Service Contract
You will likely be offered an extended warranty, also known as a service contract, if you buy a used or new car. These products are often sold by banks and dealers. They provide security and peace of mind. If you don’t take care, you might end up paying too little or get the wrong coverage. If you aren’t sure if an extended warranty is right for you, read Should I Buy an Extended Warranty? before you continue reading this. Here’s everything you need to know about purchasing an extended warranty.
Extended Warranty
- Do not call it a warranty. The common term “extended warranty” is incorrect. It is actually called “service contract”. While warranties cover defects, service contracts provide service to a set of parts without regard to the reason they failed (with the exception of abuse or acts of God).
- Only purchase a service contract that is backed by the auto manufacturer. Service contracts that are manufacturer-backed are the best. A service contract purchased from an after-market vendor is a waste of money. Many after-market service contract companies are difficult to work with and can dispute your claims. They may also fail to cover all of your repair costs. Auto manufacturers want to sell you another vehicle so service contracts can be very beneficial in terms of coverage, ease-of-use, and customer service. Learn more about why a manufacturer-backed warranty is a good idea.
- Get the best coverage. Do not buy anything less than a comprehensive service agreement. You want a service contract that covers all aspects of your car, except wear and tear. The best coverage is important because even small repairs, such as a defective power lock switch or power button, can run into the hundreds of dollars. Why not include every part? It is not uncommon to save money by purchasing lower levels of coverage. The cost difference can be as low as a few hundred dollars. You’ll be happy later if you get the best coverage.
- Purchase the longest term possible (as long as the mileage is reasonable). Match your mileage with your coverage years when you purchase. If you drive 15k miles per year, a 6yr/100k-mile service contract is logical. A 7yr/75k-mile service contract would work better if you drive 10k miles per year. No matter what you do, make sure you get the best service contract you can. Service contracts are most valuable during the last year. However, don’t spend less than one year on a service contract. They are rarely cost-effective.
- Compare prices. This is the most important aspect of purchasing a service contract. Since you are only buying a manufacturer-backed contract, it is necessary to compare prices at many dealerships. Most new car dealerships sell service contracts at a premium of $800 to $2000. This kind of profit margin can easily double the expense. When you are offered a service contract, ask for the cash price. Next, take down the price and ask them if it’s the best price they can offer you. Tell the finance representative that you will think about it and will get back to them shortly. Call other dealers to get the best price after you return from the dealership. It only takes a few minutes to save a few hundred dollars.
- Read the service agreement. Although most dealers are honest, you shouldn’t trust every person you meet. Make sure you carefully read your service contract before paying for it. Make sure you fully understand what level of coverage you are purchasing, how long you can drive while covered, as well as your deductible. Make sure that the warranty is manufacturer-backed. A few dealers might sell someone an after-market service contract, claiming that it was factory-backed.
- You can view the manufacturer’s service agreement online. Many manufacturers have excellent websites that provide information about their coverage. However, the price you pay online may not reflect the cost of the service contract. Ford, for example, will sell their service contracts to dealers at a lower price than what they would sell directly to customers. Of course, your local Ford dealer will often be able to beat the price you find online by a few hundreds of dollars. This is true for Toyota, GM and many other brands. The price you see online should not be the highest you pay.