Let’s be brutally honest for a moment, vehicles are probably one of the worst investments one can make. You’ve probably heard the saying that ‘you lose 10% of your money as soon as you drive off the lot,’ and believe it or not, this generalization is not far from the truth. Depreciation is real, and the hard truth is that most people don’t even know they’re upside-down on their car loan until it’s too late — especially if you’ve been battling a high-interest rate.
In addition to the fact that your car is worth less every year, there is another hard truth that your vehicle will require regular maintenance, insurance, and fuel. All of these expenses eventually add up, and the last thing you want is to add another unknown cost to this ledger. VSC’s allow you to fix the cost of ownership on your vehicle while you are paying off your loan and protect you from unexpected repair bills that could end up costing you thousands of dollars. In turn, this protects your credit as you eliminate ever having to choose whether to keep making your car payments on time or using that money for unexpected vehicle repairs.
Any fixed cost of ownership can bring you peace of mind. Your car payment is already fixed, so by adding a VSC, you can count on that monthly number not changing for the life of the loan due to any unexpected repair bills. This allows you the flexibility to invest, save, or spend the extra money that you have each month and gives you financial security by knowing that your ‘rainy-day fund’ is safe from vehicle expenses. Lastly, as most VSCs include roadside assistance, you don’t have to worry about being stuck on the side of the highway with an empty gas tank or a flat tire. Your service contract provider will take care of you when you don’t have anyone else that can come help!
With all this talk of depreciation, you may feel like you really messed up on your last car purchase. Sometimes life deals us a rough hand: you may have had a total loss on your last vehicle that left you with some negative equity, or maybe the dealership low-balled you when you brought your car in for a trade-in. Either way, if you have negative equity from a previous loan that was rolled into your new loan, it often feels like you’re being held upside-down and underwater. If you’re in this position, the last thing you need is a large, unanticipated bill to repair something small like a water pump, or electrical sensor. That money would be much better spent paying down the negative equity on your loan, saving you money in interest, and improving your ever-important Loan-to-Value ratio(in 3 C’s of Credit).
Insurance 101: If you can afford the worst case scenario without it affecting your finances, then self-insurance will always be the cheapest option. No need to pay $650 / month for health insurance (totaling $78,000 over 10 years) if you have $10 million tucked away right? If only we were all that lucky! Your health and your car are obviously quite different, but the principle is the same.
Vehicle Service Contracts are optional. We understand that you may be in a very healthy financial position with plenty of savings set aside for the unforeseen occurrences that life may bring. If this is the case, you may be better off keeping your money in your savings account and rolling the dice on whether or not your car will need any major repairs down the road.
Ask yourself this question: “If car insurance was not required by state law, would I continue paying for it?” If your answer is no, then adding a VSC to your new loan may not be worth it, and self-insurance is probably your best option. If you feel like that’s a bigger risk than you’re willing to take, you should rethink at least protecting your vehicle from major breakdowns.
There are hundreds of different VSC providers out there, and with most providers promoting the same options, finding the best extended warranty company in the United States can feel a bit daunting. The most common complaints against extended car warranty companies revolve around having claims denied for a variety of reasons:
ALWAYS READ THE FINE PRINT! Make sure to do your due diligence and always avoid signing off on a contract that you don’t fully understand.
You will usually be offered a Vehicle Service Contract and GAP from the F&I Manager at the dealership, as they are both another source of profit for the independent dealers. To be clear, we are not attempting to generalize the entirety of the auto industry with a blanket accusation that all car salespeople and F&I Managers use pushy sales tactics. However, it’s no secret that you need to keep your guard up and do your own independent research before you head down to the car lot to pick out your new ride. In order to keep up with competitors and the rising costs of doing business in a technological world, many of these companies are forced to mark-up the costs on this much-needed protection, sometimes in excess of $3000 per car.
It’s important to understand that a manufacturer (or dealer) warranty is not the same as a Vehicle Service Contract. Although these terms are often used interchangeably, the Original Engine Manufacturer, or ‘OEM,’ warranty is in effect when you purchase a new or used car from a dealership, and it will provide a combination of exclusionary coverage and powertrain coverage with different time and mileage limitations.
You’ll commonly see these warranties structured as a 3 year, 36,000 mile ‘bumper to bumper’ warranty and a 5 year, 60,000 mile plan for your Powertrain only (eg. engine and transmission). Understand that these time limitations are based upon the year your vehicle was manufactured, not from the time that you purchased it. For example, if you buy a used 2015 truck that has a 5 year warranty, it will expire at the end of 2020. The OEM Warranty will normally require you to service your vehicle at the dealership, but in this case, you are guaranteed to get the best parts and labor available.
VSCs, or ‘Vehicle Service Contracts,’ are purchased independently from a private provider that should be backed by an A.M. Best Insurance Company. They are designed to extend the time and mileage protection on your exclusionary or powertrain warranty that the OEM included. Since the pricing on VSCs is based upon the collateral quality (year, make, model, and mileage), many people purchase VSCs when they buy a new car at the dealership — securing the highest levels of protection at the cheapest overall cost. Others, who don’t think they will be keeping the car longer than 3-5 years, often opt out of VSCs.
Let’s recognize that no warranty or service contract will ever be covering your bumpers. This term has become far too common-place and is thrown around quite loosely. What a ‘bumper-to-bumper’ warranty really means, is that you should be getting an ‘exclusionary’ warranty.
Most companies stray away from this ‘exclusionary’ word because it sounds a bit scary, but we are here to unveil the truth again! “Exclusionary” simply means that everything in the vehicle is covered, except for a list of ‘excluded items.’ See how ‘bumper to bumper’ sounds a little better than that? The truth is that the list of excluded items is limited to small ‘wear and tear’ items, like windshield wiper blades, tail lights, rubber hoses, spark plugs, and other items that would normally cost under $100 to replace. Exclusionary coverage will always be the highest level of protection available for warranties and VSC’s alike, but it’s important to note that your ‘bumper to bumper warranty’ will never cover aesthetic items in your vehicle like wheels and tires, glass, or leather. These items can be covered by an entirely separate contract, usually running for around $500 / each additional item.
Unfortunately, people’s word doesn’t hold the same meaning as it once did. We all have to be more diligent in our research, as many companies have decided to leave morals and ethics behind in order to increase their profit margins.
Always, always read the fine print in your contracts. You will normally find clauses that will cause your protection to be void if you are not responsible for the regular maintenance of the vehicle, such as oil changes, air filters, and other fluid changes. Any gross negligence of your vehicle will normally result in a voided contract, as well as ‘pre-existing conditions.’ Watch out for this, as you normally will have to wait for at least 30 days, or 1,000 miles in order to use your new VSC.
