Consumers’ trend toward used cars, especially certified pre-owned, could eventually slow the growth in sales of extended service contracts, says Mike Buckingham, senior director of J.D. Power and Associates’ automotive finance practice.
Indeed, service contract penetration is slowing among prime-risk borrowers, which Buckingham links to purchases of certified pre-owned vehicles. Those vehicles come with a factory warranty.
“There are some attractive certified 2- or 3-year-old cars out there, with low interest rates and a low price point, which dealers are telling me is causing some people to switch” from new to used, Buckingham told Automotive News.
U.S. certified pre-owned sales this year through July totaled 1.6 million, up 4.1 percent from the first seven months of 2015, according to the Automotive News Data Center.
The popularity of leasing, which reached an all-time high of 36.4 percent of new-vehicle financing in the second quarter of 2016, according to Experian Automotive, also could crimp service contract sales. Lease customers buy fewer service contracts because they usually turn in their cars before the original warranty expires.
Buckingham said the net result is a cloudier outlook for extended service contract sales, although he cautioned that sales are unlikely to decline outright.