You've probably seen ads on TV and the Internet for service contracts on new and used vehicles from companies claiming they help eliminate auto-repair bills. The service plans, the ads say, can save you thousands on costly repairs of transmissions, engines, and other parts. We've long found that extended warranties usually don't make financial sense, and when we took a close look at the terms of those service plans we found other reasons to avoid them.
Many service plans are sold by marketers such as StopRepairBills.com, Mogi, and US Direct Protect. They don't provide the coverage themselves but act as middlemen for numerous third-party companies. Marketers usually offer various types of coverage, such as drivetrain or bumper-to-bumper protection. Coverage can cost hundreds or even thousands of dollars, depending on your vehicle, its mileage, and the type and duration of the plan you choose. Some plans have no deductible, and some cover roadside assistance, towing, car rental, meals, and lodging required because of a breakdown.
It sounds great, but auto-service plan marketers have drawn fire from consumer watchdogs, government agencies, and customers who complain that plans deny claims, refuse to make refunds, and use misleading sales tactics.
The industry has drawn outrage from the public and members of Congress over the last few years when some companies have called consumers or sent letters advising them that their car warranties were about to expire, giving the impression that the companies were representing a dealer or manufacturer. The Federal Trade Commission says such sales tactics are commonplace. Chris Koster, attorney general of Missouri, where many marketers are located, says auto-service contract fraud was the No. 1 complaint in 2009.
Many consumer complaints we found on independent Web sites and message boards say that plan providers search for any reason to avoid paying claims. Because the marketers don't provide the actual coverage, they often try to disclaim responsibility, says Bill Smith, an investigator with the St. Louis Better Business Bureau, which calls plan marketers a "problem industry." He says some auto-repair shops won't accept some plans because they're too troublesome.
Rosemary Shahan, president of Consumers for Auto Reliability and Safety, in Sacramento, Calif., says the fact that the marketers are middlemen "makes it harder for consumers to figure out who is responsible for fulfilling claims and how to get repairs or a refund."
In our review of plans, marketers' Web sites, and consumer complaints, we found that contracts usually include a lot of fine print that can be used to deny claims. For example, to screen out pre-existing conditions, which aren't covered, there's usually a waiting period of 30 days and 1,000 miles or so between the date the coverage is purchased and when it can be used.
Claims can be rejected if a customer can't prove the vehicle was maintained according to the manufacturer's recommendations or if the problem was caused by gradual wear and tear or overheating. And plan benefits might be limited to a vehicle's market value at the time of a breakdown or a specified maximum amount.
Marketers say that customers don't read the contract terms until they try to use the coverage. But some companies acknowledge they engaged in bad business practices, which they say they're working to correct. They also say they're pressuring coverage providers to pay legitimate claims and have stopped marketing the plans of those that don't.
Whether a service plan is offered by a broker, car dealer, or manufacturer, we recommend skipping it. Instead, buy the most reliable vehicle that suits your needs and follow the manufacturer's maintenance recommendations. If you're buying a used car, choose one with above-average reliability Ratings (available to subscribers), which you'll find in our Annual Auto Issue each April or online at ConsumerReports.org.