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Should I Purchase a Vehicle Service Contract/Warranty?

Purchasing a warranty is an important decision. Vehicle Service Contracts (VSCs), more commonly referred to as extended warranties, can be a great purchase under the right conditions. There are three major questions you should ask yourself when considering a VSC:

  • Does the VSC fit my needs?
  • How much is the VSC?
  • What does the VSC specifically cover?

For some context, here are a few things to know about extended warranties.

  • About half of all car buyers (new or used) purchase VSCs. More say they would purchase them if they were not so expensive.
  • You can purchase a VSC for a car you currently own. You don’t necessarily have to buy it at the time you buy your vehicle.
  • Most VSCs (91%) will cover at least one claim during their duration, and a significant percentage will cover multiple claims.
  • VSC coverages vary dramatically, so it’s important to know exactly what’s covered. Verify slogans used, such as unlimited, bumper-to-bumper, or lifetime. When a VSC includes one or more of these terms, ask for written definitions. The coverage specifics are generally less than what the term implies.
  • According to a 2017 study by AAA, average repair cost for each individual repair is $600. A vehicle will require an average of three repairs in its first seven years. The average cost to replace an engine is over $5,000. A significant number of components and sensors cost over $1,200.00 each to repair or replace. The average labor cost nationwide is over $100 per hour.

While VSCs are not an insurance product, they provide a similar peace of mind and protection against the worst-case scenario of repairs costing $1000, $2500, or even more than $5000. So when deciding whether a VSC is right for you, consider the following:

Does the VSC fit my needs?

To determine the fit, ask yourself the following:

  • Will I own the car for less time than the protection of the manufacturer’s warranty (usually three years or 36,000 miles)?
    If so, a VSC is not a good purchase.
  • Am I leasing the car?
    If so, a VSC is not a good purchase.
  • Can I afford the out-of-pocket expense of a major car repair?
    Over 71% of Americans have less than $1000 in savings. Could you afford a repair cost of $350, $900, $1600, or more? Depending on your financial situation, a VSC may be a great purchase.

How much is the VSC?

This is a key factor. Dealerships sell 95% of all VSCs. Sales of VSCs are typically the highest or second-highest source of revenue for a dealership. It is not uncommon for a dealership to mark up VSCs by $1000, $2500, or even more. However, VSCs are available through other sources at significant savings, and can still match or exceed the coverage of VSCs offered at dealerships. In addition, many dealerships may suggest that it is required that you service your vehicle at the dealership, even though that may not be required by the contract. So it is wise to consider the cost of the VSC and your ability to choose where to have your car serviced.

What does the VSC specifically cover?

The final factor is to know exactly what the VSC covers. Do not decide based on a sales slogan, such as “bumper-to-bumper” or “lifetime” warranties. There are three types of coverage, which are explained in the next section. In addition to understanding these three coverages, ask if the VSC includes the following coverages in the price being quoted, or if there is additional cost for them. Also ask about the permissibility of other actions listed here, such as VSC cancellation and repair shop options.

Wear and tear coverage
This is an important coverage, and usually not included as standard coverage. VSCs cover “mechanical failure” or “breakdown”–that is, when a component breaks down or fails mechanically, as opposed to wearing out because it has exceeded its expected life. A majority of repairs are needed because of the latter. In those instances, the repairs would not be covered by most standard VSCs. If the VSC includes wear and tear, then such a repair would be covered.

Seal and gasket coverage
Most often, this too is an additional, optional coverage not included in most warranties. If you do not have seal and gasket coverage, repair costs will not be covered. While a seal or gasket leaking essential fluid may cost under $100 to fix, the total cost to replace it can be significantly more when you add in labor and taxes. In addition, if a covered component fails or breaks down due to excess leakage from a seal or gasket not being replaced, then that component will not be covered by the warranty.

Sales tax on parts and labor
Believe it or not, most VSCs do not cover this.

Fluid replacement for a covered replaced component
Again, most VSCs do not cover this. For example, a VSC may cover the cost of replacing the air conditioning system, but not cover the cost of the refrigerant required to make it work.

VSC cancellation
By law, all VSCs may be cancelled, but fees for cancellation can vary dramatically.  Ask about the cost of cancelling a policy.

VSC transferral by a private sale
Many VSCs may not be transferred privately. When this is permitted, costs for transferring vary, so ask about the cost to transfer a policy.

Trip interruption coverage
Most all VSCs offer 24/7 roadside assistance, but many do not offer additional reimbursement of hotel, food, and car rental expenses if breakdowns occur while you are away from home. Ask if the VSC includes such coverage, and the dollar amount limits of that reimbursement.

Repair shop options
Ask where repairs can be performed.

Coverage start dates and requirements
Most coverages for VSCs purchased during manufacturers’ warranties begin the moment of purchase and do not require an inspection. Most coverages for older, higher-mileage vehicles either require an inspection or a “time and additional mileage driven period” before coverage begins. Ask what is required and if an inspection is required, who may perform the inspection, and who is required to pay for it.

Standard maintenance
Most VSCs do not cover the cost of standard maintenance. If they do, compare the additional cost for that coverage to the standard cost of the required maintenance. When a VSC includes standard maintenance, it usually requires the maintenance to be done at the dealership or the repair shop where the warranty is sold.

Types of VSC Coverage

There are three types of VSCs available.

Exclusionary coverage offers the most extensive coverage of all warranties available, and states a list of exclusions of coverage. If a component is not on the list of exclusions, it’s covered. Exclusionary contracts are generally for cars no more than four model years old, and with less than 40,000 miles.

Stated coverage is usually available for both new and used cars. Stated coverage means that the covered components are stated in the contract. If a component (or service) is not listed, then it is not covered. Stated coverage wrap coverage (discussed below) are generally the only options for cars with higher mileage, typically over 40,000 miles. Stated coverage can vary dramatically, so it is very important to see exactly what is included on the list of covered components, parts, and services. If you have a choice between exclusionary or stated coverage, it is always best to choose exclusionary coverage unless there is a dramatic difference in price for what the VSC covers.

Wrap coverage is available for cars that have a manufacturer’s powertrain warranty that extends past manufacturer’s coverage of the rest of the engine components. Wrap coverage basically extends the coverage offered by the manufacturer’s warranty for those components (which are no longer covered after a stated date or mileage) to match the end date (or mileage) as the manufacturer’s powertrain warranty.

Have more questions about vehicle service contracts and warranties? Feel free to contact us at 336-601-6390 or slindsaygraham@yahoo.com.