Why car package-deals are actually a rip off

By ArunBalakrishnan

If you've been scouring the market for a new car, you may have come across attractive offers - club the car purchase with insurance and car loan and get a fabulous deal. Car dealers usually have tie-ups with an insurance company as well as a financing firm and tend to push the products which fetch them a good margin. They typically bundle these three products and entice customers with the prospect of discounts on the package deal. But do these discounts really translate into savings for you? Not really. In fact, the opposite may be true.

If the dealer claims to give a good discount on the insurance premium, he would usually make up for it on some other component of the package - for instance lower discount on the price of the car. Similarly, the dealer may choose to factor in a discount from the car manufacturer which is meant to be offered to the customer into the loan cost. This makes the EMIs appear lower than the stand-alone rate offered by banks. But this also means you end up losing out on cash discount on the down-payment for the car. You don't really save because the cost is built into the package to make sure the dealer recovers a stipulated amount.

 Why car package-deals are actually a rip off

If the dealer claims to give a good discount on the insurance premium, he would usually make up for it on some other component of the packag. AFP

However, if you were to separate the purchase of all three and treat them as distinct products with appropriate due diligence for each, you would stand higher chances of landing the best deal on each individually.

Many a times, car buyers end up paying higher insurance premiums as they are not aware of the fine print and simply take whatever the dealer offers. For instance, those with a good driving record and claims history can get between 20-50% discount on account of No-Claim bonus. When you purchase a new car, NCB can be transferred from the old to the new car, leading to substantial savings on the first premium. Car insurance dealers are typically not insurance experts and often they have a standard plan they sell with the car, rather than identifying the appropriate plan as per the customers' requirements. Buying insurance separately also means you would buy insurance from an expert. A good company would make sure that the product you buy is best suited for your needs as a customer, and not necessarily the most profitable product in terms of commission and revenue. As the old adage goes, "you wouldn't get a haircut from a vegetable seller". This makes it important for you to be aware of these nuances and do your own research to ensure you are really getting the best deal.

A point to be kept in mind is that the policy offered is typically valid for one year. Thus whatever deal one gets from the car dealer is applicable for the first year. From the second year onwards, it is the policy holder's responsibility to renew the policy and pay the premium. Although you may get an attractively priced policy from the dealer, make sure you are aware of the renewal costs beforehand.

Buying from the experts would give you the opportunity to understand the product so that you are completely cognizant of the features and coverage being offered to you. So instead of going for a standardized policy with features which you might never use, you could opt for the specific add-ons which would add value. To explain, while cover for electronic accessories might make sense if you own a fancy car with an expensive externally fitted audio system, investing in roadside assistance cover may be of utility to women and the elderly who own a basic car. Buying directly after proper research reduces the possibility of mis-selling due to conflict of interest between the insurance buyer and the intermediary. Moreover, in case a policy is mis-sold, while you can initiate legal action if the policy has been purchased directly from the insurance company, it would be tougher to do in case it has been purchased through an intermediary.

Direct interface with the insurer is more convenient as well. So whether you need to make any changes to your policy, or have any endorsements, or if you need to make a claim, directly liaising with the insurance provider offers greater control over the process.

It is very simple nowadays to obtain quotes, compare policies and buy the most suitable one. There are various aggregator websites that can help map your needs, guide you to the right auto insurance policy as per the make and model of your car and identify the best deal on the same. You can, in fact, purchase your motor insurance policy online as soon as you get the registration number of the vehicle. So if you're shopping for a car this festive season, don't ignore insurance. Invest some effort in shopping for insurance too and you may find a deal to add to the festive cheer.

A guest column by Arun Balakrishnan, CEO, BerkshireInsurance.com

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Updated Date: Dec 20, 2014 20:18:38 IST