High-cost service contracts are major profit centers for auto dealers. One dealer told Automotive News that in 2005 his gross profit per extended service contract was $436. By the end of last year, it had skyrocketed to $1,178. (Automotive News, March 11, 2013)
Consumers anxious to avoid unexpected, costly repairs often buy them without realizing they are usually full of loopholes and exclusions that allow companies to deny coverage. For example, they usually fail to cover prior damage, even if that’s the cause of the problem.
Some auto dealers pressure their finance managers to meet a quota of service contract sales, or be fired. Others have tried to sell service contracts at lower, more competitive prices, but then faced litigation by the companies that offer them.
Some dealers mislead car buyers into thinking that they have to buy a service contract in order to get financing. Legal experts say that such deception is illegal, but can be difficult to prove.
CARS recommends that, instead of getting a service contract, it’s smarter to spend about $000 for a thorough inspection before you buy. Then if the car has major problems, you can decide if you still want it, or take your business somewhere else. Also — beware of dealers who try to sell you service contracts that kick in at the same time as the warranty, and expire just when you might need them.