Pros and Cons of Automotive Service Contracts, a.k.a Extended Warranties

 

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Consumers buying a new or used vehicle at most dealerships will face pressure to purchase an "extended warranty" on that vehicle. Extended warranties are also known as "service contracts." Dealerships like to sell extended warranties because they make good profits for the dealership. But do they make sense for you? And how do you use one, if you already purchased it?

What are "automotive extended warranties"?

In simple terms, they are service contracts with a warranty company that agrees to provide, under certain conditions, certain repair services for a certain period of time from an identified provider. As you might assume from the very general terms of this definition, the provisions and quality of extended warranties can vary greatly. Some are provided by national manufacturers or companies who stand behind their agreement; others are provided by fly-by-night companies based in states with weak consumer protection laws—companies that often take the money and fold before any consumers can make many claims against their "warranty." As a consequence, consumers must examine any contract carefully and look at all the pros and cons for their individual situation.

When does buying a service contract make economic sense?

The average service contract costs the dealership very little but they frequently sell for thousands of dollars. Unless you are absolutely sure that you are going to keep a new vehicle for years beyond the manufacturer's warranty—and manufacturers' warranty terms are getting longer—then extended service contracts don't make financial sense for most people.

Many extended warranty terms, for example, overlap with manufacturer's warranties but the consumer can't make a claim against them until the manufacturer's warranty expires. So you might think that you've bought a six-year service contract, but the policy doesn't kick in until the manufacturer's warranty runs for 5 years or 50,000 miles. In effect, you've paid big bucks for a one- or two-year contract. Some service contracts also cover only limited repairs.

If you are buying a used vehicle that is no longer under the manufacturer's warranty, then a service contract may be more useful. But just as with a new vehicle, you must check out the terms and benefits just as you would for a new vehicle.

Give any service contract you are considering a very close inspection, read all the fine print, ask questions, and if you don't get satisfactory answers, don't buy it. Also negotiate the price. Then check our warranty products for competitive rates.

Tips for evaluating an automotive service contract

Making sure a service contract meets the following criteria won't guarantee that you, the consumer, won't get burned, but it can help.

  • Is the service contract provided by a national automotive manufacturer or a reputable national company? How long has the company been in business? What's their record of customer satisfaction?
  • Does the coverage term of the service contract begin after the manufacturer's warranty (or any dealership warranty on a used car) has expired? If it overlaps, does the contract provide "wrap-around" coverage, which means that the contract covers repairs not covered by the manufacturer's warranty? What are the actual years of coverage (those years after manufacturer's warranty ends) for which this service contract will be the only coverage?
  • Can you see a sample copy of the contract before you buy it? If you can't have a sample copy for review, think twice about considering that contract.
  • What services and repairs are covered under the terms of the contract? Does the warranty provide bumper-to-bumper coverage of both wear-and-tear and mechanical breakdown problems? Or does it cover just certain systems or parts? Or cover just mechanical breakdowns, not wear-and-tear failures? Experts advise that it's in the consumer's best interest that service contracts cover damage caused by overheating as well.
  • Does the contract require a deductible? How much? Is the deductible required "per visit" or "per repair"?
  • What entity under the contract provides the service for the vehicle under contract? Some contracts may require that the vehicle be serviced by a single service center, even if the breakdown occurred five hundred miles away. Better contracts allow the repair to be performed by any licensed, ASE-certified mechanic.
  • How is a claim or request for service made under contract? Must you get the contract administrator's okay before the repairs are begun? How quickly can you contact the contract administrator if that's the case? How quickly do they respond?
  • Does the service contract company (administrator) pay for the repair claims or does the consumer pay and get reimbursed? Avoid contracts that follow the reimbursement plan; it's too easy for the administrator to deny the claim.
  • Does the service contract company have a "claims reserve account" with a separate insurer to cover consumers with contracts should the company fail? If the company is insured by a separate entity, what is its insurance rating?
  • What are written policies on handling disputes over what repairs are covered and about handling problems with repairs made under the service contract?
  • Is the service contract transferable, if you sell the vehicle before the contract expires?
  • What's the warranty company's record with local and state consumer protection agencies, state attorney general's office or the Better Business Bureau?

Making a claim under an automotive service contract

Make sure that you fully understand the requirements under the contract. Ideally you did this before you bought the contract, but if not, do it as soon as possible. Most contracts require that you follow the manufacturer's or their routine maintenance schedule. It is also a safe practice not to drive the car after a problem occurs but have it attended to as quickly as possible. Running a car that is overheating, for example, is grounds for voiding most service contracts. If you have to call the contract administrator for a ruling on whether the proposed repair is covered under the service contract, keep the phone numbers and other information you need with the vehicle in a handy spot.

 

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