Following a report on the use of the sensors by The Sun, the company said drivers were not being tracked at all times and that real-time data could not be accessed.
The firm added that the use of location sensors was highlighted on all financing agreements, printed on the document in bold above where the customer signs.
In a statement, Mercedes said the feature was only activated in "exceptional circumstances", adding: "We place great importance on the responsible and transparent use of customer data."
AdvertisementMercedes said: "The customer determines which services he wants to use and which data he wants to pass on - either by consent, by contract or at the push of a button. We also inform our customers about the repossession process when they apply for finance through Mercedes-Benz Financial Services.
"In this case, they sign a contract and agree to the use of the car's location in the event they default or breach their finance agreement.
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"This repossession process is used in a few exceptional cases and only as a last resort, when customers default or breach their finance agreement and repeatedly fail requests to return their vehicle.
"We also want to emphasise that this does not mean constant tracking."
As the use of the sensors is mentioned in the financing agreement, Mercedes does not fall foul of EU data protection laws that prohibit the tracking of vehicles without the knowledge of the driver.
But the company has still come in for criticism over its use of the technology, which rival manufacturers including BMW and Jaguar Land Rover have said is not included in their cars.Human rights group Liberty said on Twitter: "Enabling companies to track their customers is yet another threat to our privacy. This creeping growth of surveillance in the private sector is particularly disturbing when customers have no idea they are being tracked in this way."Larry Trowell, principal consultant at security tech firm Synopsys, told Sky News: "Part of the problem in this case is that we know very little about this device or what it can actually send. Since we don't know the level of security within this tracking device, at this point, it could be secured by nothing more that obscurity, which is troubling."
But racing driver and motoring expert Rebecca Jackson told Sky News concerns over the sensors were overblown.
She said manufacturers and dealers "need to do more to educate people coming into the showrooms", but defended their right to install location sensors.
"We've seen a growing number of users getting caught out by making modifications to cars that until the final payment is made, aren't theirs," she said.
"If you own something that is precious, then it's fair that the owner, in this case, the car manufacturer or its finance arm, should want to take care of it and know where it is."
She added: "Being able to track a car could offer additional benefits; it has become easier for thieves to get into cars without having the keys so any method for finding the car could be very handy and save a hefty bill. As our cars become smarter and more connected, expect there to be more services knowing exactly where your car is.
"Even your mobile phone logs where you have parked it so we need to accept that these services could be beneficial as long we understand how and when they are being used."