Pricey new-car extended warranties are usually poor deals, according to a recent survey and in-depth report published in Consumer Reports'Annual Auto Issue. Providing further evidence is action by the Missouri attorney general against several warranty companies in the St. Louis area.
Sixty-five percent of more than 8,000 Consumer Reports readers surveyed by the Consumer Reports National Research Center earlier this winter said they spent significantly more for a new-car warranty than they got back in repair cost savings.
Extended warranties are very lucrative for dealers, who are being squeezed by lower commissions and better pricing information. On average, dealers collected around $800 on each extended warranty they sold.
Meanwhile, Missouri Attorney General Jay Nixon took legal action against several businesses, most of them based in the St. Louis area, that he said used misrepresentation and deception to sell motor vehicle extended service contracts to consumers around the country.
Nixon said the coordinated filings of lawsuits and settlements, dubbed Operation Taken For A Ride, involve scores of consumers who were misled into paying for extended service contracts on their vehicles that, in most cases, they did not need.
In the Consumer Reports survey, respondents cited warranty costs of $1,000 on average that provided benefits of $700 -- an average $300 loss.
Some 42 percent of extended warranties were not used, and only about a third of all respondents used their plan to cover a serious problem. About one in five respondents (22%) said they had a net savings. Seventy-five percent did not buy extended warranties at all.
"Extended warranties sell costly 'peace of mind' for repair nightmares that probably won't occur," said Rik Paul, automotive editor, Consumer Reports. "Sellers know what tends to break, and in most cases consumers are betting against the house."
Extended warranties were, however, a better deal for those who bought more troublesome cars scoring lower in CRs reliability ratings, such as those from Mercedes-Benz. Still, only 38 percent of Mercedes-Benz owners said they saved money. The average loss was $100.
Lexus and Toyota owners lost the most money: $600 on average for Lexus and $550 for Toyota. Owners of Pontiacs and Jeeps broke even because on average they had covered repairs that equaled the warranty cost.
Consumer Reports' analysis of specific car makes was based on 5,465 responses from a December 2007 online survey of CR readers who owned 2001-2002 vehicles.
What to do
Consumer Reports experts suggest, among other things, shoppers put the $1,500 to $2,300 they might spend on an extended warranty into a money market savings account or mutual fund instead, to insure against unlikely significant repair costs.
For consumers who want absolute peace of mind and don't mind paying for an extended warranty, Consumer Reports offers the following advice:
• Don't feel pressured to buy an extended warranty at the same time as buying a new car. Instead, shop about six months before the vehicle's factory warranty runs out.
• Ask for and have a trusted mechanic review sample contracts before buying.
• Bargain hard -- sales commissions can be large.
'Taken for a Ride'
Missouri AG Nixon said the companies targeted by his office used use high-pressure, misleading tactics.
Its rather insidious how these companies prey upon consumers fears, sending misleading letters informing them that their current motor vehicle warranties were about to expire, when in fact many of the consumers possessed factory warranties that wouldnt expire for several months, Nixon said.
That was the hook to sell these consumers unneeded motor vehicle extended service contracts for hundreds or thousands of dollars. When consumers canceled the contracts, many received only a partial refund or no refund at all.
Nixon says the companies mislead consumers in letters and postcards with boldfaced statements such as Notification of Interruption! and Important Dated Material Enclosed leaving the impression that they are sent from the manufacturers who produced the consumers vehicles or the dealers who sold the vehicles to them.
In fact, Nixon said, the defendants fail to inform the consumers that they are not affiliated with the manufacturer, dealer or any local, state or federal government agency, and that the mailings amount to advertisements for the companys service contracts.
Many consumers confused, but not wanting their car warranties to expire went ahead and purchased the new, but in most cases unneeded, service contract the company was hawking, Nixon said.
In one case, an elderly consumer received a postcard stating that her motor vehicle warranty was expired or about to expire in March 2007, even though her actual extended warranty through General Motors wouldnt expire until November 2008. The consumer purchased a new service contract for $1,898 from the company, and the company refused to issue a refund when it was requested.
