Albert Lea Auto Repair

The Hidden Truth About Vehicle Extended Warranties and Service Contracts

As vehicles have become more complex and expensive, many consumers have invested in extended warranties or service contracts as a way of managing out-of-pocket repair costs. It sounds like a simple and easy solution, but not all extended warranties or service contracts are the same. It really comes down to the details of the warranty itself. Many car companies offer warranties to customers when they purchase new or used vehicles. New vehicle warranties are backed by the vehicle manufacturers. For instance, a 2024 Jeep Wrangler comes with a basic warranty coverage for the complete vehicle of 3 years or 36,000 miles. The emission system is covered for 2 years or 24,000 miles; 3 years unlimited miles for body corrosion; and 5 years or 60,000 miles, whichever comes first, for the powertrain (engine and transmission). All these stated warranties are backed or covered by FCA US (Mopar). GM, Ford, Toyota, and other vehicle manufacturers all have similar factory warranties. The manufacturer warranties are only valid at the manufacturer dealerships. What we are going to discuss here is in addition to or begins after the manufacturer’s base warranty period has expired.

What is a Vehicle Extended Warranty or Service Contract?

A vehicle extended warranty or service contract is a service agreement that covers the cost of certain repairs or services after the original manufacturer’s warranty expires. Unlike the manufacturer’s warranty, which is included with the purchase of a new vehicle, an extended warranty or service contract is purchased separately, either at the time of the vehicle purchase or later. Think of it as an insurance policy against vehicle repairs.

The key difference between extended warranties and service contracts is the company that backs or honors the contract. Extended Warranties are backed by the vehicle manufacturer and usually are only valid at the dealership. Service Contracts are backed by an independent or third parties and are valid at any qualified repair facility.

While extended warranties or service contracts are often marketed as a way to save money on expensive repairs, their value depends on several factors, including the type of coverage, the vehicle’s reliability, and the details of the contract agreement.

Types of Service Contracts or Extended Warranties

• Bumper-to-Bumper Coverage: Marketed as the most comprehensive vehicle coverage. The idea is they cover everything on the vehicle from the front bumper to the rear bumper. They don’t typically cover maintenance items like brakes, tune-ups, tires, or fluid exchanges. Some of these contracts do have excluded items too. It’s all in the fine print. They are usually the most expensive service contracts to purchase upfront.
• Powertrain Coverage: Powertrain coverage contracts are the most common service contracts. They focus on covering the high-dollar replacement items of the powertrain, like the engine, transmission, transfer case, and some differentials. These contracts are usually more affordable but can still cost a significant amount of money. Keep in mind that they usually don’t cover every part of the repair. For instance, if your engine fails, the service contracts will usually cover the engine, but you will be responsible for fluids, hoses, ignition parts, etc., which can add up to a significant portion of the repair cost.
• Stated Component Coverage: This is a contract designed to cover specific components. Usually, they are a service contract that is in between the Powertrain Contracts and Bumper-to-Bumper Contracts. Think of it as a powertrain extended warranty with additional covered components, like heating and air conditioning systems or infotainment systems.
• High-Tech or Electronics Coverage: Modern vehicles are a network of computers working together to monitor and control many vehicle systems and functions. Problems with these systems can have a dramatic effect on the operation of your vehicle. Testing and repair of these systems can be costly and time-consuming. Many service contracts exclude electrical components for this reason. Electronic coverage contracts focus on electrical components and systems.
• Wrap Coverage: Wrap coverage is another add-on contract that pairs with Powertrain Coverage to give you similar coverage to the Bumper-to-Bumper policies, like the Stated Component Coverage but with more general component coverages.
• Certified Pre-Owned (CPO) Coverage: You will usually see these kinds of cars and contracts on vehicle dealer lots. It is supposed to indicate a vehicle that has been more thoroughly looked over and comes with some additional coverage. In some cases, it can include towing, some additional maintenance, or extra component coverage. CPO vehicles usually come at a higher purchase price that helps cover these additional added benefits. It doesn’t mean you are getting a better vehicle, just that it is marketed as a more reliable vehicle. These contracts are usually designed to funnel the customer back to the place of purchase.

Pros and Cons of Service Contracts or Extended Warranties

Pros:

• Peace of Mind: Knowing that your vehicle has repair coverage can reduce stress and make vehicle ownership more enjoyable.
• Stabilized Repair Costs: Service contracts can help protect us from large, unexpected repair costs like an engine or transmission replacement, spreading out the overall cost of the repair and service contract over time.
• Many Plans to Choose From: With so many different service contracts and plans to choose from, one can be found that meets your needs and budget.

