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GENERAL SERVICE CONTRACT INFORMATION

Service contracts are sometimes referred to by customers as "Extended Warranty." Actually, a warranty cannot be purchased. You can't purchase a warranty for your car.... it comes with it. It is a legal obligation between the customer and the manufacturer. A service contract is just that, a contract between the owner of the vehicle, and the company (or dealer) who issues that contract.

SO WHAT'S THE DIFFERENCE?

Well, actually in the eyes of the owner, none. A service contract clearly outlines what it will cover. If in this contract it does not list a covered item, it's not covered. However, the difference in contracts verses warranty will become a little more clearer if you read on.

GET TO THE POINT, SHOULD I BUY ONE?

Generally, I am in favor of buying a service contract with a vehicle if you plan on owning the vehicle past the expiration of the basic warranty. Let's say your car has a 3/36 warranty (most manufacturers are going to that now). . If you drive 15,000 miles a year and only plan on keeping the car 2 years, then a service contract may not be the way to go.

If, however, you plan on keeping the vehicle until the wheels fall off.. yes, I absolutely feel you should get a contract. I have sold many vehicles to my family members and friends, and I make sure each of them walk away with a service contract.

SO WHAT'S THIS STUFF I HEAR THAT BUYING A CONTACT IS A RIP OFF?

Well let's put things in perspective. I would NEVER buy a service contact for a home appliance. You've all seen where you pay $300 for something and they want to charge you $45 for the service contract. That's 15% of the cost of that item... that's highway robbery (in my opinion). Now, you pay $30,000 for an automobile and the dealer offers you a service contract for $800 that covers your for 7 years or 75,000 miles, that's less than 3% of the cost of the automobile. AND.. your chances of that service contract paying for itself in the long run is better than 50/50. HOWEVER, and this is a big however, if you are not careful on WHAT contact to buy, it can be a nightmare... read further.

SO, WHO SHOULD I BUY A SERVICE CONTRACT FROM?

Actually, this is a simple question. Buy the contract from the manufacturer of the vehicle. If you buy General Motors, buy a GM contract... if you buy a Chrysler, buy a Chrysler Contract, if you buy a Ford, buy a Ford contract and so on. NEVER, REPEAT NEVER, buy a contract from an independent service contract company... that's where the nightmares begin.

WHY? WHAT'S SO WRONG WITH INDEPENDENT CONTRACT COMPANIES?

FIRST, Independent contract companies have a long history of going belly up. If you purchase a contract from one of these independents, and they go south.. you have no coverage.

SECONDLY, Most dealers will only honor the manufacturers contact OR the independent contract they may be selling. Let's say you by a independent contract from XYZ Motors in New York and you are on vacation in Arizona and your car breaks down. The dealer in Arizona may tell you that you are responsible for the entire cost of the repair and it's your responsibility in getting reimbursed. (Trust me, this happens ALL the time, because dealers know that independent contract companies are very bad about paying).

THIRDLY, most of these independent contract companies want to use junk yard parts or non OEM parts to fix a car where a manufacturers contract have the same parts requirements as they do under the manufacturers warranty. How would you like it if your engine blew up and instead of putting a new short block in it, they ship a junk yard engine with 40,000 miles on it to fix your car?

FOUR.. If you do buy a manufacturers contact, it will be honored at any dealer bearing that manufacturers sign.. no fuss, no hassle.

FINALLY, most independent service contract companies take a profit, and the balance of the money the customer paid is put it in a reserve account (like an escrow) and all claims are paid from that reserve. The MORE the dealer shorts the holder of that contract by the way of repairing as cheap as possible, the MORE the dealer makes what that contract expires. This opens the door up for the bad dealers to rip off customers who hold independent contract. HOWEVER, the profit the dealer makes in selling a manufacturer contract is his to keep, and ALL of the future risk is held by the manufacturer.. not the dealer. This means it actually benefits the dealer to repair vehicles CORRECTLY because they can make more money (in labor and parts mark up) in the long run without regard for the end cost.

