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OTHER VOICES: Extended service contract? Skip it, CR says

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(Crain News Service photo)
Jim Henry

By Jim Henry, Crain News Service

DETROIT (March 12, 2014) — Consumer Reports slams extended service contracts in its latest annual auto issue, one of the magazine’s most widely read editions.

The issue, dated April 2014, reached subscribers last week.

“Looking for an easy way to save hundreds on your next new car and simplify the buying process at the same time? Skip the extended warranty,” the magazine says in its article, “Extended warranties: An expensive gamble.”

The article, which uses the term “extended warranty” to describe what is actually an extended service contract, prominently features photos and quotes from unhappy buyers.

“It was a horrific experience. I feel like the dealer ripped me off,” said one. “I feel like I probably paid too much for peace of mind,” said another.

Consumer Reports said its advice was based on survey responses from more than 12,000 subscribers who bought an extended warranty for vehicles from the 2006 to 2010 model years. The survey was conducted in November and December of 2013.

The magazine repeated the same advice it’s been giving for years: Instead of buying an extended service contract, customers should set aside the same amount of money in an interest-bearing account so they’ll have it if they need it for repairs.

“People basically are doing the same thing when they buy a service contract, whether they realize it or not. Plus it costs more if you finance the service contract,” Jeff Bartlett, deputy editor of autos for Consumer Reports, told me.

It’s easy to poke holes in the detailed survey results—starting with the fact that the data is based on customers’ memories, including how much they paid for the extended service contract, how much they paid for service visits, and how much the extended service contract covered.

Unless people checked their receipts, it’s hard to remember those details accurately over a period of several years. You can also argue whether Consumer Reports subscribers represent all consumers as a whole.

Even so, the results are something F&I (finance and insurance) managers can probably expect to hear customers and others quote back to them in the coming weeks and months.

The bad news: 55 percent of the respondents said they never used their extended service contract during the life of the contract, getting zero return for an average retail price of $1,214. The 45 percent who did use their contracts said they saved an average of $837—still not enough to cover the cost.

“You’re buying peace of mind, and for some people that’s worth it. But you should go into it with your eyes open,” Mr. Bartlett said. “It’s not surprising to us that it pays out less than you pay in. We realize it’s a money-making venture. For it to make any money, on average it’s never going to repay more than you put in.”

In the Consumer Reports article, the bottom line is that “the median savings was zero” for purchasing an extended service contract. The survey said fewer than 30 percent of the respondents said they would definitely buy another one.

The report wasn’t all negative.

A majority of customers for some brands—such as BMW, Mercedes-Benz, Chrysler and Dodge—did use their extended service contracts. But Consumer Reports said those brands have ranked average or below average in reliability and that using the coverage probably helps consumers feel more justified about having spent money—“a bittersweet way to rationalize the purchase.”

Respondents were also more highly satisfied with extended service contracts purchased at dealerships than they were with contracts purchased from third parties such as insurance companies or direct marketers.

In addition, Consumer Reports said anyone who buys an extended service contract should opt for “full protection” bumper to bumper instead of trying to save money on less complete coverage.

Nevertheless, the takeaway is unavoidably negative.

Automotive News special correspondent Jim Henry wrote this blog for that Detroit-based sister publication of Tire Business.

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