Vehicle Service Contracts
What is an Extended Service Contract? An Extended Service Contract (ESC) is also known as a service contract, extended warranty and possibly other names. The correct term is Extended Service Contract. It is an agreement whereby a consumer pays a segregated and additional charge to the ESC provider in order to transfer the risk of a component failure of the vehicle, per the agreement, from the consumer to the provider. It can have various coverage, terms, deductibles and etc..
Is an ESC the same as a warranty? No, technically, a warranty (and/or limited warranty) is coverage that is provided with the vehicle as part of the purchase of the vehicle (much as an engine comes with a vehicle), and coverage exists by virtue of the vehicle purchase and not payment of an additional charge. The coverage is provided to the vehicle purchaser by the selling dealer “warranting” that if certain (limited) conditions occur, the selling dealer will repair the vehicle per the warranty without charge (a deductible may apply).
Can I charge money for a warranty? No, see paragraph 2
Can I “build” in the cost of a warranty into the vehicle price? Yes, by the very nature of putting a vehicle into inventory numerous “costs” occur- base cost of the vehicle, transportation charges, inspection fees, reconditioning expenses and etc. Part of the inventory “costs” should include a reserve for potential repairs that the selling dealer may be called upon to provide by virtue of the (limited) warranty that was offered with the vehicle. Therefore, the “cost” would become part of the inventory cost and thus part of the selling price of the vehicle.
Can I charge money for an Extended Service Contract? Yes, selling dealers charge a cost for the ESC. The charge to the consumer may be added to the finance contract as an authorized charge. A portion of that charge can and should be a profit margin for the selling dealer.
Must I charge a cost for the Extended Service Contract? No, the selling dealer could “pay” for the cost of the ESC on behalf of the consumer. Remember, the entity with the coverage is still the consumer, not the selling dealer, even though the selling dealer “paid” for the ESC. This should be taken into consideration should cancellations occur. If the selling dealer wants to pay for the coverage the ESC provides, the dealer may be better served by offering an expanded coverage (limited) warranty.
Should I reinsure the Extended Service Contract that I sell? Yes, in our opinion, assuming at least minimal production of ESC, the ESC program should be reinsured because ESC’s are profitable for the ESC company (why do you think there are so many ESC companies?). If the ESC program is not profitable, then the selling dealer will get a rate increase to make it profitable for the ESC company, the ESC company will cancel the selling dealer to mitigate losses and/or “call claims tight” creating customer service problems for the dealer (who will usually end up paying some claims anyway). We believe that, “bottom line” over time, the ESC program will be profitable and thus the principal should participate in the profitability that the ESC program is generating.
Should BHPH/LTO dealers offer ESC’s? Yes, because your customers do not, generally, have the funds available to repair their vehicles. BHPH/LTO dealers are the creditor and thus, ultimately, have the risk should a mechanical failure occur to their collateral. Moreover, most dealer/creditors anticipate such an occurrence by having, in place, the ability to generate “side loans” to the debtor to pay for repairs so the debtor will continue to make the payments. The other alternative is to reposes the vehicle (this debtor base will not make payments on a vehicle they cannot drive), pay the cost to repair it, anyway and then resale it. The ability to offer ESC’s are a perfect match for this creditor/debtor marketplace.
Why haven’t BHPH/LTO, historically, offered ESC’s? Most ESC companies require the full payment of the cost of the ESC upfront. The creditor would have experienced a “negative cash flow” situation because the creditor would have had to “front” the funds on behalf of the debtor and recoup the cost in the form of monthly payments coming from the debtor.
How can I offer an ESC program without the negative cash-flow mentioned above? Our program allows the BHPH/LTO dealer to pay a small upfront enrollment fee , then remit the balance of the ESC cost as it is collected from the debtor in the form of the monthly payment.
Can I reinsure the ESC program? Yes, in fact, we only offer programs where the principal participates in the underwriting profit.
What is the debtor/consumer charge for the ESC program? The charge is determined by the term, coverage and mileage of the vehicle, as well as additional dealer profit. The additional charge to the monthly payment is about $1.00 per day- less than a cup of coffee or a bottle of beer. Dealer/creditor net rate sheets are available upon request.
