Service contracts for cars with 125,000 miles? It's happening
As new-car dealers sell more high-mileage used cars, some extended-service contract administrators are creating high-mileage contracts to match.
At the tail end of last year, some dealers and aftermarket vendors said they expect vehicles with more than 80,000 miles to account for at least 20 percent of used-vehicle sales a month at many franchised dealerships. That was up from less than 5 percent of a typical dealership's mix just four years ago.
And some extended-service contract providers are prepared to benefit.
"Because of the short supply of used cars, we knew new-car dealers were going to have a demand for products for these higher-mileage cars," said Wayne Herring Jr., national sales manager for Preferred Warranties Inc. in Orwigsburg, Pa.
He said that about 18 months ago, the company made longer-term extended-service contracts available and raised the upper mileage limit for vehicles that are eligible for coverage. Instead of 80,000 miles, some contracts are available for vehicles with up to 125,000 or 150,000 miles on them. In addition to a 12-month term, the company also added options for 24- and 36-month contracts.
Until recently, Preferred Warranties did next to no business with new-car dealerships. Today, new-car dealerships account for around 8 percent of the company's sales, Herring said. Preferred Warranties sells extended-service contracts to dealers via independent agents in 16 states in the eastern half of the country, plus Texas.
Mark Krejci, president of F&I development brokerage firm Continental-National Group, said this week that based in part on demand from new-car dealers, the company signed up last year to offer extended-service contracts from administrator AUL Corp., a specialist in extended-service contracts for older used cars.
"Companies like AUL, which were regional specialists, have gone national and moved into the mainstream of dealers," Krejci said.
There are some trade-offs. Krejci said auto lenders are still tight with the amount they are willing to lend relative to the value of a vehicle. That has improved lately, but it still doesn't leave much room for customers to finance an extended-service contract on the same finance contract as the vehicle, he said.
At the same time, dealerships need to keep prices low, so customers who buy high-mileage used cars can afford extended-service contracts, Krejci said. That also means coverage can't be very comprehensive, he said. The cost of a service contract that covers powertrain and limited electrical, air conditioning, would have a dealer cost of $300 to $500, he said.
Service contracts typically retail for around twice the dealer cost.
"We didn't have a product at that low price point," he said. "Dealers asked us for a contract that would pay claims, that isn't too expensive."
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