cutting-edge features.   If you are afraid of a breakdown or the prospect of it sounds frightening, think about why this is so.   Making financial decisions based on FEAR is never a good idea.  (That's how you end up with a President Trump!)

Also, if you are buying an extended warranty, be sure to cram them down on price.  If you buy through the dealer, the salesman will get a commission on the warranty, and they have every incentive to pad the price.  And the sales pitch is as old as the hills.  "A new transmission could cost $5,000 plus labor!" they say, giving you the list price on a factory-new tranny from the book - a price that no one in their right mind pays.   So $4000 sounds like a real bargain for an extended warranty, doesn't it?  (Buy a warranty directly from the car manufacturer if you can - and avoid salesman's commissions).

Truth is, though, if your transmission did blow up, odds are you'd replace it with one from a wrecked car and then sell the car or trade it in.  Because if your car is eating transmissions during its normal service life (150,000 miles or less) then something is wrong with the car or the way you are driving it.

Myself, I would rather spend the money changing the transmission fluid every 40,000 to 50,000 miles (or as recommended by the manufacturer) than to buy an insurance policy for it.   But that's just me.  Your mileage may vary.  Extended warranties to me, are just a waste of money, even when they are not just fraudulent.

By the way, if you Google "best extended warranties" you will get pages of SPAM from sites that sound like Consumer Reports, but are not.   This alone should tell you how shady this business is!