Consumers seem happy with vehicle service contracts

Only a quarter of consumers who bought a vehicle in the past four years protected it with a service contract, but three-fourths would purchase the coverage again, a new study has found.

Consumers who bought the finance and insurance product overwhelmingly had been informed of its costs, terms and voluntary nature, the study also showed.

The research by retired Federal Reserve Senior Economist Thomas Durkin, Federal Reserve Principal Economist Gregory Elliehausen and Mississippi State University Professor Thomas Miller Jr. was funded by the Voluntary Protection Products Coalition and drew upon polling of 1,200 consumers in January and March.

Fifty-eight percent of respondents had bought a vehicle in the past four years, and 25 percent of them added a service contract. The penetration rate of the F&I product was even higher, 29 percent, measured only by dealership transactions. (Among franchised dealerships, service contract penetration runs 51 percent on new vehicles and 56 percent on used models, according to 2021 data from the National Automobile Dealers Association.)

Six percent of contract holders bought the coverage without the seller even mentioning it, the study found.

The Federal Trade Commission is considering requiring expanded disclosure and consent on F&I products, including discussion of the price and optional nature, and banning certain coverage, such as products deemed to have no value.

In its 2022 rule-making proposal, the FTC said that complaints from vehicle buyers suggested that some dealers had added thousands of dollars in unauthorized charges. This included add-ons consumers had already rejected. The issue was made worse when preprinted contracts included charges for optional add-ons. Also exacerbating the issues were consumers being rushed through processing stacks of paperwork or being asked to sign blank documents.

The FTC said that its provision would help protect consumers from unfair or deceptive charges that were buried within lengthy contracts or stacks of paperwork.

But Durkin, Elliehausen and Miller reported that 96 percent of customers who bought service contracts said they were told the coverage was voluntary, while 94 percent said the costs and terms were explained to them.

"As indicated, a group of factors seems related to frequency of purchase, and almost all purchasers ... understood the voluntary nature of the purchase," they wrote. "A large majority ... of purchasers reported that the seller explained the costs and terms, and looking back, only about 6 percent of buyers reported any dissatisfaction with their purchase. All of this suggests that predicable consumer demand factors underlie existing variations in purchase of vehicle service contracts."

Service contracts work like insurance to protect against the cost of repairs for unexpected car issues. The polling showed 28 percent of contract holders wound up filing a claim, with 84 percent saying it ended with the result they expected and 80 percent calling the process easy.

While 6 percent of coverage holders were dissatisfied with their contract, 82 percent reported being satisfied with it. The remainder were neutral.

Seventy-six percent said they would purchase another service contract in the future, 75 percent said they would recommend coverage to family and friends, and 75 percent called a service contract a good idea. For 23 percent, it was a bad idea, while 2 percent were on the fence.

Both contract holders and those who didn't purchase the coverage explained their assessment of the product as a good or bad idea. Those who didn't buy a service contract were more skeptical of the concept; 67 percent said it was a bad idea and 4 percent were neutral, but 29 percent of them still called it a good idea.

"It is clear from verbatim answers that most respondents held well-developed views, and that many respondents were quite loquacious about them," the paper's authors wrote.

The research found "positive views coalesced around contentions that you never know what might happen in the future and that there could be budget implications associated with this unknown future."

Many respondents suggested service contracts bring "greater peace of mind."

Those who viewed the contracts with disfavor said other warranties were sufficient, the expense was high, and they might not be needed. Other reasons included respondents feeling their own maintenance efforts were sufficient and concerns that warranties "were just dealer profit," the study found.