Service Contracts on Vehicle Purchases: Findings from a New Survey

Summary Observations

• A large majority of purchasers and non-purchasers indicated that the dealer explained the costs and features of the service contracts
  • Purchasers – 94 percent; Non-purchasers – 89 percent
• 96 percent indicated their understanding that the purchase was voluntary
• Among purchasers of service contracts, 28 percent indicated they had filed a claim of some kind at some time
  • This same group reported that the filing experience was easy and most filers also indicated they received the expected result
• 76 percent of purchasers indicated they would purchase again, and 77 percent said they would recommend purchase to family and friends.
• Only 6 percent of purchasers indicated they were dissatisfied with the product
• 75 percent of buyers said purchase was a good idea with 29 percent favorable among non-purchasers.
• “In general, positive [consumer] 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 a service contract leads to a greater peace of mind.”
• Purchasers of service contracts are more likely when the purchase involves dealer financing and is a high-price vehicle ($45,000 or more).
• Higher-income buyers are more likely to purchase a service contract, but also those with liquidity constraints and a greater measured degree of personal risk aversion. New vehicle purchasers who plan to keep the vehicle for a long time also are more likely to purchase a service contract.
• “Vehicle dealers typically offer service contracts as part of the vehicle sales process, but the sales process itself does not appear to govern the outcome.”

By Thomas A. Durkin, Senior Economist, Board of Governors of the Federal Reserve System (Retired), Gregory Elliehausen, Principal Economist, Board of Governors of the Federal Reserve System (Retired), and Thomas W. Miller, Professor of Finance and Jack R. Lee Chair in Financial Institutions and Consumer Finance, Mississippi State University. Published June 2023. Survey fielded by the Survey Research Center of the University of Michigan (SRC). SRC interviewed a total of 1200 individuals about vehicle service contracts in a nationally representative sample in January and March 2023.