Bizarre auto financing rules, or bizarre sales bullshit?

I’m looking at buying a new car, and I sat down with the dealer finance guy to see if I could get financing for it. A bit of background – my credit score is very poor. Not long ago I was unemployed for more than 3 years and my house was being foreclosed on. I got a job just in time to save my house, and I’m still pulling myself out of the hole I was in.

The guy is really pressing for me to buy an extended warranty, which I think is nonsensical for a brand new car with a 3 year warranty already. He claims that it will improve the odds of the bank okaying the loan. Ok, I say, if we put in the application that I intend to buy the warranty and the loan is approved, and then I choose not to buy the warranty, will the bank pull back the approval or change the terms of the loan offer? And he tells me no, I can do exactly that and the loan would still go through as specified. So I agree to do that.

A couple days later he tells me the loan is approved. In the mean time I decide to add an option package. The warranty is $1500 and the option package is $1000, so swapping them means a net $500 decrease in the loan amount. He says he’ll have to run the loan through for approval again because of their bank’s lending policies. I am rather stunned – why would they need to do this when they are being asked to loan less money than was already approved?

He explains. The bank considers the warranty a form of insurance, and the amount approved didn’t even need to include its cost. IOW, for a $20,000 loan that includes the warranty, the amount they consider for approval is $18,500, and if they approve it they will still loan you the full $20,000. But after swapping out the warranty for the options, leaving a net cost of $19,000 the bank needs to reassess the approval for the full $19,000 amount. The actual loan amount would decrease, but from the financier’s point of view, the amount to approve would increase. While none of this makes sense to me, the revised loan amount did get approved with no change to the APR or any other of the terms.

I was pretty sure the guy was bullshitting me about the warranty making the loan approval more likely. But I’m now rethinking it in light of the subsequent events. He didn’t object at all to dropping the warranty, and the 2nd approval didn’t cost me any more than before, so it wasn’t some clever scheme to gouge more money out of me. Or if it was, I can’t see how.

So is this a real thing. or some convoluted scheme to … what, exactly?


  • Are you asking for a loan that is longer than the length of the warranty (three years)?
  • When you say “bank”, do you really mean dealership financing?
  • Is there some reason you cannot arrange your own financing, therefore eliminating any confusion or conflict of interest?

The dealerships make their money on financing and add-ons. Always secure your own financing; it gives you a more solid place from which to negotiate.

Yes, 3 year warranry, 5 year loan.

Financing is through the dealer, but the dealer is not directly making the loan. Mazda USA seems to have a deal with Chase bank to actually make the loans. The last loan was from them, I assume the new loan would be too.

They offered me a much lower APR (0.9%) than I can get from my own credit union. As I mentioned, my credit rating is shot.

They’re not offering you better rates out of the goodness of their hearts. They plan on making as much money from you as possible, and they know their job better than you know auto financing. You still may get a better deal through your credit union.

No I won’t. I don’t even have to apply – they advertise their rates on their websites, and their lowest rate (which I won’t qualify for) is nearly 4 times higher.

Can we skip the questions about whether this is a good deal or not? I want to know if this bizarre tale of how auto financing works is true or not. Regardless of the dollar amounts or the APR, it just doesn’t make any sense to me.

The lender will require you to carry full coverage insurance for the full term of the loan, but I have never heard of a one considering whether the vehicle is in or out of warranty. Nowhere in this Bankrate nor in this Edmunds article and thread article does it mention a loan as a reason to consider purchasing an extended warranty.

No, it isn’t true, it’s complete bullshit they are using to sell you an extended warranty, which is a huge profit center for dealerships.

But they didn’t object to me dropping the warranty from the deal. And it doesn’t explain why they had to get a second approval for a lower loan amount than what got approved the first time.

What do you mean, he didn’t object to you dropping the warranty? Sure he said words that might reasonably be interpreted that way when you suggested that you might drop it at some future date, but when it came time to actually drop the warranty you’re getting some serious push back in the form of this reprocessing story.

I think what you interpreted as not objecting was actually just a tactic to keep you in the room and the deal on track until you’re too emotionally invested to reject the hard warranty sell.

Firstly, you cant afford a brand new car.

Secondly the extended warranty is a scam.
Its like loaning people 100$ so they can buy $100 of magic beans off you.
You aint bothered if some of 'em default.

This makes a certain amount of sense to me, assuming you’ll be taking more than 3 years to pay off the car. The bank could well worry that something major would go wrong with the car before you’d finished paying it off, and you’d just stop making payments, and if they repo-ed the car, it’d be worth a lot less than the amount you still owed them.

I mean he agreed that I could drop the warranty purchase after the loan was approved, and once the loan was actually approved and I said to drop the warranty, he said ok and didn’t say another word about it. By that time I wasn’t in the room anymore. And it was me who raised the option buying issue, not them. They had already started looking for the car without the option package, and my change made them restart the search.

I agree this makes a certain amount of sense. OTOH, it doesn’t make a lot of sense that, if this is true, they wouldn’t be more insistent about twisting my arm not to drop it later.

That’s not true.

If you’re buying a car, and you plan on keeping it 6 to 8 years, putting 100k or so miles on it, then it’s probably worth it assuming:

  1. It must be a warranty through the manufacturer, not a second party.
  2. You negotiate the price of the warranty. Yes, they do negotiate on the price.
  3. You maintain the car, saving proof of all the services performed. Oil changes, etc.
    If you change cars every 4 or 5 years or less. Then it’s a waste of money.
    ETA - and new cars often offer better financing, payment rates, and obviously longevity.

An “Extended Warranty” is 100% profit.

Car dealer are notorious for pushing them.
The only way I could get the salesman to stop pushing it was to simply inform him, that should he mention it again, I would walk.

I cannot imagine a lender giving a rat’s ass about such a thing - the warranty does nothing to protect the lender.

  • OR -

What nicky said - the warranty is a scam.

With my first house, the seller threw in a “Home Warranty”, covering large item.
The water heater died, I called a plumber and asked if they accepted the coverage. His response:

“Since we haven’t been paid for the last 7 jobs we did for them, No.”.

Just tell him to either put the app through (they have lenders who, for the right price, will finance the dead). If they can’t find a lender who will deal without the ‘really, really good idea’ warranty, you will find a dealer who can find financing.
And then do it.

If your financial condition is shaky, you don’t need to be paying for a worthless “Warranty”.

p.s. - When the salesman says “I don’t know if I can get the Sales Manager to give you this tremendous bargain, but: I really like you so I’ll do my best” and leaves, He is getting a cup of coffee or taking a piss, or maybe he and the Sales Manager are having a laugh about the sucker he’s got on the line this time.

The salesman knows the minimum he needs to get - and, if this lot does any business at all, he is making much more than minimum - if he wasn’t, another salesman would have the job, not him.

Listen, I don’t care if the warranty is a scam or not, because I’m not going to buy it. I haven’t yet decided to buy the car.

What I want to know if the financial people actually do what the guy says they do. The claim is they discount the value of the warranty from the loan approval, so they only need to approve a lesser amount than the actual dollar value of the loan. Therefor, if you remove the purchase of the warranty and add some other options, they have to run the approval again for higher dollar value, even though the dollar amount you want to borrow goes down.

It makes no sense to me, and since the term and APR of the loan didn’t change, I don’t see why they would themselves jump through these additional hoops, which don’t earn them any more money from me as far as I can tell.

That is why I’m asking – are there actually bizarre rules that make them do this, or is there a hidden route through which they eventually expect me to pay more. And if so, what is it?