Car loan add-ons: Are they worth it?

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The zero percent and super-low interest rates on car loans currently offered by automakers are a chance for many savvy dealers to sell more add-on services, such as extended warranties, theft protection and insurance, to new-car customers. Some extras can be useful, but only if they are priced right.

Often, dealers offer these extras as a package instead of as stand-alone items. This strategy — designed to sell more items — is often presented as a “protection package” and usually is offered in three levels, grouped by bronze, silver and gold. Known as “menu selling,” this approach makes it easier for the dealership to ensure the salesman presents all the extra items or services the dealership offers. It also gives the salesman an easy way to make the customer feel as if these packages are not optional even if they are.

While it may seem underhanded, this strategy of selling extras by offering a menu of packages is no shadier than what happens in numerous sales situations. Think of a grocery store’s “buy two for $5” promotion, where you could buy just one item for $2.50 anyway. The difference here is that customers often spend thousands on these packages instead of an extra five bucks.

So what should you buy? It depends on the price and if you really need it. Life insurance and other nonauto extras are almost always unnecessary and can be purchased cheaper elsewhere.

One type of useful insurance you may be offered is gap insurance, which pays the difference between what you owe and what your car is worth. Buy this if you are leasing a car — if it’s not already included in the lease agreement — or if you are getting a car loan for more than the car is worth, like when the remainder of your previous car loan is rolled into the new car payment. Still, it’s best to research the costs of gap insurance through other sources first so you know if the dealership is offering you the best price.

Services such as VIN etching, paint protection or fabric protection generally aren’t worth it. You can do these things yourself or bring your car to a detail shop later and most likely pay less. Stolen vehicle recovery services are probably not worth the extra money either, unless you are buying a high-theft vehicle and driving it in an area where it’s likely to be stolen. If you decide you really need any of these extras, research your costs for them elsewhere first and then compare it to the price offered by the dealership.

Extended warranties, which kick in after the manufacturer’s warranty has expired, and service plans, where you purchase a book of coupons for factory scheduled maintenance and roll it into your monthly payment, are also often not worth it. Consider an extended warranty only if you expect to own the car well past the manufacturer’s warranty. Prepay for regularly scheduled maintenance only if you are sure you will want to go to that dealer for your service. If you purchase either of these options, take the time to research these service costs from other sources.

Be very clear on exactly what’s included and what will happen to your money if the company that backs these products, which may not be the dealer or auto manufacturer, goes out of business. Keep in mind that rolling these extras into your car loan means you’ll be paying interest on them.

Finally, remember that while you may be presented with three choices of packages, you can decline them all. You also can negotiate these car services individually if you want just one. Later, you can cancel many services, such as an extended warranty or a service plan, if you decide you don’t want them. Items that are attached to the car, such as VIN etching or a stolen vehicle recovery system, usually cannot be canceled. Just be sure to read any paperwork so you understand the cancellation policy.

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If you have a car question, e-mail it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories.

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