Car Care 2013 Tip 10: Handle Service Contracts Wisely


When you buy a new car you are usually encouraged to buy supplemental protection called an auto service contract. This sounds like a good idea, but do not buy one unless you understand all the terms of the contract and who actually provides the coverage.

auto service contracts

1. The Auto Service Contract

The auto service contract is often referred to as an extended warranty, even though it is not a warranty by definition, it is a promise to pay for or perform certain services. The contract can be arranged any time and costs you extra, while a warranty is included with a new car purchase and included in the price. That additional cost is what distinguishes a warranty from a service contract.

2. The Terms

Before you decide to buy a service contract, consider these:

Does the auto service contract duplicate warranty coverage?

Compare the manufacturer’s warranty with the service contract. The new car warranty covers many things. You don’t want to pay for something that is already covered. If you buy a demonstrator model find out if it is still under warranty and for how long.

Who backs the auto service contract?

Be sure to ask who will perform the repairs or who pays. Is it the dealer, the manufacturer or a company not associated with either? Usually the dealer sells the contract for an independent company known as the administrator. The administrator acts as a claim adjuster and authorizes the payment of a claim. In case of a dispute, it is the administrator you have to deal with.

If the company holding your contract goes out of business, the dealership may still be liable to uphold the terms. Read the fine print carefully.

How much does a service contract cost?

The cost varies depending on what type of car you have. The make, model and condition of the car will have a direct impact on how much the service contract will cost, as well as the length of the contract. On top of the initial charge, there may be a deductible charged every time you take your car in for repairs. There may also be cancellation or transfer fees. Most contracts come with limits and restrictions. So, make sure the cost of the contract is worth the potential savings.

What is not covered and what is?

Don’t expect a service contract to cover everything. If it is not specifically stated, assume the repair is not covered. Watch for clear exclusions. For example:

– If a certain part is covered, but that part gets damaged by a part that is not covered, your claim could be denied. Likewise, if the contract states mechanical breakdowns are covered, but your problem is caused by wear and tear, you may not be covered.

– If fixing the problem involves a complete tear down to reach the damaged part and a non-covered part is discovered to be damaged, you may be responsible for labor costs for the tear down and rebuild of the engine.

Even parts that are covered may have additional costs. The company may only pay for partial repairs after calculating in the depreciation factor and the mileage on your car.

How are claims handled?

Before you decide to buy a service contract, make sure you know how claims will be handled. Do you pay up-front and wait for reimbursement? Do you decide who will perform the repairs? Are you covered if your car breaks down while out of town or on vacation in a different state? Do you need authorization before going ahead with a repair or a tow?

Make sure you ask:

– If authorization is required, how long does it take?

– ┬áCan you only get authorization during normal business hours?

– Is there a toll free number you can call? If so, test the number before you buy to make sure you can actually get through.

– If you are required to pay up-front, how long does reimbursement take?

– Who settles the claim in case of dispute?

– Are reconditioned parts authorized in repairs or are you guaranteed new parts will be used?

– Does the repair shop stock adequate supplies to avoid delays?

What are you responsible for?

The contract may have strict rules as to maintenance schedules, such as spark plug and oil changes. If you don’t keep up, your contract could be invalid. Keep detailed records and all receipts. Also, find out who is authorized to perform the maintenance. Is the contract void if you do your own oil changes? In many cases only the dealership is authorized to touch your car.

What is the length of the auto service contract?

If you think you might sell your car before the contract expires, find out if your auto service contract is transferable to the new owner. If not, ask about a shorter contract.

3. Other Tips

If the salesperson tells you that you cannot qualify for financing without a service contract, ask the lender yourself if this is true. This sounds like a blackmail and should send you a big red flag.

If you do decide to get a service contract from the dealership and the contract is administered by a third party, make sure your payments are being forwarded to the company. Get written confirmation. Too many consumers have found out too late that the money was never send to the company and that they are not covered at all.

Service contract providers may be subject to insurance regulations. Find out if the company you plan to sign up with is required to:

– Maintain adequate funds to pay out claims

– Base contract fees on the amount they expect to pay out. Some providers make huge profits by charging more for contracts than they ever expect to pay for service or repairs

– Be approved by the state for the contract fee

4. Complaints

Contact the state consumer protection agency, the attorney general and/or the state insurance commissioner in your area to report a contract problem. If help is needed in resolving a dispute you can contact the Better Business Bureau. The FTC tries to prevent deceptive, fraudulent and unfair business and provides consumers with information on how to stop, spot and avoid being taken advantage of.

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