This is the first in a series of Informed blogs about motor vehicle/voluntary protection products (VPPs).
When consumers go to a car dealership, they often buy supplemental services and protections for their cars commonly called voluntary protection products (VPPs). Cars are expensive and these services appeal to consumers wishing to protect their investment. To better understand the distribution of pricing in VPPs, we looked at an anonymized and de-identified sample of auto purchases involving 340,000 loans from the first nine months of 2023 (January 1st to September 30th).
The variations we found in VPP prices was surprising. Costs for these plans vary from as little as $100 to more than $4000.
The table below shows the median, average, highest 1% cost (max premium) and lowest 1% cost of the following VPP products:
- Anti-Theft: Typically offers anti-theft devices and benefits if a car is stolen.
- Appearance Plan: Products applied to interior and exterior to protect appearance.
- Key Replacement: Provides free replacement car keys if they are lost or stolen.
- Maintenance Plans: Contracts that cover scheduled and expected maintenance.
- Paintless Dent Repair: Removes vehicle dents.
- Tire/Wheel Plan: Repairs tires with road damages
- Windshield protection: Covers cost to repair damaged windshield.
We highlight the prices of the highest 1% (“max premium”) of VPPs in yellow.
It’s notable that the price distribution is skewed by some extreme outliers. What that means is that a portion of auto buyers pay very high VPP premiums, but the majority of consumers pay below average prices. Additionally, we see “bumps” or outliers in the distribution at certain psychological price points such as $499, $999 etc.
The violin plots below do a better job of revealing the outliers at psychological price points.
Vehicle Price Plays a Big Role in VPP costs
Our study also looked at the cost of VPPs relative to the car price. Our assumption was that a vehicle price would significantly impact the VPP costs. It’s logical that the cost of a Tire and Wheel Plan would be greater for a Porsche than a Honda. Or that Maintenance plans for Lexus cars would cost more than Toyotas.
Largely, our analysis was consistent with this hypothesis. As the table below shows, the average cost of VPPs varied from 2% to 4% of the vehicle purchase price.
But there are some notable outliers. We saw examples of anti-theft products that cost 20% of the vehicle purchase price and paint dent repair contracts costing up to 23% of the vehicle price. For some of these extremely expensive purchases, one has to ask: are consumers getting a fair deal?
If you’re shopping for a car, it’s important to carefully assess any voluntary products attached to your loan, especially those with cost ratios > 5%. Anything above this threshold is a “statistical outlier” and should be carefully considered.
For the purposes of our statistical tests, we looked at variations in premium and the ratio of premium to vehicle price. For both these variables, to limit the effect of outlying extreme values, we created winsorized values where we eliminate the top and bottom 1% of the records.
Tom Oscherwitz is Informed’s VP of Legal and Regulatory Advisor. He has over 25 years of experience as a senior government regulator (CFPB, U.S. Senate) and as a fintech legal executive working at the intersection of consumer data, analytics, and regulatory policy.
Husain Yusuf Radiowala is Informed.IQ’s Senior Data Analyst. He is an accomplished analytics professional with 9 years of experience in FinTech, Marketing, Sales and Supply Chain Analytics in which he leverages his expertise in Data to extract meaningful insights from complex financial datasets.