Motor trader’s guide to car warranties

As a car dealer, you’re no doubt keen to seal the deal with your buyers and turn them into satisfied, returning customers. So how can offering a warranty help you do just that?
 
The world of car warranties can be a quite bewildering one for customers and dealers alike. In this blog, we’ll take a look at the types on offer, the pros and cons for you and your customers, and how to make sure you stay on the right side of the law.
 
Offering car warranties can be a great way to boost your business and build up a flourishing dealership – but remember to protect it with insurance for motor traders, too.
 

What is a warranty?

A car warranty is an agreement to cover certain costs for repairing vehicles that develop faults within a specified time frame.
 
They can be issued by manufacturers, dealers, or independent insurance providers. There are a few different types, referred to by more than one name, and customers often don’t realise which one they are getting. So what are the chief differences?
 
A manufacturer’s warranty will be issued to a brand new vehicle.
 
Approved used car warranties are offered by franchised dealers on good quality second-hand cars.
 
Finally, there are also aftermarket or used car warranties. You can offer these yourself, but your customers can also search the market independently for deals.
 
Let’s take a look at all of these types in more detail.
 

Manufacturer’s warranty

A manufacturer’s warranty is a comprehensive policy that covers new cars. Unsurprisingly, they’re also known as new car warranties. So what’s included?
 
Well, they vary, but they’re likely to cover the core components such as: engine, gearbox, electrics, fuel system, suspension, steering, clutch, brakes and safety system. The anti-perforation policy covers for any rust or corrosion that might develop.
 
And what’s never covered? The things that might be expected to get worn or used up, including: brake discs, light bulbs, tyres, fan belts, and fluids like anti-freeze. All these things are known as ‘consumables’. Accidental damage or vandalism will also be excluded. 
 
It may be possible for customers to buy add-ons to these warranties to cover certain elements that aren’t included on the core policy.
 
A manufacturer’s warranty commonly provides cover for three years or 36,000 miles, whichever comes sooner. Increasingly, though, manufacturers are offering longer periods: Kia’s is for seven years or 100,000 miles.
 
This type of warranty will be passed onto the new owner if the vehicle is sold before the term is up, so covers many nearly new cars.
 
It’s important to note that the cover period starts from the vehicle registration date, not the point at which it is sold. Plus, many warranties cover different elements of the vehicle for different timeframes: anti-rust cover might even last for up to 15 years.
 
Customers risk invalidating these warranties if they use unapproved fuel or parts, or modify their vehicle in any way. Repairs due to neglect can also render the warranty void.
 
Customers must also get their car serviced according to the approved schedule. However, while manufacturers can recommend customers use their franchised garages for services, this is not enforceable.
 

Extended warranties

A manufacturer’s warranty often comes with the option to extend when it expires. Customers can choose to purchase this extension at the time they buy their new car.
 
However, the terms and conditions are likely to change at the point of extension, and it could well be advantageous for the customer to switch to a different provider – see the section below on ‘aftermarket warranties’.
 
As a dealer, you are likely to get commission whatever type of warranty you sell.

Approved used car warranties

If you’re a franchised dealer, you will know all about the approved used car scheme. It means that a second-hand car has passed certain checks and met criteria set out by the manufacturer, which are likely to concern age, mileage, number of owners, and service history.
 
So approved used car status is a stamp of approval – and consequently, such vehicles can also benefit from wide-ranging warranty cover.
 
Approved used car warranties are often branded as an extension of the manufacturer’s warranty. However, they’re usually underwritten and managed by a third-party insurance provider.
 
Terms vary, but it’s common for these warranties to last for 12 months. There are likely to be more exclusions than on a new car warranty, in recognition of the fact that these older cars are more vulnerable to faults developing.
 
Again, customers will have to stick to a service schedule to maintain the validity of the warranty. And these warranties can stipulate that services have to take place at authorised garages, such as yours. Unlike with new car warranties, this requirement is enforceable.
 

Aftermarket warranties

Finally, if you sell second-hand cars, you need to know about aftermarket or used car warranties. These are underwritten by insurance providers, and customers can either obtain one from a dealer, or search the market themselves.
 
Terms vary hugely, depending on the age and value of the vehicle. For older cars, it’s common for dealers to provide warranties for just a few months. They’re rarely offered at all for cars that are more than 10 years old, or with more than 100,000 miles on the clock. Cars worth less than £1,000 are usually very expensive to cover by warranty, so it’s unlikely to be worth the customer’s while.
 
Aftermarket used car warranties are generally more restrictive than other types, in recognition of the fact that it’s expected that things will go wrong on older cars. Customers may be obliged to contribute to the cost of repairs, and there may be a maximum amount they can claim during the term.
 

What is consequential loss?

This is a term you’ll often see in warranties. So what does it mean, and how can you explain it to your customers when offering or selling a warranty?
 
Consequential loss refers to damage caused by an uninsured element to an insured element. One example would be if a catalytic converter (excluded under the terms of the warranty) breaks, and damages the exhaust (included in the warranty).
 
