Used Car Warranties

Car Warranties Explained - Advantages and Disadvantages



There are a number of types of warranties and guarantees on the motor retail industry market today however, broadly speaking, they divide into three areas, manufacturers, insurance backed and those that are dealer backed.

Here we list all the types of warranties and guarantees available including some of the advantages and disadvantages:

1. Manufacturers Guarantee

The manufacturer promises that if anything goes wrong with the product due to faulty design or manufacture, or the item otherwise does not live up to its expected performance, the manufacturer will replace it or make it perform as intended. The manufacturers guarantee is in most cases the best but unfortunately is offered from new and may only cover the vehicle for a limited period and sometimes on a declining scale.

2. Insurance Backed Warranty

Insurance Warranty (MBI) - this is underwritten by an insurance company and is an agreement that the insurance company will indemnify the policyholder against loss caused by a covered peril.

Advantages of an insurance warranty (mbi)

  • Your customer has peace of mind of the backing ofan insurance company if your dealership closes.
  • Your customer can seek help from the FCA and Financial Ombudsman if they feel they have been unfairly treated.
  • If you are FCA approved you can sell other insurance products (GAP, RTI etc).

Disadvantages of an insurance warranty (mbi)

  • You will need to be FCA approved or become an Appointed Representative of an insurance provider, with the associated training, record keeping and general bureaucracy.
  • The cost of insurance backed warranties will generally be significantly higher than dealer backed warranties, as there is an insurance cost and payment of middlemen in the insurance claim.
  • Many insurance warranties have exclusions that you would be legally obliged to honour under your customers' legal rights.


3. Dealer Backed Warranty


Obligor Warranty / Guarantee - this is a contractual warranty between you and your customers which a warranty provider will administer and handle the warranties on your behalf. You will have financial protection through an insurance policy or service contract to cover any losses you may suffer due to vehicles failing whilst under the control of your customers.

Advantages of an obligor warranty / guarantee

  • You have peace of mind of the backing ofan insurance company.
  • No need to register with the FSA.

Disadvantages of an obligor warranty / guarantee

  • The cost of an obligor warranty / guarantee can be costly as there is an insurance cost and payment to your warranty provider.
  • Many obligor warranties have exclusions that you would be legally obliged to honour under your customers' statutory rights.

Self Funded 'pot scheme' Warranty - this is a contractual warranty between you and your customers which a warranty provider will administer and handle the warranties on your behalf. Your warranty provider will charge you as each warranty is registered and hold your money in a 'pot' ( their bank account) to cover any claims that may be made under the warranty. At the end of each year you will receive any unclaimed money back less an administration charge.

Advantages of a Self Funded 'pot scheme' Warranty

  • You do not have the extra expense of the insurance company/policy.
  • No need to register with the FCA.

Disadvantages of a Self Funded 'pot scheme' Warranty

  • Whilst your money is in another company's bank account it is at risk.

In House Warranty - this is a contractual warranty between you and your customers administered by yourself.

Advantages of an In House Warranty

  • You do not have the extra expense of the insurance company/policy or warranty administrator.
  • No need to register with the FCA.

Disadvantages of an In House Warranty

  • It is your responsibility to make sure your warranty complies with substitute 'legal requirements' and FCA regulations.
  • You will have to administer all your claims

Verbal Warranty - this is a gentleman's agreement between you and your customer.

Advantages of a Verbal Warranty

  • It costs nothing.
  • No need to register with the FCA.

Disadvantages of a Verbal Warranty

  • Under the amendments to the Sales of Goods Act it is illegal.
  • There is no written evidence of the terms agreed.

Read more about how to run your own in-house warranty scheme


Author: Joel Combes

Published: 25 Mar 2011

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