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#306 Automobile service contracts

mp3 #306 Automobile Service Contracts (mp3 file)

When you buy a new car or truck, or a used car or truck, your car dealer or your lender may also offer to sell you a motor vehicle service contract. A service contract will pay for certain types of repairs, during a certain period of time. These are specified repairs which are not already covered under the manufacturer's new car warranty.

Before you sign such a service contract, be sure to take the usual precautions that you would normally observe before signing any contract. What do you know about the company that issues the service contract? Exactly what repairs are covered? What repairs are excluded? Who decides if covered repairs are needed? Is the full price of each repair paid, or only part of the price? Are there any deductibles you must payout of your own pocket? Do the deductibles apply to each repair, or only once? May you choose where to have your car repaired, or are you limited to certain repair shops?

California law gives you some important protections when you buy an automobile service contract. The law is in Civil Code section 1794.41. This law only covers service contracts purchased in 1986 and later.

Before you buy a service contract, the dealer must let you look at the contract itself. When you actually purchase the service contract, the dealer must give you your contract, or a brochure that describes in specific detail, the terms, conditions, and exclusions in the contract. If you are given a brochure instead of the contract, the dealer has 60 days after the date of purchase to deliver the service contract itself to you.

When you buy an automobile service contract, California law permits you to change your mind and cancel the contract, and even receive a full refund of what you paid for the contract.

You may cancel and obtain a full refund if you meet these three conditions:

1 -- If you give a written cancellation notice to the person specified in the contract, and

2 -- If you have made no repair claims against the service contract, and

3 -- If you cancel within 60 days after you receive your copy of the contract, if it is a new car, or if you cancel within 30 days after you receive your copy of the contract, if it is a used car without manufacturer warranties.

You may still obtain a partial refund, however, when you cancel during these 60-day or 30-day time periods, even if you have made a repair claim against the service contract. The partial refund is based either on elapsed time or mileage, as stated in the contract.

You may also obtain a partial refund if you cancel the contract beyond the 60-day or 30-day time periods, again based on either elapsed time or mileage. If you cancel after these time periods, the company that issued the contract may also charge you a $25 cancellation fee, whether you have made a claim against the contract or not.


If you had financed the service contract along with the purchase of your vehicle, the company that issued the service contract may make its refund check payable to you only, or to your lender only, or to both you and your lender together.

Remember that a motor vehicle service contract is only as good as the company that issues the contract itself, which is often a different company than the dealer or lender who sells you the contract. You need to choose a reliable company that is able and willing to pay for covered repairs if you keep your service contract and that will pay you a refund if you decide to cancel your contract.

The company that first issues you a service contract might then sell your contract to another company without letting you know the name and address of the new company. Some contracts require you to contact the issuing company for approval before repairs are made under the contract. If your service contract has been sold to another company it may be difficult for you to locate the company that bought your service contract. If you cannot find the company you cannot obtain the company's prior approval for repairs that are covered by your contract.

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