7 Myths of Vehicle Service Contract Programs

Service Contract with Wrenches
(Last Updated On: May 23, 2022)

Misinformation Abounds

We live in an age of information, yet there’s so much that’s blatantly false, or deliberately misleading. You know it just from sifting through content online. Vehicle Service Contracts are no exception.

Though not here in the GreenProfit Learning Library! If you’ll recall, we even made a guide to choosing a Vehicle Service Contract program for your credit union. Yet misconceptions still exist.

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Is this how your CU staff looks at VSC?

These are the “Big Three” Myths of VSCs:

  • They’re a scam
  • They’re a waste of money
  • They’re too expensive

Ask your FSRs. How many of those claims pass their desk in a given week? Are they trained to gently “bust” each of them in turn?

Yet it’s not just your borrowers who entertain these perspectives. Staff can share them as well, which leads to poorly-performing programs within your institution. Who’s going to sell something they feel is a scam?

We’re here now to address the top 7 Myths About Vehicle Service Contract programs. Just reading and sharing this article with your team can mean greater success of your VSC program.

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It’s about helping your staff recognize the real value. Not just to your institution, but to your borrowers. When they begin to understand how not having a VSC can hurt a family, they’ll get invested in offering it.

Does it mean everyone will buy? Of course not. But at least members will have the opportunity to get protected.

With 39% of consumers needing to go into debt to cover a $400 unexpected expense, the need is more important than ever. (That number rises to 59% when it’s $1000.)

You’re all about great member service. Isn’t ensuring they understand all their protection options part of that service commitment?

There’s no shortage of myths in this industry. You’ll hear them from vendors, around the water cooler, from service shops, or just in your daily life. It’s time to bust ‘em:

This webinar was right up your alley. Consider getting the recording.

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Myth #1: VSC and Extended Warranty are the Same

This is a common misconception. Most of the time, it’s simply a misnomer.

A warranty comes with the purchase of a new vehicle and is provided by the manufacturer. Most manufacturer’s warranties are for three years or 36,000 miles.

An extended warranty is offered by the manufacturer to continue coverage on the vehicle (though it may include additional exclusions).

A Vehicle Service Contract can be purchased to provide repair coverage after the manufacturer’s warranty expires.

It’s important to note the VSC does not extend the coverage of your original manufacturer’s warranty. It is simply a promise to pay for covered auto repairs, under a new contract between the consumer and the contract provider.

VSCs may cover different repairs than manufacturers’ warranties, offer a range of coverage limits, and also may include additional non-repair benefits like Trip Interruption Coverage.

In this case, the right terminology makes all the difference.

Isn’t there another product which has this issue? Oh, right…GAP!

Remember, what you offer is GAP coverage, not GAP insurance. The latter is a component of a consumer’s auto insurance policy.

You’re all about compliance. We’re all about providing accurate information. Together, we can keep those class action suits out of your offices.

Myth #2: VSC’s Offer Limited Revenue

Whoever said you can’t make money off Vehicle Service Contracts never tried all that hard. Like any of your other products, there’s a markup applied to each sale that you determine in-house. Finding the amount that provides suitable income while remaining affordable for members is your goal.

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You may need a few more to hold all this extra revenue!

Yet there’s another, potentially massive, revenue source that VSC programs can offer. And it’s based on an idea you already use.

Does your credit union offer credit insurance?

Yes? Perfect.  

And each month, your credit union earns a percentage or pre-arranged fee for each member who purchases?

Yes? Stay with me.

At the end of each year, the insurance company adds up all of the collected premiums, compares them to the paid claims, and (assuming premiums are more than claims) sends your “profit share” in the form of a big check.

Right? That’s pretty neat.

So what’s the point? Well, this is now available for VSC programs. And we’re not talking a few cents on the dollar. This is 100% profit share, in addition to your per contract markup.

Profit Sharing VSC Price Distribution Pie Chart
An example where profit share would net your CU the blue and red sections each year.

Based upon typical reserve to claim ratios, it is likely (although not guaranteed), that your credit union can increase non-interest income from your VSC program by 300%!

Myth busted wide open!

Myth #3: Covered Components or Exclusions Solely Govern Claim Decisions

Let’s take a walk in a grey area. Seriously, we’re addressing “Grey Area” claims. These are claims which may not fall within the black and white contractual language.

Scale with Question Marks

A VSC is a legally-binding contract. Thus, the wording governs claim decisions. But sometimes life gets in the way. You might call them “extenuating circumstances”, where good sense and customer relations deems a different decision. Here’s an example:

A typical exclusion in VSC’s is overheating. Regardless of the cause, it’s likely the driver is made aware of the problem, barring a total failure of the vehicle warning lights. At that point, most drivers would pull over, turn off their vehicle, and call for roadside assistance.

But what if that wasn’t the safest option?

