Car Warranty Scams: What to Watch Out For

Jim TrummFeb 10, 2017

There are a number of legitimate and reputable used car warranty companies out there. These companies stand behind what they sell and provide protection and peace of mind for those of us who drive used cars–or who bought a new car that is no longer covered by the manufacturer’s warranty.

However, there are also a lot of scammers out there, people who will try to trick consumers into giving up their credit card information, driver’s license numbers, social security numbers, and other personal data, without actually providing any sort of warranty at all. Finally, there are also companies that provide something that looks like a real repair and maintenance contract, but is in fact written with so many loopholes that it looks more like Swiss cheese than a real warranty.

What Is a Car Warranty?

A car warranty isn't a warranty like the one you get when you buy a new car. It's actually a service contract. The consumer pays a certain fee in exchange for the car warranty company's promise to diagnose, fix, and/or replace certain parts and systems of a vehicle. As with any contract, there is an exchange of trust involved. The company trusts that the consumer will be honest and make timely payments. The consumer trusts that the company will honor its agreement and do what it says it does. Most of the time, that's exactly what happens. But there are a few unscrupulous companies out there who abuse consumers' trust. These are the car warranty scammers.

How do Warranty Scams Work?

Car warranty scams can be divided into three categories.

First, there are companies whose warranty contracts contain too many loopholes and consumer-unfriendly clauses. No one likes reading lengthy legalese in a contract, but this is one time when it's important to do so. Some contracts give the warranty company the right to supply their own replacement parts. Unscrupulous companies can take advantage of that clause and supply used or defective parts whose provenance is unclear. In that case, the consumer may be stuck with a car that's been "repaired" with shoddy or non-working parts. Other companies' contracts use slippery language to describe what vehicle systems are covered.

Second, there are the companies whose contracts look fine on paper, but are simply not honored when a claim is presented. Phone calls are ignored. Paperwork is "misplaced." Repair approvals are withheld. Repairs are not paid for. Companies that operate this way typically stay in business for a few years, fold, and then re-form under new names.

Third, some car warranty scammers deceptively market themselves as the termination of a consumer's manufacturer's warranty approaches. They will pretend that they are calling from your car dealer or manufacturer and trick consumers into thinking that their "warranties" are an official continuation of the about-to-expire new car warranty. Marketing calls like this follow a script that begins something like this: "Hi, Mrs. Smith. This is Betsy from your car dealer service department. I just noticed that the warranty on your Toyota is about to expire and I wondered if you were interested in continuing service coverage for the vehicle?" In this way, consumers are duped into thinking that the call is coming from Toyota, the Toyota dealer, or a company approved and affiliated with them. However, that is not always the case.

What to Watch Out For

How can a consumer tell the good from the bad in this industry?

Step One: hang up on telemarketers. The FCC has warned about these scams. A consumer receives a call from someone who pretends to work for a car dealer or manufacturer. Caller ID says that the call is coming from one of those companies. The person at the other end of the line seems legit and knows a lot about the consumer’s vehicle and its warranty. The message is often that “your manufacturer’s warranty is about to expire,” but that by providing certain personal information the consumer can extend or renew the warranty. Of course, no such warranty or extension exists, but the consumer’s personal information is then used or sold, leaving him or her with a mess of fraudulent transactions and accounts.

Step Two: beware so-called taillight warranties. No, these are not service contracts that cover the brake lights–they are warranties only good until the warranty company “drives away,” leaving the consumer to watch the scammer’s tail lights disappear along with his money. Some warranty companies go bankrupt or out of business in a handful of years, leaving consumers holding the bag for repairs they thought were covered. A quick check with the Better Business Bureau can often determine how long a company has been in business and give consumers some idea of what its reputation is.

Step Three: carefully read the contract and the warranty. This isn’t fun. No one likes wading through legalese. But it’s vital. There is a big difference between manufacturers’ warranties and third-party warranties in terms of what is covered and what sorts of repairs and replacement parts will be paid for. If possible, try to go with a company that has an exclusionary warranty. They specifically list the kinds of repairs that are NOT included under the warranty, the implication being that all other repairs are included. These contracts are generally easier to understand than inclusionary warranties, which can take advantage of a consumer’s lack of understanding of automobile technology and systems.

Step Four: make sure the vehicle in question is not already covered by a manufacturer’s warranty. Just because a letter, email, or phone call says a particular car’s warranty has expired or is about to expire doesn’t mean it’s true. A consumer with a three year/36,000 mile warranty from the manufacturer doesn’t need a third-party warranty after only two years and 20,000 miles. Further, some vehicles which have been recalled already have de facto warranties on certain vehicle systems. Understanding what is already covered on a particular vehicle will help consumers avoid the purchase of duplicate coverage.

What To Do If You've Been Targeted

If you are one of the unlucky people who've been scammed by one of the bad apples in this industry, you have three potential remedies. None of them, however, are easy or even likely to produce results.

First, consumers can pursue compensation by way of damages in a small claims court action or, in some cases, a class action suit. These proceedings, however, are slow and cumbersome. Few lawyers want to take on a suit where the amount in question is only a couple thousand dollars or less. Even if a consumer wins a judgment against a warranty company, there is no guarantee that he or she will be able to collect on it. 

Second, people who've been ripped off can attempt to convince state authorities to begin a criminal or regulatory action against the unscrupulous warranty provider. Again, these are long, drawn-out processes. And even if a court does order restitution, you can't blood from a stone. If the company or the people behind it are broke, unhappy consumers are left holding the bag.

Third, pursuers of phony car warranties can take to the computer keyboard and post negative reviews. The best such reviews are clear and specific as to what the company did wrong. Of course, bad guys don't care about bad reviews, but at least potential new customers will be warned.

How to Pick a Reputable Car Warranty Company

As with most consumer purchases, forewarned is forearmed when it comes to avoiding used car warranty scams. Ask questions. Do some basic research, such as looking for online reviews, complaints to the BBB, and ratings on TrustPilot. People who are contacted by telemarketers should ask for a number to call back to verify that they are who they say they are. Another way consumers can protect themselves is by reviewing the various plans offered by our top ten car warranty companies. We’ve already kicked the tires and driven them around the block.