Know the Facts about Auto Service Contracts

10/30/2003

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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, the Better Business Bureau urges consumers to be sure they understand the terms of the contract and know who is responsible for providing the coverage.

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, the BBB suggests you ask the following questions.

  • Who backs the service contract? 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.

  • What’s the cost of the auto service contract? Usually, the price of the service contract is based on the car make, model, condition (new or used), depth of coverage and length of contract. The cost of the service contract can range from several hundred dollars to more than $2,000. In addition, you may need to pay a deductible each time your car is serviced or repaired.

  • What is covered and not covered? Few auto service contracts cover all repairs. Watch out for absolute exclusions that deny coverage for any reasons. For instance, if the contract specifies that only “mechanical breakdowns” will be covered, problems caused by “normal wear and tear” may be excluded.

  • How are claims handled? When your car needs to be repaired or serviced, some service contracts permit you to choose among several service dealers or authorized repair centers. Others require the car owner to return the vehicle to the selling dealer for service. Find out if you will need prior authorization from the contract provider for any repair work or towing services. Ask how long it will take to obtain authorization and whether you can get authorization outside of normal business hours.

  • What are your responsibilities? Under the contract, you may have to follow all the manufacturer’s recommendations for routine maintenance, such as oil and spark plug changes. Failure to do so could void the contract. To prove you have maintained the car properly, keep detailed records, including receipts. Find out if the contract prohibits you from taking the car to an independent station for routine maintenance or performing the work yourself. The contract may specify that the selling dealer is the only authorized facility for servicing the car.

  • What is the length of the service contract? 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.

Consumers should check with the BBB for a reliability report on the business offering the contract, and with any regulatory agencies that oversee this type of company. Make sure you read and thoroughly understand the agreement and check that all verbal promises have been included. Do not 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.

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