Auto Service Contracts
With ten years experience as a service manager in the auto repair industry, I am often reminded of one of the biggest scams in the business today. Car dealerships for years have profited greatly from the sale of extended service contracts on new and used vehicles. Although most people realize that they're not a sound investment at the time, they convince themselves that it's a good idea to buy them anyway. This happens for a variety of reasons, but mostly they buy them out of fear that catastrophic and costly repairs may one day be necessary to maintain their new vehicle.
But what most people don't realize is just how bad of a deal these warranties actually are. Lets examine the main factors of what makes this such a negative proposition.
1) Cost. Depending on the age of the vehicle and term of the contract, an extended warranty for your new or used car will likely cost between $1500 & $2500. We'll use the figure of $2000 for an average.
But is that the only cost? No! Chances are, if you're buying a new or used car from a dealership, you're likely financing at least part of the sale price. This means you'll also be financing the cost of the service contract. Even at 7% annually, you'll likely pay $400 - $500 in interest on the contract you've financed. So now the average cost is up to $2500.
2) Many contracts have deductibles for every claim. The typical deductible is around $100. Let's say you average one repair claim per year for the five years of the term. That's an additional $500 you'll pay even though you have the service contract.
3) If the estimated repairs exceed a certain predetermined amount, most warranty companies will employ an adjuster to inspect any repairs before they'll give approval. This can extend the downtime while your vehicle is in disrepair. This can also cause additional expenses for you such as rental cars, time missed from work, etc.
4) Some contracts are written in such a way that certain non-routine repairs are not covered. In other words, the contract contains language to allow the warranty company potential grounds to deny claims. Many contracts do not cover gasket failures, for example. Furthermore, they don't cover items damaged as a result of the gasket failure. So while cylinder head damage may be covered, for example, if it's determined by an adjuster that the damage was the result of gasket failure, they have grounds to deny the claim.
5) Almost all contracts state that the cost of the covered repairs will be paid as far as replacement parts/labor is concerned, but additional items such as fluids replacement, wheel alignments that may be necessary to complete the job, etc. are not covered. What this means is that along with the deductible, you'll potentially be responsible for other costs as well.
6) Some warranty companies can be slow to pay their portion of the repair bill. The facility performing the repairs will likely not release the vehicle back to you until payment has been made in full. This means you'll likely have to pay the bill out of pocket and seek reimbursement from the warranty company or increase downtime without your vehicle while you wait for them to pay.
7) The risk/reward ratio is very poor. In other words, it's very unlikely the service contract will pay for itself. If the average repair is about $350 or so, you'll likely have about $1750 in repair bills over the course of the warranty term. With deductibles and other miscellaneous items you'll have to pay for with each repair, you're probably only likely to save about $1000 over the course of the contract. In essence, you're spending a guaranteed $2500 to save $1000 or possibly even less. The only real value in the warranty would be if a truly catastrophic repair were to occur.
When shopping for a new vehicle, invest the time and energy into researching the vehicle you're considering for purchase. All new vehicles come with a standard warranty (many to 100,000 miles), anyhow. If you're looking at purchasing a pre-owned vehicle, again do your homework, but also take the vehicle to a reputable repair facility for a thorough bumper to bumper inspection. While no technician has a crystal ball, he/she will be able to give you the piece of mind as to whether the vehicle you're considering is a sound choice. You should be able to accomplish this for $50 or less, which is a heck of a lot better than $2500.
