Everything you ever wanted to know about the "Forced Extended Auto Warranty Scam" but didn't know who to ask. Also known as the "Back End Products Scam," this scam relates to anytime a dealer sneaks in extra finance products into your car loan without disclosing them to you at the time of signing the contract.
Some unethical finance managers may go as far as tell you they're unable to get your loan approved unless you buy a warranty or other back end products. This is a false statement and is illegal, you can read more about it below.
A little known fact is extended warranty prices are negotiable and the best way to get a great deal is to shop around and find coverage that fits you and your families driving needs.
If you're in the market for an extended auto warranty. Visit my extended auto warranty guide to learn what to look for, how to select, compare and get the best deal when buying coverage for your new or used car.
Forced Extended Warranty Scam Explained
The scam is normally attempted when you're about to sign the paperwork for your new car. The finance manager tells you the lender will not approve your loan unless you purchase an extended warranty and/or GAP insurance, credit life and disability, or some other back end product the dealer's selling.
The forced extended warranty or back end products scam is normally used on car buyers trying to finance a vehicle with a poor or bad credit. Dealers know people in these situations are in need of a transportation and it's easier to convince someone in need of a car to fall for this scam. However this scam may also be used on people with good credit also.
Never let a car dealer tell you that you must purchase an extended warranty before lender will approve you for a car loan. This is false and illegal.
How the Forced Extended Warranty Works
You visit some car dealerships shopping for a new car. After looking around you finally find the perfect car you'd like to buy. You go inside the dealership and do the back-and-forth with the car salesman and his manager for a couple hours. Finally agreeing to a price, you're about to meet with the finance manager and sign all the paperwork. Now all you can do is sit and wait, when you really just want to drive your new car.
You finally get into the finance office and meet with the finance manager. He tells you the lender will not approve you unless you purchase an extended warranty for the vehicle. He explains further and explains to you the lender wants to make sure you can still afford the payments if you have any unexpected repair costs because of a mechanical breakdown.
There are several different excuses a finance manager may tell you why a lender is requiring you to buy an extended warranty or other high price back end products.
If you're buying a used car he may tell you the lender is requiring you to purchase an extended warranty because of the excessive miles on the vehicle and the lender wants to make sure that you can still pay for the vehicle by having protection if the vehicle was ever to breakdown.
With the price of new cars, this explanation is starting to become more popular when attempting this scam. The lender is requiring you to purchase an extended warranty because of the extended term of your requested car loan.
If you refuse all back end products - If you refuse to buy back end products from a finance manager. Be careful with the unethical F&I Managers out there, they may resort to deceitful tactics using statements like:
- "If you purchase an extended warranty and GAP insurance also. I can get you a better interest rate and approval because you're protecting the lender." LIAR! He'll just move the numbers around to give you the illusion you're getting a better deal.
- "I worked very hard on your car deal. The only way I could get your deal approved was by adding an extended warranty and GAP insurance to the deal." LIAR, LIAR Pants on Fire!
By Law, a lending institution cannot require a customer to purchase an extended warranty, GAP insurance, credit life, disability, or any other backend finance products.
Please don't make the mistake and think I believe purchasing an extended warranty or GAP insurance is a bad decision. I believe they're very good products and will protect you if something was to go wrong with your vehicle. Back end products such as these are optional and it should be your choice to buy them or not.
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How a Dealer Sets You Up for the Scam
A very common practice by car dealers is to preload or pack your auto loan payments when negotiating the vehicle's price with a customer. When quoting payments with a customer the dealer add some "fluff" into your payments like an extended warranty and other back end products figured into the car deal. Payment packing is one of the most common car buying scams in use in car dealerships today.
If a customer inquires about the extended warranty the salesman may tell them that it's included with the car or it comes with the payment. The salesperson isn't exactly lying to you. However, he is leading the you to believe the extended warranty or back end products are free when they are not.
How a $2,000.00 Warranty Affects Your Payment
Here are a few examples of how a $2,000.00 Forced Extended Warranty or Back End Products will affect your monthly car payment. There is no sales tax or additional fees in the example below:
$2,000 at 6% for 48 months = $47.00/mo = $2,246.00 Total
$2,000 at 6% for 60 months = $39.00/mo = $2,340.00 Total
$2,000 at 11% for 48 months = $52.00/mo = $2,496.00 Total
$2,000 at 11% for 60 months = $43.00/mo = $2,580.00 Total
$2,000 at 18% for 48 months = $59.00/mo = $2,832.00 Total
$2,000 at 18% for 60 months = $51.00/mo = $3,060.00 Total
As you can see from the example above, letting a car dealer slip a $2,000.00 warranty in on you without your knowledge will end up costing you even more over the life of your car loan.
