What to think about when buying add-on car financial products

Just when you’ve ended the hunt for your dream car, you might find yourself faced with another major decision: add-on financial products.

Whether you’re buying a new or second-hand car, car dealers will likely try selling you add-on financial products which cover car-related extras like tyre and rim damage, gap insurance, and extended warranties.

While caryards might try to convince you to commit to these add-ons, it’s important to remember these are optional. As in entirely. You don’t have to commit, even if it seems like a car dealer is forcing the issue. 

In fact, many of these extras may charge expensive premiums, end up being poor value for money, and potentially be restrictive with regards to payouts. Just because you’ve managed to find the best car loan, doesn’t mean that money should go to an extra you don’t potentially need. 

Dealers receive commissions of about 20 per cent of the premiums, so they may have a vested interest when selling you add-on insurance.

The Australian Securities and Investments Commission (ASIC) wants a fairer sales process for consumers and is seeking feedback from the public on reforming how caryards sell add-on financial products, which excludes comprehensive or compulsory third-party insurance.

The commission has proposed to introduce a deferred sales model, which would restrict car dealers and finance brokers from selling add-ons to buyers for four days after the buyer has purchased the car.

ASIC has also put forward the use of ‘knock-out’ questions to filter out the extras that would be of little or no value to buyers and should not be offered.

In the meantime, here are some things you should consider if you’re looking at purchasing car add-on financial products.

1. Do your research beforehand – Don’t rock up to the dealer expecting to make a decision on the spot. It pays to know what add-ons you will need before arriving. Consider using RateCity’s car loan calculator and see how much your repayments bill would be when you factor in the cost of add-ons. 

2. Stand your ground – Don’t be swayed by a dealer telling you it’s a great deal. If you didn’t think you need the extra after doing your research, chances are you still don’t need it after meeting the dealer. Remember, car dealers get paid for what they sell, so you might be following their lead, not your own. 

3. Determine the right level of cover – Make sure you’re buying the level of cover that suits your needs to avoid paying too much and being over-insured. You might be sold insurance that covers a longer period than you really need (for example, if your car’s mileage is reaching the insurance policy’s expiration limit). Weigh up the information and come to your own conclusions.

4. Are you getting enough bang for your buck? – Perhaps you’ve decided that you do need extra cover, but are you getting value for the money you are paying? Sometimes it’s hard to know when you’re being offered the product on the spot by the car dealer. Try to find out if the premiums will be worth the potential payouts and in what circumstances will they accept claims.

5. Check, check, check – Go through the product disclosure statement before you sign anything. It won’t be the most riveting read, but it will pay off in the long run. One thing to potentially look for are duplicates, so make sure you're not buying extra cover for something you might already be covered for.

What if you think you’re potentially being ripped off? 

If you believe the add-on insurance you purchased was sold through an unfair sales process, get in touch with the insurer’s complaints team. If that doesn’t get you anywhere, you can escalate your complaint to the Australian Financial Complaints Authority, which is an independent body that many add-on insurers are a member of. For more information on how to complain, check ASIC’s MoneySmart site.

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