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Trust, but Verify Your Service Contracts

Kevin Faulk May 29, 2015

Once you decide to purchase a vehicle at a used car dealership, you’ve decided to trust them about many things. You’re trusting them about the condition of the vehicle, the history of the vehicle, the registration, and, often, which companies to buy policies from.

As Ronald Reagan said, “Trust, but verify.”



You may have frequently heard the advice to verify the condition of the vehicle before you purchase it: Always take the vehicle to a mechanic for an inspection first. You’re also frequently told to check the history via CarFax or AutoCheck. But people are rarely advised to check their service contract companies and GAP insurance providers. And these days, dealing with random companies is becoming more and more dangerous. This article, “The Insurance Scam That’s Fleecing Low-Income Drivers — and How Police Are Making It Worse” gives one example of insurance fraud by people claiming to represent legitimate insurance companies.

Service contracts are often called extended warranties by dealerships. Remember, though, that there is no such thing as an extended warranty. A service contract is only an agreement that repairs will be paid for, though you will often have to pay a deductible. Service contracts are often burdened with a huge number of conditions, and service contract companies love to deny coverage.

When you purchase a service contract from your dealership, there are several precautions you should take.

  1. Negotiate the price. There is always a significant profit margin in the first price that they offer you, so don’t be afraid to haggle.

  2. Review the terms of the service contract. Look for deductible charges, make sure that your major systems are all covered, and check for unusual provisions that allow them to deny coverage.

  3. Look for reviews of the service contract company online. If there are no reviews or negative ones, stay away. A service contract with a bad company is worthless, as they will just deny coverage at every turn.

  4. Follow up and make sure that the dealership paid for the service contract. Many dealerships like to pocket that money and hope that you never attempt to use the policy, or, if you do, that it is so far in the future that you’ll write it off.

A GAP contract or GAP “insurance” (though it isn’t actually insurance) is a policy that purports to cover the balance of your loan if you total your vehicle during the life of the loan.

When you purchase a GAP contract, you need to do many of the same things, such as negotiate. However, there are more complex terms that you need to be sure to check.

  • Look for any provision that limits the maximum payout by the GAP insurance policy to a number related to the NADA or Blue Book value of the vehicle. If you pay a high price for the vehicle, or have a high interest rate, these provisions will often result in GAP payments that do not actually cover the entire balance of your loan. Read these provisions carefully, and even try and do the math before you purchase the contract. If the GAP policy would not cover the entire loan at the time of sale, it never will.

  • Just as with the service contract, check out the specific company and follow up to make sure that it was paid.

Trust, but verify. And apply that to every part of the transaction.