SO HOW MUCH SHOULD I PAY FOR A SERVICE CONTRACT

Let's be reasonable, the dealer deserves to make a reasonable profit from selling a service contract. Prices for the independent contracts are all over the board, and I HOPE I have convinced you NOT to buy one of these. So, if you look at the retail price the manufacturer lists for a contract, and pay 75% of that price, I believe most good dealers will obtain a fair profit without ripping off the public.

WHAT IF I TELL THE DEALER I WANT A MANUFACTURERS CONTRACT AND HE SAYS HE DOESN'T SELL THEM?

If you specifically ask for a manufacturers contract (make sure the contract clearly shows the name of the manufacturer) and the dealer tells you he doesn't sell them.. I offer you one word of advice... WALK OUT OF THERE FAST. Dealers will tell you that this independent contract is JUST AS GOOD as a manufacturers contract... this is simply BULL. They will tell you it's cheaper than a manufacturers contract and cover as many items.. DON'T BUY THAT ONE EITHER... the up front price MAY be a little cheaper, but in the long run you are miles ahead with a manufacturers contract.

ARE THERE OTHER BENEFITS IN BUYING A MANUFACTURERS CONTRACT?

Absolutely.. Remember when I said that service contract clearly state what they will cover and if it's not listed it is not covered? Well, every single business day I get calls from dealers on something that failed out of warranty to see if I can help cover that repair. One of the FIRST things I ask is DOES HE/SHE HAVE A SERVICE CONTRACT? Many times the answer is Yes he/she does but it's not a covered item. Depending on the circumstance, I cover that as a policy adjustment and only charge the person their service contract deductible. I take the position that if a customer does what they can to protect themselves for future problem, I feel obligated to go the extra mile for them. All of the reps I deal with feel the same way. I have a motto with my dealers, "I will NEVER offer a better deal to a customer WITHOUT a service contract that one who does." That, in my opinion, is being fair.

WHAT ABOUT SERVICE CONTRACT DEDUCTIBLES?

Contract deductibles generally range from Zero (the high end, expensive contracts) to $25, $50 and $100. Obviously the higher deductible the lower the price of the contract. Most manufacturers offer a menu of contract so you can tailor a contract to your specific driving needs.

OK, OK.. SO MR. REP.. DO YOU HAVE A SERVICE CONTRACT ON YOUR CAR?

You bet I do! I would not let my wife drive a vehicle without one!

NOW HERE THIS.. ACTUAL HORROR STORY FROM A READER

Now.. here is an actual EMAIL from one of my readers on what happens when you buy one of these independent contracts. This reader has given me permission to share their experience to benefit others.

My mother (who lives in PA) purchased a low-mileage used car in Ohio. She also purchased a service contract for the car. (I think it was one of those so many years or so many miles jobbies.) The contract is still in force. This summer her car's air conditioner compressor died. When she called the dealer about bringing the car in for service she was told:

* The original thrid-party company that held the contract sold it to another third-party company in New jersey. (Mother received no notification of this change.)

* The new third-party company went bankrupt. My mother has tried to contact this company by mail and by phone, and has received no response.

* The dealer from whom she purchased the car and (she thought) the service contract refuses to stand behind the contract, and have told her, "Tough luck. Give us $1200 and we'll fix your air conditioner."

My mother is a widow who lives on a fixed income and that $1200 might as well be million. She's contacted comsumer protection in both Ohio and Pennsylvania, but from the response she's received, doesn't expect much action from them. We're trying to track down consumer proection in New Jersey, but aren't encouraged that we'll get much help from them.

Is there anything she can do to either get some or all of her money back from the service contract or get her air-conditioner repaired? This whole independent third-party thing has her really flummoxed because she had the impression from the dealer that he was holding the contract.

UptownJudy@aol.com

SO IS THIS THE END OF YOUR STORY?

There is still more to say about service contracts, but I hope this has enlightened you to be a more educated buyer. I have one final word.. when you close on a car ONLY buy the Accident and Disability insurance if you genuinely feel that you might use it.. and then only if the price is less than what you can get from your local insurance agent.


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Last modified: May 06, 2001