Nixon filed one of his lawsuits against that company, Vehicle Services Inc., of St. Peters, in St. Charles County Circuit Court, requesting injunctions, restitution for consumers, penalties and other relief. In addition, the Attorney General filed lawsuits today against the following businesses:
• TXEN Partners, which does business as Service Protection Direct of St. Louis; and a related company, United Warranty Solutions, for using misleading notification letters to pressure, confuse and intimidate consumers into purchasing MVESCs they did not need. The defendants failed to disclose coverage requirements to consumers who purchased MVESCs (such as the requirement to use a specific brand of oil to receive reimbursement for repairs); failed to honor contract terms and perform repair on consumers vehicles; and failed to issue refunds to consumers, including one consumer who is owed as much as $3,800. The lawsuit was filed in St. Louis County Circuit Court.
• Dealer Warranty Services of St. Charles, for using misleading notification letters to pressure, confuse and intimidate consumers into purchasing MVESCs they did not need. The defendant also misrepresented to consumers the cost of purchasing the MVESCs and debited the bank accounts of several consumers without authorization. The lawsuit was filed in St. Charles County Circuit Court.
• Certified Auto Warranty Services Inc., of Lenexa, Kan., which promised a 100 percent Money Back Guarantee to those consumers who purchased and canceled MVESCs, but then issued only partial refunds or no refunds at all. One consumer who paid $1,335 canceled her contract, but has received no refund to date. The lawsuit was filed in Greene County Circuit Court.
• National Dealers Warranty Inc., of St. Peters, which sent consumers postcards and letters informing them that they had limited time to purchase renewed, extended warranties for their vehicles. The company neglected to inform consumers that it was not affiliated with the dealers or manufacturers of the vehicle, or that it was actually offering to sell MVESCs instead of warranties. The lawsuit was filed in St. Charles County Circuit Court.
• National Auto Warranty Services Inc., of Wentzville, which also sent consumers postcards and letters informing them that their warranties were about to expire, and that it was offering them their final chance to purchase a renewed, extended warranty. The company failed to inform the consumers that it was not affiliated with the dealers or manufacturers of the vehicle, and that it was actually offering to sell MVESCs instead of warranties. In addition, the company violated the Missouri No Call Law by calling Missourians who were on the No Call list, as well as federal telemarketing laws by contacting consumers by phone and failing to honor their requests not to be called. The lawsuit was filed in St. Charles County Circuit Court.
• Smart Choice Protection of St. Louis, doing business as Direct Dealer Warranties, which also sent consumers postcards and letters informing them that their warranties were about to expire, and that it was offering the final chance to purchase a renewed, extended warranty. The company failed to inform the consumers that it was not affiliated with the dealers or manufacturers of the vehicle, and that it was actually offering the sell MVESCs instead of warranties. The lawsuit was filed in St. Louis City Circuit Court.
In addition to the lawsuits, the Attorney General filed assurances of voluntary compliance with two companies to settle allegations of misrepresentation in the selling of extended warranties:
• Carhill Enterprises, which does business as Consumer Protection Services, of 1232 Washington Avenue in St. Louis, will pay $7,209 restitution to eight consumers and $4,000 to the state to cover the costs of the investigation and enforcement of the case. The company also agreed to injunctive relief which requires them to inform consumers upfront of specific details of their product prior to purchasing. The agreement was filed in St. Louis City Circuit Court;
• Warranty Activation Headquarters, of 12244 Tesson Ferry Road in St. Louis, satisfactorily responded to all consumers who complained. The company will pay $5,000 to the state to cover the costs of the investigation and enforcement of the case, which was filed in St. Louis City Circuit Court. The agreement also requires the company to provide full refunds to any consumers who cancel within 30 days.
Nixon encouraged consumers who have complaints about businesses selling motor vehicle extended service contracts to file complaints with his office, by either going online to ago.mo.gov or by calling the Consumer Protection Hotline at 1-800-392-8222.