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?