Here's a surprise: Used-vehicle service contract penetration has slipped the last two years.
A boom in certified used-vehicle sales and healthy late-model used-vehicles sales in general should have given used-vehicle service contracts a boost. People who buy pricier used vehicles often want to protect their investment with an extended service plan.
But nearly new vehicles represent a decreasing share of the used-vehicle market, which has led to a decline in number of used-vehicle buyers who purchase service contracts.
Three factors have contributed to the lower service contract penetration:
1. Sales of older vehicles are increasing because of the tough economy.
2. Leasing has declined, shrinking inventories of late-model, off-lease vehicles.
3. Some consumers who had planned to buy late-model used vehicles were lured by large incentives to buy new vehicles.
"Near-new vehicle customers are the logical candidates to be switched to new cars," says Tom Libby, director of industry analysis for the Power Information Network, an affiliate of consulting firm J.D. Power and Associates. "The salesman says for just X amount per month you can get a new vehicle."
Used vehicles no more than 3 years old represented 27 percent of overall used-vehicle sales in the first seven months of 2003, down from 35 percent in 2000. As a result, penetration of used-vehicle service plans has declined for all but a few luxury makes, Libby says.
Overall, the percentage of used-vehicle buyers who purchased service contracts has declined from 38 percent in 2001 to 36.1 percent in 2002 and to 32.4 percent in the first seven months of 2003, according to the Power Information Network.
The National Automobile Dealers Association also noticed a decline in used-vehicle service contract penetration in 2002, though the organization says it is up slightly in 2003.
"Penetration is up on near-new used cars, but older cars are selling strongly as well because concerns about layoffs persist in some regions," says Paul Taylor, NADA's chief economist.
And, he says, the older the car, the less likely the customer will buy a service contract.