EXTENDED WARRANTY or SERVICE CONTRACT? To Buy or Not to Buy?
In these tough economic times most consumers are relying on their vehicles to last longer. The days of the 24 month lease or consumers changing cars every three years is going by the wayside. As a result, consumers are often asking us whether they should buy an “Extended Warranty” in conjunction with their new vehicle purchase. Their desire is to be protected from the cost of repairs to the vehicle as it gets beyond the original factory warranty. They also want to be sure they have protection in case the car turns out to be a LEMON.
The first thing a consumer should understand is that when they purchase a contract to cover the cost of repairs beyond the original factory warranty this is generally not a “Warranty”. A warranty is a promise by the manufacturer or seller of a vehicle that it is free from defects. A warranty is provided to the consumer free of charge and accompanies the sale of the vehicle. When a buyer pays extra for what they believe is an “Extended Warranty” this changes the character of the promise from a warranty to a “Service Contract.”
Service contracts have the look and language that most consumers think is an extended warranty. Dealers will also often call what the consumer is purchasing an extended warranty. Such is not the case. A service contract is merely an agreement by the dealer or service contract company to pay for repairs to the vehicle, which are covered by the terms of the service contract, for a specific period of time. A service contract is not a guarantee or promise that the vehicle does not have any defects. A service contract is more like an insurance policy than a warranty.
What does this mean for consumers? A service contract backed by the manufacturer of the vehicle may seem to be a wise investment if the vehicle were to have problems beyond the factory warranty. However, consumers must realize that not all parts are covered by a service contract. If the problem with a vehicle is caused by a non covered part then the consumer is on the hook for the cost of the repair.
A service contract backed by a company other than the manufacturer of the vehicle is generally not a wise purchase. It is often difficult to determine the financial stability of these companies. If the service contract company were to go out of business this might leave the consumer with no recourse and a costly repair bill.
It also important for consumers to understand that when a vehicle has defects during the warranty period they may be protected by their State’s Lemon Law. This may entitle them to a refund of their purchase price of the vehicle or a replacement vehicle if they meet the State’s specific Lemon Law requirements.
On the other hand, the California Supreme Court has ruled that a service contract does not give consumers full Lemon Law rights should a vehicle have problems covered by the service contract. The consumer would be limited to damages for breach of contract, which may include the cost of repairs. But, this does not allow a consumer to obtain a refund or replacement of their vehicle for a service contract breach.
Some tips to help you make your decision whether to purchase a service contract.
1. Generally only consider contracts backed by the manufacturer of the vehicle. Be careful of non manufacturer backed service contracts unless you are 100% sure of the company’s financial stability.
2. Read the terms of the service contract carefully before purchasing. Know what is covered and what is not covered. Keep in mind the length of time you intend to keep the car and number of miles you drive each year. Do not just rely on what the dealer tells you is covered.
3. If you do purchase a service contract make sure you keep meticulous maintenance records. Lack of maintenance is often used as a reason by the service contract company to deny a claim for repairs that would otherwise be covered.
4. Realize that a service contract may give you some peace of mind for potential repairs beyond the original factory warranty but you may not have California Lemon Law protection for breach of this service contract.
Best of luck in your new car shopping. Make sure to do your homework before you sign on the dotted line.