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Understanding Extended Service Contracts

What Coverage is Right for You?

You might have heard them called extended warranties or an insurance policy on your vehicle, a safeguard against expensive, unforeseen repairs. The term extended warranty is actually a misnomer, since, in the strictest sense of the word, these aren't warranties at all. Like auto warranties, they cover repairs and/or regular maintenance for an agreed-upon period of time. True warranties, though, are included in the price of the product; extended auto warranties are really extended service contracts, since they cost extra and are sold separately.

An Extended Service Contract may be purchased at the time you buy your vehicle; it's also possible to purchase one much further along in your ownership experience. If you're the type who likes to be prepared for all eventualities, an extended service contract may be just what you're looking for. Bearing in mind the ever-increasing cost of vehicle repairs, these extended service contracts can make a lot of sense.

In deciding whether an extended service contract is right for you, and in selecting the best plan for your needs, you'll need to ask yourself the following questions:

  • How long is your vehicle already under factory warranty, and is this coverage in adequate with how long you plan on owning it or how many miles you drive per year? If the car you've just bought is new, take a close look at its factory warranty before making an extended service contract decision. If, for example, the vehicle has a factory warranty of three years or 36,000 miles, and you plan on keeping it for two or three years -- with an anticipated annual mileage of about 10,000 -- then an extended service contract makes little sense, since you'll likely be covered under the manufacturer's plan. However, if you plan on keeping the car long after the factory warranty expires, an extended service contract is worth considering. If the car you've just purchased is used, you'll need to ascertain if there is warranty coverage from the dealership (coverage periods may range from as little as a month to up to a year, or more). If you're buying a late-model used vehicle, it's possible that the vehicle's original factory warranty is still in effect (this will be dependent on how many miles the car has under its tires, and on how much time has passed since it was originally titled). Some manufacturers also offer "certified" programs that extend original factory warranty terms on pre-owned vehicles. If the car isn't under warranty, or if you plan on keeping it past its warranty's expiration, an extended service contract makes sense.
  • What's the reliability record of the make and model you're considering? Take a look at the reliability history of the make and model you're buying. Though this is by no means a fail-safe way of predicting what your repair bill will look like, it does give you an idea of what you may be in for service-wise; bear this information in mind when making a service contract decision.
  • Who is behind the service contract you're considering?An extended service contract may be backed by an independent insurance company (these are known as aftermarket service contracts) or by the covered vehicle's manufacturer. Knowing who will be underwriting your policy can give you insight into the strengths and weaknesses of the contract you're considering. Manufacturer-backed service contracts score very highly when it comes to ease of use. However, aftermarket service contracts are often cheaper. (If you opt to purchase an aftermarket service contract, take a look at how the company's financial strength has been rated by A.M. Best and/or Standard & Poor's; this will give you an indication as to its ability to pay your claim. Your safest bet is to choose a company that has a minimum "A" rating with Standard & Poor's, and/or a minimum "A" or "A-" rating with A.M. Best.)
  • How much is your deductible? Fully investigate a policy's deductible before signing on the dotted line. Consider not only its amount, but also whether it's per visit or per repair. With a per visit deductible, each visit to the shop will run you a fixed amount, regardless of how many parts are repaired; a per repair deductible applies to each serviced part. What sounds like a minor difference may, under certain circumstances, have a major impact on your wallet. If, for example, you've got a $100 per repair deductible and you take your car in to get the air conditioner, fuel pump and alternator serviced, you'll be out $300; had you opted for a per visit deductible, those repairs would only have cost you $100. Charier still is a $0 deductible policy. You will have to pay extra for this, but if your circumstances become such that you have to take your car in frequently, you'll find that this policy more than pays for itself.
  • Is the service contract transferable? Some extended service contracts end when the person who bought the warranty sells the car. A service contract that allows you to transfer it to a new buyer is preferable; it's an excellent selling point for prospective buyers.
  • Where can repairs be performed? Some extended service contracts stipulate that repairs must be performed at the dealership from which the service contract was purchased; this can prove limiting and inconvenient. It's best to opt for a service contract that, at the very least, gives you more than one service facility to choose from. You'll appreciate this should the vehicle ever need service while you're on a road trip, miles away from home.
  • What’s covered - exactly? Know what's covered -- and what's not covered -- by the extended service contract you're considering. Does the service contract cover breakdown as well as wear and tear? Under a "breakdown" contract, coverage is extended only to parts that break. Such a policy can prove less inclusive than is desirable, since not all parts fail due to breakage. Some need to be replaced because they've worn down over a period of time; a "wear-and-tear" contract extends coverage to worn-down parts in need of replacement. Additionally, some "entry level" contracts don't cover ABS brakes, so if your vehicle has this feature, you should consider upgrading to this level. And overheating -- regardless of its cause -- isn't covered in many service contracts. Thus, if overheating occurred due to problems with an expensive part such as your radiator, you'd be stuck with a hefty repair bill. Before committing to a service contract, take the time to fully explore the ins and outs of its coverage implications. The distinctions between the various plans might seem slight, but they can prove quite important.
  • Is out of pocket cash required for repairs? Some extended service contracts require that you pay the bill, then send the receipt in and wait for reimbursement; in many cases, months elapse before you get your money back. Ideally, you'll want a service contract that pays the dealership directly with a credit card.

Lastly, remember to compare all your options before making a service contract decision. Utilize the Internet to do your research; many companies sell directly online, and, at the very least, getting quotes from them can help give you a ballpark idea of what an extended service contract with your desired features should cost. In service contract buying, as in so many other aspects of life, it helps to be fully informed.
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