Some warranties provide cover for consequential loss, and some don’t.
 

What is a betterment clause?

Many warranties will have a betterment clause. This means that if a damaged part is replaced with a better quality part, or the vehicle is repaired in such a way that its value is raised, the customer might have to contribute to the cost of the repair.
 

What’s the difference between insurance and a warranty

For customers, this can be a confusing area – particularly as many warranties are underwritten by insurance providers!
 
First of all, it’s key to note that vehicle insurance is a legal requirement, while a warranty is not.
 
Then, broadly speaking, insurance covers a car for external factors, while a warranty is for internal factors.
 
In practice, that means that if a customer suffers an accident, theft or vandalism, they need to claim on their insurance. If, however, their vehicle breaks down due to a mechanical fault, they need to claim on their warranty. Of course, terms and conditions apply.
 
And for you as a dealer, it’s your motor trade insurance that will pay out if a customer has an accident while test driving the car.
 
Both insurance policies and new car warranties might bundle in a few extras, such as breakdown cover or courtesy cars. If the warranty you’re offering does this, it’s a great selling point for customers, as it means they don’t have to pay extra for these on their insurance policies.

What does the law say about warranties?

It’s important to note that warranties supplement rather than replace or override a customer’s statutory rights.
 
Under the Road Traffic Act 1988, it is an offence for a trader to sell an unroadworthy vehicle unless it’s clearly described as such and the buyer is not intending to drive it on the road in that state.
 
And under the Consumer Rights Act 2015, customers have certain legal rights if the car turns out not to be not as described or faulty. The details depend on how long ago they bought the car from you.
 
Of course, such things are open to interpretation! However, if you dispute this with a customer, the case could end up in court, where a judge will take factors like the car’s mileage and age into account when considering whether the customer’s complaint is valid. By including legal cover on your insurance for a motor trader, you get support if a customer disagreement escalates into legal action against you.
 
While you can offer your customers a discount instead of a warranty, you cannot get them to waive their legal rights.
 
You should also be aware of the laws around selling a warranty. You’re obliged to provide accurate and clear information to your customers without omitting crucial details, eg. what is and isn’t covered.
 
And if you sell the warranty over the phone or online, rather than in person at your showroom, there’s a 14-day cooling-off period.
 

What are the pros of warranties for dealers?

Motor traders are generally keen to offer or sell warranties. So what are their plus points?
 

• They give customers reassurance to go ahead with a pricey purchase. The customer is insulated from the risk of expensive repairs, so may feel better able to choose a higher value car.
   
• They demonstrate that you are confident that the car won’t require expensive repairs in the specified time frame. Customers want a reliable motor, so this can be a real point in their favour.
   
• They can tie the customer into services with your garage. With some types of warranty, it’s a requirement that services take place at your dealership. Even when there’s no obligation, customers are likely to return to you out of loyalty or convenience.
   
• You are likely to get commission if you sell a customer a warranty. While a manufacturer’s warranty comes with the car, other types are from third-party providers who will pay you a cut.
   
• Offering a free warranty can be a good sales or marketing tactic. It works in much the same way as a discount for undecided customers, and can be used as a promotional offer, too. Why not mention your great deals on social media?
   
• It’s an obvious add-on to your main business of selling cars and providing motoring services. Unlike vehicle accessories and other stock, warranties don’t take up any showroom space!

What are the cons of warranties for dealers?

Of course, there are always a few drawbacks or points to consider.
 

• If your customers feel you have misled them about the warranties you have provided or sold, it could seriously damage your relationship with them, or even your business reputation.
   
• It’s important to stay on the right side of the law when providing or selling warranties. The laws around selling cars are already quite complex, so warranties can just feel like too much.
   
• If your skills and passion lie in cars, then selling warranties might just feel like a headache to  you. There’s a lot to be said for focusing on what brings you pleasure and pride. Make sure you protect the business you’ve worked so hard to build up with motor trade insurance.

Get a quote from Insurance Choice today

Running a dealership or garage is a complex business. So at Insurance Choice, we like to make things simpler for you by arranging your motor trade insurance.
 
We’ve been arranging insurance for over 20 years, searching providers for the policies that suit your needs. We specialise in tailoring motor trade combined insurance policies to meet your business requirements.
 
We can arrange cover for your stock and premises, cash, theft, fire and vandalism, business interruption, legal support and much more. You and your staff are covered while driving customers’ vehicles, and prospective buyers will be covered for test drives, too.
 
Payment is simple, thanks to flexible solutions such as paying in monthly instalments.
 
Contact us today for a quote for motor trade insurance to protect your business.
 
Policy benefits, features and discounts offered may very between insurance schemes or cover selected and are subject to underwriting criteria. Information contained within this article is accurate at the time of publishing but may be subject to change. As a car dealer, you’re no doubt keen to seal the deal with your buyers and turn them into satisfied, returning customers. So how can offering a warranty help you do just that?