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Are Auto Service Contracts Important?

Do Your Homework Before you Buy an Auto Service Contract


Have you ever been offered an auto service contract to go along with a car or truck purchase? Your salesperson might even have called it an extended warranty, but it isn't actually a warranty, so don't confuse the two terms:

What Is a New Car Warranty?

A new car warranty is an automaker's agreement to provide certain repairs and service needed for a specific period that's linked to time or mileage. A warranty is included in the vehicle's sticker price.

What Is an Auto Service Contract?

An auto service contract is more like an insurance policy that kicks in after your manufacturer's warranty has expired. The contract pays for specific repairs and service, but you must pay a fee to acquire the coverage.

One thing is similar about the two types of coverage... it's your responsibility to perform all regular maintenance recommended by your vehicle's manufacturer. If you don't, your warranty or service contract could be voided. Be sure to keep all receipts associated with your car or truck's maintenance.

Who Sells Auto Service Contracts?

  • Vehicle manufacturers sell service contracts.

  • Auto dealerships offer service contracts, sometimes self-backed and managed, but most often backed by a separate provider.

  • Some providers advertise and offer policies independently of dealerships.

Programs that are tied to a reputable manufacturer are typically fairly safe, because it's not common for a major automaker to face bankruptcy or have other issues that will keep it from honoring its agreements.

Most auto dealerships that have been around awhile are careful to choose a reputable service contract provider. There's no guarantee the dealership's choice won't go out of business, leaving you without coverage, but if that happens, the dealership that sold the policy might be required by law to make good on repairs.

What's Covered by an Auto Service Contract?

Service contract coverage varies -- and varies widely. You can buy comprehensive coverage or coverage for specific systems. I've heard the term bumper to bumper coverage used many times, but I've never seen a service policy that truly insures ever part of a vehicle. All policies have exclusions -- repairs that aren't covered.

Always read every word in the contract, paying as much attention to the exclusions as you do to the list of covered repairs.

Important Questions to Ask Before Buying a Service Policy

  • What's covered?

  • What isn't covered?

  • What if an insured repair can't be completed unless technicians tear down systems surrounding it, and those systems aren't covered? Will the policy pay for everything, or only the insured repair?

  • Will the policy pay for repairs that happen when you're on the road, or do you have to take the vehicle back to the place where coverage was purchased?

  • Will you be reimbursed for repairs you make yourself?

  • Will you have to pay for repairs and wait for reimbursement from the provider? Or will the provider pay the repair facility with a credit card while you're still there? If you have to pay up front, how long does it take to get your money back?

  • Does the provider have a 24-hour toll free number? How long does it take to get a repair authorization?

  • Will new parts always be used to make repairs, or are rebuilt parts required if they're available?

  • Will you be charged a co-payment for every repair? How much?

  • Can you transfer the contract to someone else if you sell the vehicle to before the policy expires?

Ask questions -- but read the contract to verify for yourself that the answers you get are correct.

Compare Contract Prices

Let's say you're comparing two service providers, and that you think each one is equally reliable, but one's policy costs significantly less.

Grab a sheet of paper and make two columns down the center of the page, one for each company. Jot down a list of covered repairs on the left of the page and put check marks under each company that provides the coverage. Make another list -- this one for excluded repairs. If one policy is a lot cheaper than the other, there's a reason, and your old fashioned spreadsheet will help you find it.

Check the Provider's Reliability

The Internet is a pretty good source of information about a service contract provider that consistently delivers poor service. Search online for terms like: XYZ company complaints, or XYZ company reviews to find out what other policy owners are saying.

The Federal Trade Commission recommends that you:

  • Ask for references and actually check them out.

  • Contact local and state consumer protection offices, auto dealer associations, state department of insurance and motor vehicles department to ask if they have details about the company.

Do You Really Need a Service Contract?

How long do you intend to keep the vehicle? How many miles will you put on it? Do you feel comfortable driving the vehicle that long if it isn't covered by a manufacturer's warranty? The need for extra coverage is a personal choice and differs for every owner.

When to Buy Coverage

Some companies require that vehicles are still covered by a factory warranty when a policy is purchased. They figure your car or truck will still be in pretty good shape if you've had access to warranty repairs.

Other policies aren't as strict, but the vehicle's age, condition and mileage determines policy coverage and cost.

Direct Mail Policy Offers

I receive service contract policy offers on a fairly regular basis, all from companies who use a logo similar to well-known manufacturers' registered logos -- but just different enough to keep them from being accused of copyright infringement. They all say the same thing: your warranty is expiring soon... when they actually have no idea when my warranty expires.

They send out enough letters to hit it right sometimes, and to fool some people into thinking they're buying a policy from an automaker. Inspect unsolicited offers carefully before you buy.

Bottom Line

Service contracts get a lot of bad press, but there are good policies out there. Like anything you invest a significant amount of money in, do your homework before you hand over a check.
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