Imagine your daughter coming home from an evening activity. She sees the temperature warning light illuminate. Yet she also didn’t feel safe pulling over to wait for assistance. So she drove straight home, causing serious damage to the vehicle. But she got home safely.

By the black-and-white of the VSC language, the claim wouldn’t be paid. Is that right? This is where a Grey Area provision comes in handy.

Those VSC providers with such a Grey Area fund will review and potentially approve claims like our example. And since your credit union is asked to be part of the process, you can reach out to the member to get the full story. That’s relationship-building.

And yes, VSC providers can have a heart. That’s no myth.

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Myth #4: VSC Terms Start at Purchase (And miles are “total”)

Maybe. Maybe not. It depends on your provider.

Here’s an example:

  • Vehicle: 2017 Ford F-150
  • Mileage: 28,000
  • In-service date: 11/16/17
  • Purchase date: 03/15/19
  • Term: 5 year/100,000 mile

Question time! So, when does the plan expire?

  1. 3/15/24 or 100,000 odometer miles, whichever comes first
  2. 3/15/24 or 128,000 odometer miles, whichever comes first
  3. 11/16/22 or 100,000 odometer miles, whichever comes first

Tricky, right? Now you see why this myth continues.

Let’s clear it up, if we can:

  • “1” is unlikely, as typically in-service dates are only used for manufacturer warranties
  • So, it’s “3”. No, wait, “2”.

You are correct. “2” is the most likely. The plan can go by “add-on” or “total” miles. Typically, they use the former. However, to be sure, check with your provider.

Myth #5: VSC Cost Does Not Affect LTV

That’s easy. False. VSC cost absolutely does affect LTV.

Though most credit unions do not use it as a factor in calculating LTV, the price paid for the VSC still has an effect. Let’s look at this example:

The car has an NADA “Clean Retail” value of $15,000. The member wants to borrow $13,000, making the LTV 86.6%. Sounds good. No issues.

LTV - Loan Amount over Car Value

Ok, so imagine your MSR really understands providing protection services and the borrower adds VSC to their loan. Add in $1800 for the VSC and the LTV is now “theoretically” 98.6%.

Still ok. However, we did say their MSR was passionate at sharing details on available protection choices. The borrower ended up adding GAP and Credit Disability Insurance.

Then, turns out the vehicle isn’t actually “clean retail”.

If this vehicle were totaled, could it surpass your LTV limits? We don’t know. But you may not, either.

Food for thought, right?

Myth #6: $0 Deductible = $0 Out of Pocket

My two favorite words in insurance after “you’re covered”: Zero deductible.

Dollar Bill Stack

I can’t be the only one. Who else loves insurance plans with a $0 deductible? (If we were on FaceTime, I know there’d be a ton of hands raised.) Typically, consumers equate a zero deductible with “the company covers everything”.

Doesn’t seem unreasonable. However, VSC plans are complex.

Even the most comprehensive plan has dozens of non-covered parts. Plus, people may assume parts and services are covered, like diagnostic time, fluids, even tax, and be surprised at the final bill.

Bottom line: Your VSC plan might offer a $0 deductible, yet still have members paying hundreds out of pocket, even on a covered claim.

Ensuring you work with a VSC provider which offers the highest coverage is one path to keeping members happy. Another? Be wildly upfront about what is and isn’t covered.

Myth #7: A VSC is Collateral

Your member spent $2,000 on a VSC when they financed their 2014 Jeep Cherokee last year. No worries. Your credit union risk didn’t increase, since there’s always equity available from the cancellation refund.

“Are you going to tell me that’s a myth, too?” In some cases, yes.

Let’s look at that Cherokee example.

Your member selected a 6 year 100,000 (add-on) mile term. They put 10,000 miles on the odometer, but now, the loan is in default.

Sadly, your credit union had to repossess the car. With it comes the VSC.

Based on a pro-rata valuation, the cancellation refund should be 83% (using time as a factor), less any cancellation fee (usually $50 or $75): $1660-$50 = $1610

Yet, your credit union receives a refund of only $457. What’s going on?

Some companies deduct paid claims from their cancellation benefit. In this case, the original borrower had claims totaling $1,153.

So, the VSC as collateral: Myth or not? Depends on the provider.

The VSC is always some collateral, but maybe not at the amount you expect. Our advice? Do your homework.

Otherwise, you might be the one explaining that additional loss to your CEO or Board.

Summing it Up

So, Myth Buster, how’s it feel to have all this new information? Ready to debunk some more ideas? We’ll steer clear of the flamethrowers and cliffs, but you, hey, enjoy!

When it comes to VSCs, wouldn’t you agree that knowing is safer for all involved?

Continue myth-busting while learning to better help your members (and excite skeptical staff) with other VSC content:

Joe Winn - CU Geek

Blogger. Speaker. Futurist. Part-time Jedi.

Dedicated to helping your credit union, large or small, deliver mission-focused financial empowerment to your members. And make a positive impact on your community while you’re at it.