Will my debtor/customer purchase an ESC program? Not all will, but most understand that an ESC will pay for the repair of their vehicle with only a small deductible. This debtor base understands, better than most, that they don’t have the money for extraordinary expenses such as an unanticipated mechanical failure of their vehicle.
Is an ESC the same as a warranty? No, technically, a warranty (and/or limited warranty) is coverage that is provided with the vehicle as part of the purchase of the vehicle (much as an engine comes with a vehicle), and coverage exists by virtue of the vehicle purchase and not payment of an additional charge. The coverage is provided to the vehicle purchaser by the selling dealer “warranting” that if certain (limited) conditions occur, the selling dealer will repair the vehicle per the warranty without charge (a deductible may apply).
Can I charge money for a warranty? No, see paragraph 2
Can I “build” in the cost of a warranty into the vehicle price? Yes, by the very nature of putting a vehicle into inventory numerous “costs” occur- base cost of the vehicle, transportation charges, inspection fees, reconditioning expenses and etc. Part of the inventory “costs” should include a reserve for potential repairs that the selling dealer may be called upon to provide by virtue of the (limited) warranty that was offered with the vehicle. Therefore, the “cost” would become part of the inventory cost and thus part of the selling price of the vehicle.
Can I charge money for an Extended Service Contract? Yes, selling dealers charge a cost for the ESC. The charge to the consumer may be added to the finance contract as an authorized charge. A portion of that charge can and should be a profit margin for the selling dealer.
Must I charge a cost for the Extended Service Contract? No, the selling dealer could “pay” for the cost of the ESC on behalf of the consumer. Remember, the entity with the coverage is still the consumer, not the selling dealer, even though the selling dealer “paid” for the ESC. This should be taken into consideration should cancellations occur. If the selling dealer wants to pay for the coverage the ESC provides, the dealer may be better served by offering an expanded coverage (limited) warranty.
Should I reinsure the Extended Service Contract that I sell? Yes, in our opinion, assuming at least minimal production of ESC, the ESC program should be reinsured because ESC’s are profitable for the ESC company (why do you think there are so many ESC companies?). If the ESC program is not profitable, then the selling dealer will get a rate increase to make it profitable for the ESC company, the ESC company will cancel the selling dealer to mitigate losses and/or “call claims tight” creating customer service problems for the dealer (who will usually end up paying some claims anyway). We believe that, “bottom line” over time, the ESC program will be profitable and thus the principal should participate in the profitability that the ESC program is generating.
Should BHPH/LTO dealers offer ESC’s? Yes, because your customers do not, generally, have the funds available to repair their vehicles. BHPH/LTO dealers are the creditor and thus, ultimately, have the risk should a mechanical failure occur to their collateral. Moreover, most dealer/creditors anticipate such an occurrence by having, in place, the ability to generate “side loans” to the debtor to pay for repairs so the debtor will continue to make the payments. The other alternative is to reposes the vehicle (this debtor base will not make payments on a vehicle they cannot drive), pay the cost to repair it, anyway and then resale it. The ability to offer ESC’s are a perfect match for this creditor/debtor marketplace.
Why haven’t BHPH/LTO, historically, offered ESC’s? Most ESC companies require the full payment of the cost of the ESC upfront. The creditor would have experienced a “negative cash flow” situation because the creditor would have had to “front” the funds on behalf of the debtor and recoup the cost in the form of monthly payments coming from the debtor.
How can I offer an ESC program without the negative cash-flow mentioned above? Our program allows the BHPH/LTO dealer to pay a small upfront enrollment fee , then remit the balance of the ESC cost as it is collected from the debtor in the form of the monthly payment.
Can I reinsure the ESC program? Yes, in fact, we only offer programs where the principal participates in the underwriting profit.
What is the debtor/consumer charge for the ESC program? The charge is determined by the term, coverage and mileage of the vehicle, as well as additional dealer profit. The additional charge to the monthly payment is about $1.00 per day- less than a cup of coffee or a bottle of beer. Dealer/creditor net rate sheets are available upon request.
Will my debtor/customer purchase an ESC program? Not all will, but most understand that an ESC will pay for the repair of their vehicle with only a small deductible. This debtor base understands, better than most, that they don’t have the money for extraordinary expenses such as an unanticipated mechanical failure of their vehicle.