Cons:

• Cost: Service contracts or extended warranties can be expensive, and not all vehicle owners will recoup the cost of the original contract. It’s vital to compare the cost of the contract and the covered components to the likelihood of a failure that might be covered by the contract.
• Exclusions and Fine Print: Service contracts are very specific about what they will or will not cover. If you are not familiar with automotive industry jargon, it can be hard to navigate the fine details of the covered items and components. Sometimes they also have a limit on how much they will pay per hour for labor costs. For example, a service contract may only pay $50 per hour for labor, but the shop charges $100 per hour. The vehicle owner will be responsible for the difference. The details of the contract will make all the difference regarding how much of the cost of repair you will be responsible for.
• Partial Repairs: Some service contract providers are good at covering listed components and nothing more, even if that goes against the automotive industry recommendation for said repair. For example, your vehicle has a front spring that is broken. The terms of your service contract cover broken springs, so they may only want to pay for the one broken spring, not the pair of front springs that would be recommended by any qualified repair facility to prevent poor or unpredictable vehicle operation. It is not a good idea to have a new spring on one side of your vehicle and a worn-out spring on the other side. You could still replace the pair of springs, but you would be responsible for the additional repair costs.
• Used Parts: Some service contract providers will opt for used parts instead of new parts to complete a repair, or they will try to send the parts directly to the repair facility. Their goal is to reduce their liability for the repair. The customer and the repair facility do not benefit from this because they can’t control the quality of the parts used to repair the vehicle, and you would lose out on any replacement part warranty that may be available. Check the details of your service contract to see if they have this option.
• Time: Evaluating your vehicle, sorting out the finer points of the service contract, contacting the service contract provider, and gaining repair authorization takes time. Then after the vehicle is repaired, there is a process to secure payment from the service contract provider. This process usually takes several days and in rare instances weeks to accomplish. During this period, you may be without a vehicle.
• Limited Transferability: Some service contracts are not transferable to a new owner, which can affect your resale value.
• Cancellation Costs: Some service contracts have early cancellation fees or non-refundable contracts. You may be out the total cost of the service contract without enjoying any of the benefits.

Pro or Con:

• Deductible: Like an insurance policy, service contracts typically have a deductible to pay with each claim submitted. We have seen the deductibles range from $100-1000. Some policies will have “disappearing deductibles,” which encourages the policyholder to return to the place of purchase. It sounds like a good way to save money, but it depends on how the dealer handles the service contract claim. In the big picture, it could end up costing you more money than if you took the vehicle to your local trusted repair facility.

Choosing the Right Service Contract/Extended Warranty

The right service contract on your vehicle can be beneficial. They can provide you with peace of mind and possibly save you money if you select the right service contract. It really comes down to the details of the contract. Here are some key points to help you select the right service contract for your needs.

• Vehicle Reliability: Does your vehicle need a service contract in the first place? Research the reliability of your specific make and model. Does your vehicle have a common failure point that may require some additional coverage? For more information about selecting the best vehicle for you, see our BLOG on Car Buying Tips from April 2024. Does your vehicle operate in a location or environment that may be a contributing factor towards needing a service contract? For instance, your child is attending school in another state.
• Cost vs Benefit: Service contracts or extended warranties cost a significant amount. Does your vehicle have the likelihood of a high-dollar part or system failure that justifies the cost of the contract? In many cases, setting aside money for repairs may be more cost-effective than purchasing a service contract.
• Coverage Needs: Evaluate your driving habits, vehicle age, reliability, and financial need. Find the service contract that covers those areas of concern. Older vehicles, high-mileage vehicles, or highly advanced vehicles with many integrated safety systems may benefit from contracts that offer more comprehensive coverage.
• Provider Reputation: Not all service contract providers are created equal. Take the time to evaluate the service contract details. Read the fine print! Check on how those companies handle payouts. Connect with your trusted repair facility and see which companies they have had good experiences with. One company that we can recommend is NAAC (North American Auto Care). They have been fair to deal with and honor their service contracts. They cover the components and repairs that they say they will.

Tips for Getting the Most from Your Service Contract

• Partner with a qualified and trusted Repair Facility: A professional repair facility like Sanderson Auto Repair will understand the nuances and details of your service contract. They will know how to properly present the concerns and recommended repairs to the service contract provider to ensure that you receive the maximum benefit from that service contract.
• Have your vehicle regularly inspected: Don’t wait for a breakdown. Quality inspections from a trusted repair facility will identify areas of concern before they lead to a breakdown. Using your service contract to take care of those issues right away will allow you to maximize the benefits of your service contract.
• Be diligent about your vehicle maintenance: Keep your vehicle current with its maintenance and service requirements. Showing the service contract provider that you are doing your part makes it much easier to get the full benefit of your service contract. Then they can’t deny claims because of improper maintenance.
• Keep good records: This goes along with diligent maintenance. Keeping good records of all service and repair can be vital to getting your claim properly authorized. For example, if your engine should fail, the service contract provider is going to want to see records of regular oil changes. If you are partnered with a quality repair facility and regularly see them for maintenance and repair, then they will be able to provide that information when they submit the claim on your behalf.
• Know the details of your service contract: It really comes down to the details with service contracts. Learn what steps need to be taken to keep your vehicle in compliance with the terms of the contract. Know what to expect should you need to utilize your service contract and how that contract can benefit you and help keep your vehicle on the road.

Final Recommendations

Vehicle service contracts and extended warranties can provide valuable protection. How good that coverage is varies wildly from company to company and contract to contract. Take the time to evaluate and research each company and contract. Consult with your trusted maintenance and repair facility and seek their recommendations. They can help you understand the finer points of each contract. Be prepared for items or services that are not covered by the service contract. By understanding the different types of coverage and carefully evaluating your needs and the fine points of the contract, you can make an informed decision that offers you peace of mind and financial security. Whether you opt for basic powertrain coverage or a comprehensive bumper-to-bumper policy, the right service contract or extended warranty can help ensure that your vehicle remains safe and roadworthy for years to come.

Aaron Bjorklund