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Wednesday, May 20, 2009

Warranties and Extended Service Contracts

Warranties and Extended Service Contracts
By: Lawrence S. Searcy, Jr.

I received an e-mail this week from the Better Business Bureau warning consumers about unsolicited calls from vehicle extended “warranty” companies. These “warranty” companies have attracted attention from congress because of the number of calls received on home and cell phones. Congress is now considering measures to stop calls from computer assisted dialers (“robo-callers”) to consumers hawking these after-market products. Telemarketers are using the automated dialers to pose as manufacturer representatives and contact consumers claiming that the consumer’s manufacturer warranty is about to expire. The call solicits the customer to purchased extended warranty coverage on the vehicle. While the context of these calls is deceptive, purchasing an extended service contract may sometimes be in the consumer’s best interest.

What is an Extended Service Contract?

A warranty and an extended service contract are not the same thing even though the terms are often used interchangeably. Warranties are offered on new products at the time of purchase. Warranties are protected by federal law under the Magnason-Moss Warranty Act. The act, passed in 1975, requires all manufacturers and sellers of new and unused consumer products to provide the consumer with detailed information about warranty coverage. In vehicle sales, every new vehicle sold in the United States has a limited time transferrable warranty that covers mechanical breakdown for a period of miles or years, whichever comes first. The warranty is published in the vehicle’s operating manual and specifically details the items covered and the length of coverage. Most people will be familiar with the standard 3-year / 36,000-mile warranty.

“Extended Service Contracts” are not warranties. They are supplemental coverage to the manufacturer’s factory warranty and can be purchased separately by the consumer. They provide mechanical repair protection for items not covered by the manufacturer’s warranty or for items that fail after the lapse of the manufacturer’s warranty. Extended service contracts are not called warranties because under the law, warranties cannot be sold. For people who will keep their vehicle beyond the coverage period of the new vehicle warranty, an extended service contract will allow the consumer to know their total out of pocket repair expenses through the life of the contract – for example 5 years /100,000 miles.

Who can Purchase an Extended Service Contract?

Extended service contracts can be purchased for new, used and manufacturer certified used vehicles. A consumer may want one for a new vehicle to cover items not normally covered by the manufacturer or to use when the original factory warranty expires. On a used or certified used vehicle, the same may apply. There may be some remaining factory warranty but the consumer wants to be protected for expensive repair costs when the original warranty expires. Extended service plans may even be purchased after you have owned the vehicle but before the expiration of the original warranty. For these types of contracts, the company usually requires that a certified service center inspect the vehicle before the contract can be written to cover the vehicle. The best place to inquire about one of these products is from your local selling dealer. When you purchase from the selling dealer you know that the dealer will honor the program when you bring you vehicle in for service. Further, the dealer is associated with the manufacturers and is the most knowledgeable about the coverage that would best fit your vehicle.

Today’s vehicles have more than 14,000 moving parts, on-board computers, entertainment centers and a host of other amenities. Because of the complex interaction of all of the mechanical and electrical parts, the odds are in favor of something going wrong with a vehicle during the ownership experience. Unfortunately, the average costs of repairs are expensive. For instance, engine repairs can cost as much as $6,000.00 while something as mundane as an air conditioning compressor can cost more than $1,500. Facing these repair costs, many people elect to purchase an extended service contract at the time they purchase their vehicle.

What is Covered?

When considering an extended service contract, it is important that the selling dealer notify you what will or will not be covered. The list of non-covered items should be limited to maintenance items (oil, filters, coolant, and scheduled service), wearable replacement items (battery, shocks, struts, break pads, rotors, etc.), and appearance items (exterior molding, ornamental items, metal, paint, etc.). The price for the contract will vary with the duration in years and mileage and there may be a deductible for each claim. Additionally, the price will increase for diesel engines, four-wheel-drive trucks or high-end foreign vehicles. Each selling dealer should be able to provide a list in advance of the items that will be covered and those that will not and the complete out-of-pocket cost for the contract.

Questions to Ask a Selling Dealer.

A selling dealer should be willing to disclose to you all of the information about the company that backs its extended service products. Ask the dealer how long the dealer has been doing business with the company. Be sure to ask the cost of the product in advance and how much it may increase your monthly payment on the vehicle. Be sure to understand any limitations on the contract and the duration of the coverage. Ask whether the contract is transferable or whether a refund will be issued to you in the event you sell the vehicle before the end of the protection period. If there is a deductible, ask the amount and whether it is a per-claim deductible.

In addition to coverage for repairs, many extended service contracts offer other benefits and features. A 24-hour towing and roadside assistance benefit may be included for a flat tire, dead battery or other emergency. Some products offer replacement car rental during repairs and nationwide acceptance at other dealers in the event you are away from your selling dealer during a mechanical breakdown.

Like most other products, a consumer should beware of unknown and unwanted solicitation by phone or e-mail. Instead, it is best to see your local dealer for extended service products and information. Your dealer can give you specific information about the products that are best suited for your type and age of vehicle and can also offer a range of financing options. In the long-term, extended service contracts can limit your out-of-pocket repair costs and increase the long term value of your vehicle.