Auto Service Contracts: 6 Things You Should Know

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Consumers continue to report receiving notices of expired vehicle warranties from firms with which they have no warranty or on vehicles that they do not own. Many fall prey to invoices that accompany these notices to extend their warranty. Here’s how the scheme works.

Consumers receive a notice stating, “Your vehicle’s comprehensive warranty may shortly expire.” The notice even offers a telephone number to call and requests that the consumer provide their VIN Number, vehicle mileage, and the “warranty expiration code” provided on the form.

If you are shopping for a new or used car, you may be encouraged to buy an auto service contract.

Auto service contracts have become increasingly popular as a way to provide consumers a means to deal with unforeseen vehicle repair problems. Before signing on the dotted line, be sure to understand the terms of the contract and know who is responsible for providing the coverage.

What is an auto service contract? According to the Federal Trade Commission, an auto “service contract is a promise to perform (or pay for) certain repairs or service. Sometimes called an “extended warranty,” a service contract is not a warranty as defined by federal law.

A service contract may be arranged at any time and always costs extra; a warranty comes with a new car and is included in the original price.” This separate and additional cost distinguishes a service contract from a warranty.

Before deciding whether to buy an auto services contract, check out the company at bbb.org and consider the following:

  1. The Underwriter. It may be the manufacturer, dealer, or an independent company. Many service contracts sold by dealers are handled by independent companies called administrators. Administrators act as claims adjusters, authorizing the payment of claims to any dealers under the contract.
  2. Compete Cost of the Contract. The cost of the contract will depend largely on the make, model, and condition of your car. The contract cost will also vary widely from hundreds to even thousands of dollars. Even with a service contract, you a may still have some out-of-pocket expenses.
  3. Auto service contracts rarely cover all repairs. Watch out for exclusions. For example, if the contract specifies that only “mechanical breakdowns” will be covered, problems caused by “normal wear and tear” may be excluded.
  4. Handling a Claim. Determine, up front, what you will be required to do, if your car needs a covered repair. Don’t assume that you can take it to any repair shop. Some service contracts require you to go to designated repair shops only or to back to the dealer. Some contracts also require pre-authorization for a repair, before you can take it to a mechanic.
  5. Keeping Your Service Contract in Force. The car owner is usually required to keep up with general maintenance on the car, to include keeping records and receipts for this maintenance. Read the fine print; some contracts may also specify use of a certain dealer or repair shop for general maintenance.
  6. Contract Term. If the service contract lasts longer than you expect to own the car, find out if it can be transferred when you sell the car, whether there’s a fee, or if a shorter contract is available.

Be sure to carefully read the agreement and check that all verbal promises have been included. Don’t sign a contract with blank spaces that could be altered or changed. Finally, once the contract is signed, keep a copy of it for your records. Sources: BBB.org and FTC.gov.

BBB New Release: Auto Service Contracts: 6 Things You Should Know

For more information, check out Auto Service Contracts and Warranties. United States Federal Trade Commission, www.ftc.gov – not subject to copyright protection. 17 U.S.C. 403.