This amount can be even higher if the dealer slips in other back end products such as GAP, credit life and disability insurance also. I cannot stress enough how important it is to take your time, do your homework, and read everything before you sign.
How to Avoid the Extended Warranty Scam
Never negotiate a new or used car's price based on payments or down payment alone. You will lose money negotiating using this technique. Always research and personally figure the dealer's true cost of the vehicle your wanting to buy.
Read my section on calculating a fair profit new car offer to learn how to do this.
Never Buy a New or Used Car Based on Payments Alone
Arming yourself with this information before visiting a dealership will keep a car dealer from being able to force any back end products into the car deal without your knowledge.
If a finance manager tries to pull this kind of dealer scam on you while you're in the finance office. Ask them to see the call back or approval sheet where the lender is requiring you to purchase an extended warranty or any other back end products.
If he starts to backtrack or make up excuses, tell him you believe he is trying to force these products on you and you do not want to purchase them. If he's persistent, tell him to put it in writing that you must purchase an extended warranty or certain back end products before you will be approved for a car loan.
Always read everything and have the finance manager explain all the numbers to you. If you don't understand something, have them explain it until you do. If you find something added to your car deal like a warranty, credit life, disability insurance or GAP, and you did not agree to it. Have them explain it, or remove it from the deal completely.
Car Buying Tip - Always read everything you sign. I can't count how many times people have confronted me, days or weeks later and tell me they did not agree to purchase an extended warranty or they did not realize the price of the warranty was $2,500. It's amazing to me how many people don't read what they're sign, especially when it comes to buying something expensive like a car. You must read everything BEFORE signing it!
If the finance manager insists you must purchase any extra products you don't want, kindly thank him for his time and just GET UP AND WALK OUT IMMEDIATELY! Your car salesman and sales manager will surely approach you and ask what happened. Some finance managers may work independently and will get into serious trouble by attempting this kind of scam in some dealerships.
Once you sign the contract, it's a DONE DEAL. Consider yourself an OWNER!
Dealers mark up GAP insurance, credit life and disability insurance and other back end products hundreds, if not thousands, of dollars.
Read more about these products in my car insurance buying tips section.
How to further protect yourself:
- Before visiting a car dealership, get a couple free warranty quotes from a reputable online auto warranty companies such as Complete Car Warranty and Endurance Vehicle Protection. You can even use their quotes as leverage when negotiating with a car dealership.
- NEVER negotiate the price of a new or used car based on monthly payments alone.
- Get new car price quotes on the car your interested in before visiting a car dealership.
- Only finance a vehicle through a car dealership as a last resort.
- Use outside finance sources to get a pre-approved car loan such as your bank, credit union or for the best interest rates use online auto finance services.
- All finance and insurance products are optional. (It's your choice to purchase them and they cannot be forced on you)
- Get GAP insurance or Total Loss insurance quotes from a reputable insurance company before going to a car dealership.
- Read everything and pay attention, don't let the dealer sneak any products into your car deal without your knowledge.
If you believe you've been a victim of the forced extended warranty or back end products scam there's not much you can do if you've already signed a contract with the dealer.
You can contact the Better Business Bureau or you're State's Attorney General's Office. By doing this you will document your complaint against the dealer, warning others of the unethical business practices of the car dealership. If the dealer gets enough complaints against it. They will be investigated.
You can cancel your extended warranty though the company it's through. You may have to call the dealer to cancel your warranty or you may be able to call the number on your extended service contract paperwork. Each company has a different policy. Look at your warranty contract. There should be a section on it somewhere to show you how to cancel coverage.
When you cancel your extended warranty you may only get a prorated amount of money back. That money will be a prorated amount of the "cost" of the warranty. This does not include the amount of mark-up the dealership charged you.
Cancelling your warranty will not lower your monthly car payments. The money will normally be sent to the bank and applied to your car loan.
Keep in mind if you cancel your extended warranty you won't be covered if you have any major mechanical breakdowns.
The best advice I can give you is to do your research and comparison shopping on extended auto warranties before shopping for a new or used car.
Continue to familiarize yourself with more car dealer scams.
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