When even a free extended warranty is overpriced

Consumer Action Law Centre recently warned about virtually worthless warranties that consumers sometimes purchase when taking out a loan or buying a car.

I wrote recently about a case where the tribunal ordered a car dealer to refund the price ($14,500) paid for a used car to the consumer (‘G’).

Another part of G’s story shows how even a ‘free’ warranty can cause harm by:

  • appearing to add value to a car,
  • conditions that may add to consumer costs, and
  • giving the purchaser false confidence in the purchase.

When G was considering his purchase, he became aware that the timing belt needed replacement.  The dealer said this wasn’t an urgent repair, and so would not repair this at no cost.  G was reluctant to pay for this on top of the purchase price.  However, further discussions with the dealer included an offer of a 9 month extension of the free warranty (which, he said, was usually for 3 months) to 12 months.

Of course a range of factors goes into a decision to purchase a car, but G thinks that it was likely that this offer contributed to his decision to purchase and made him feel that the dealer had confidence in the quality and reliability of the car.

G doesn’t recall receiving the warranty document until after he signed the purchase documents, and this is supported by the fact that the warranty is dated 4 days after the car purchase contract.  However, it is unlikely that most people would read through a 13 page warranty document at this time.

The warranty is called a “Mechanical Protection Plan”.  The maximum payable for any one claim was $750 and total claims paid were capped at $2,000.   Unfortunately, the major repair that Gerard required during the period was going to cost $15,400!

Only repairs listed in the document are covered. A condition of the warranty was that all servicing is done by the dealer (regardless of where the purchaser lives).  Any mechanical repair that is required must also be done by the dealer if the vehicle is within 50 km of the dealer.  However, if the vehicle was say, 45 km away, this could add $100 or so to the towing costs payable by the consumer.  However, as G had moved interstate and couldn’t return to Victoria for servicing, he couldn’t have even claimed $750!

The warranty provider was Harrier National.  On their website, they say:

“Harrier-National’s New and Used mechanical protection plans consistently keep customers wanting to come back not only for servicing but for repair work too.  This is a win/win situation.  The customer enjoys quality servicing and repairs at highly competitive pricing, using genuine parts, while as Deloittes say, the dealers service department becomes their most successful department.”

These are clearly a great thing for car dealers and their repair departments.  Even ignoring all the obvious problems, it is likely that many consumers will try to comply with the conditions without focusing on the limited benefits.  This can reduce price competition in the vehicle repair market – just what the dealers want to do!

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