Dealers on average sold an extended service plan on 28.8 percent of the new vehicles sold in 2002, according to an annual statistical report on auto retailing.
That is the largest sales penetration rate since 1992, reports the National Automobile Dealers Association in its 2002 report, NADA Data.
The report attributes rising service plan penetration to lower vehicle lease volume, innovative service plans and a surge in nearly new-vehicle sales. People are more likely to buy service contracts when they own, rather than lease a new vehicle. And buyers of later-model vehicles - particularly high-line models - tend to purchase extended service plans to protect their investment.
"On used cars 1 to 3 years old, particularly luxury models, the inclination is to buy a service contract so that you are assured there won't be any major repairs during the first few years of ownership," says Paul Taylor, NADA's chief economist.
Finance and insurance income rose overall in 2002 to 24 percent of new- and used-vehicle department gross profits, up from 22 percent in 2001 because of a bigger focus on F&I products, particularly by the large dealership groups.
The trend in menu selling, in which finance managers present all products offered on a menu similar to that of a restaurant, and the tendency to offer specially priced packages of F&I products also boosted volume.
"Dealers are selling quantity discounts on some standard service items," Taylor says.
Pre-paid maintenance programs, particularly those offering multiple oil changes at a special price, are popular.
Service contract penetration peaked in 1986 at 35 percent of new-vehicle sales but began to slide in the mid-1980s because of improvements in vehicle quality and rising short-term lease volume, the report says. Short-term lease customers are unlikely to buy service plans because they don't own the vehicle and are driving it when it is still under warranty.
But service contracts have been making a comeback in the last four years as the industry backed off leasing. And 0 percent financing gave service contracts an added boost because it coaxed many would-be lessees to buy vehicles instead.