Don't sign an auto service contract until you understand both the terms of the contract and who is responsible for providing the coverage. An auto service contract is a promise to perform (or pay for) certain repairs or services. An "extended warranty," is an auto service contract and is not a warranty. An auto service contract may be arranged at any time and always costs extra; a warranty will come with a new car and is included in the original price. The separate and additional cost is what makes a service contract different from a warranty.
Compare an auto service contract with the manufacturer's warranty before you purchase. New cars come with a manufacturer's warranty, which sometimes offers coverage for at least one year or 12,000 miles, whichever comes first. Even used cars may come with some type of coverage.
The price of the auto service contract is based on the car make, model, condition (new or used), coverage, and length of the contract. The upfront cost can range from several hundred dollars to more than $1,000.
In addition to the initial charge, you may need to pay a deductible each time your car is serviced or repaired. Under some auto service contracts, you pay one charge per visit for repairs - no matter how many. Other auto service contracts require a deductible for each unrelated repair.
You also may need to pay transfer or cancellation fees if you sell your car or end the contract. Often, contracts limit the amount paid for towing or related rental car expenses.
If you decide to buy a "demonstrator" model at the dealership it means the car has never been sold to a retail customer but has been driven from the dealership. Then ask if you need to purchase an auto service contract or if the car is still under warranty. Does it date from when you purchase the car or when the dealer first put the car into service?
Ask who performs or pays for repairs under the terms of the auto service contract. It may be the manufacturer, the dealer, or an independent company.
An auto service contract sold by dealers is handled by independent companies called administrators. They act as claims adjusters, authorizing the payment of claims to any dealers under the auto service contract. If you have a dispute over whether a claim should be paid, you would then go to the administrator.
If the administrator goes out of business, the dealership still may be obligated to perform under the auto service contract. The reverse also may be true. If the dealer goes out of business, the administrator may be required to fulfill the terms of the auto service contract. Whether you have recourse depends on your contract's terms and/or your state's laws.
Research the reputation of the dealer and the administrator your auto service contract is under. Ask for references and check to make sure they are reliable. Some ways to talk to the right people are by contacting your local or state consumer protection office, state Department of Motor Vehicles, local Better Business Bureau or local automobile dealers association.
Find out the length of time the dealer or administrator has been in business. Determine whether they have the financial resources to meet their contractual obligations. Individual car dealers or dealer associations may set aside funds or buy insurance to cover future claims. With some independent companies they are insured against a sudden rush of claims.
Find out if the auto service contract is underwritten by an insurance company. In some states, this is required. If the auto service contract is backed by an insurance company, contact your State Insurance Commission to ask if any complaints have been filed.
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