What Is a Vehicle Service Contract?

What does a vehicle service contract cover?

Both factory warranties and vehicle service contracts only cover repairs needed due to manufacturing defects. In other words, they only pay for repairs on parts that fail entirely on their own and for no reason that you caused.

Imagine you’re driving and your dashboard and gauges suddenly stop working. Since you had nothing to do with the part failure, the cost to repair or replace it would very likely be covered under warranty.

However, if those parts stop working immediately after an accident, your warranty provider would deny your claim on the basis that the failure was caused by damage — not by a defect.

» MORE: Car warranty vs. car insurance

In addition, warranties only cover the specific components:

• Exclusionary warranties, aka bumper-to-bumper warranties, cover every single component on the vehicle except the few dozen parts listed as exclusions in the contract.
• Inclusionary warranties, such as powertrain and Silver/Gold warranties, only cover the parts that are listed in the contract.

Generally speaking, bumper-to-bumper warranties are often the best value because they cover well over 2,000 components on the car for roughly 20% more than the cost of the next-best option. Inclusionary warranties, by contrast, often cover just 500 components or fewer.

To recap: Vehicle service contracts only cover the cost to repair or replace specific parts and only if those parts fail entirely on their own — not due to damage or another outside cause.

» MORE: What does a car warranty cover?

What does a vehicle service contract not cover?

For starters, vehicle service contracts will never cover parts that aren’t designated in the warranty contract. If it’s not listed in your inclusionary warranty — or it’s listed as an exclusion in your bumper-to-bumper warranty — it won’t be covered. (Your contract trumps whatever you heard from a salesperson, so read it carefully before you buy.)

In addition, vehicle service contracts will never cover repairs needed due to:

• Damage of any form, whether it’s from a collision, theft, vandalism, weather, a wild animal or any other cause
• Neglect, like failing to stick with the recommended maintenance intervals listed in your owners manual
• Misuse and abuse, such as competitive racing, driving off-road or towing beyond your vehicle’s rated capacity
• Aftermarket parts that cause other parts to fail, such as a lift kit causing suspension damage

Finally, even the most robust bumper-to-bumper warranty typically won’t cover:

• Routine maintenance items, like tire rotations, oil changes and transmission flushes
• Wear-and-tear parts that are expected to fail within a certain amount of time or miles, like brake pads and wiper blades
• Cosmetic parts and body panels

Vehicle service contracts explained

A vehicle service contract, also known as an extended auto warranty, is an optional add-on that provides extra warranty coverage for your vehicle.

There’s technically a legal difference between warranties and service contracts, but the terms are used interchangeably in most cases. More on that below.

When a vehicle is under warranty, it means that the provider of the warranty will cover the cost of certain repairs. Let’s say you purchase an extended warranty that covers your transmission for three years or 36,000 miles — then your transmission fails a few months later.

Normally, you’d have to take your car to the mechanic and pay for a transmission replacement out of pocket, which would usually cost at least $3,000.

But, since you have a warranty, your mechanic bills the warranty company instead. When you come to pick up your car, all you have to do is pay your deductible — which is often about $100.

There’s a bit more to the process, but that should at least give you a broad overview of how vehicle service contracts work.

» READ MORE: How an extended auto warranty works

How does a vehicle service contract work?

Once you’ve bought your vehicle service contract and completed your waiting period, you need to keep up with the maintenance schedule listed in your owners manual. Then, when you have a covered breakdown, you can take the following steps to file a claim with your warranty provider:

1. Tow your vehicle to the nearest provider-approved shop: Your warranty provider can help you find an approved mechanic over the phone. If you purchased an extended warranty from your automaker, you’re typically required to go back to the dealership for warranty repairs.
2. Tell the shop that you have a vehicle service contract: This will let the mechanic know to start communicating with your warranty provider.
3. Await diagnostics and preauthorization: Next, your mechanic will diagnose the problem and send their notes to your warranty provider. If your mechanic confirms that the part failure was due to a defect, your warranty provider will “preauthorize” the repair, meaning they’ll commit to paying your mechanic once they’re done.
4. Pick up your vehicle and pay your deductible: When you pick up your vehicle, you’ll pay the mechanic your chosen deductible, and your warranty provider will pick up the rest of the tab. Most vehicle service contracts have deductibles of $100, but other options can include $0, $50, $250 and $500.

The biggest mistake consumers make when filing a claim with their warranty provider is forgetting to mention their warranty to the mechanic. Warranty providers will practically never pay for work that wasn’t preauthorized, so you will get stuck with the final bill.

“I had a policy with Endurance on a previous car. When I needed repairs on that car the claim process was a breeze,” reported Patricia in Arkansas. “I took my car in to be repaired and gave my account number to the technician. The dealership billed Endurance and I drove away with a like new car. I made my decision then and there that I would buy an extended warranty on my next car.”

» MORE: How an extended auto warranty works

How much does a vehicle service contract cost?

On average, vehicle service contracts cost around $1,000 per year of added bumper-to-bumper coverage. However, rates may vary significantly depending on your vehicle and your extended warranty provider.

Broadly speaking, vehicles that are affordable to own and maintain tend to have far less expensive vehicle service contracts. By contrast, luxury and performance vehicles with a reputation for poor build quality have much more expensive warranties.

But the cost is all relative — a $4,000 vehicle service contract on a $100,000 Maserati may very well be worth it if there’s a high likelihood that the vehicle will need an $8,000 repair within the next few years.

You have to understand what is important to you and make your decision from there. “In this space, you usually get what you pay for (assuming it's a legit company),” said Allison Harrison, an attorney with experience in automotive law. “If all you care about is your engine and transmission working, you can likely get away with a powertrain-type warranty.”

» LEARN: How to get a cheap extended car warranty

Are vehicle service contracts worth it?

Generally speaking, a vehicle service contract is more likely to be worth it if:

• You drive a vehicle with a poor reputation for reliability
• The cost of the vehicle service contract is less than your expected cost of repairs
• You’d like an additional form of insurance against sudden and expensive repair bills
• You don’t mind paying $1,000+ for added peace of mind, even if you never end up using your warranty

If you’re interested in buying a vehicle service contract, check out our article on how to choose an extended car warranty to see what you can do to make a smart purchase.

Tips for choosing a vehicle service contract

To choose the best vehicle service contract to for you compare coverage, cost and claim limits. Also, consider how each vehicle service contract company handles transferability, deductibles and claims.

• Compare providers: Look at multiple companies, including both automakers and third-party providers, to evaluate plan options and customer reviews.
• Understand the coverage: Read the contract carefully to see what is covered and what is excluded. Make sure the coverage matches your needs.
• Check for transferability: Some plans can be transferred if you sell your car, which can increase its resale value.
• Look at the deductible: Deductibles vary, so consider how much you’re comfortable paying out of pocket for each repair.
• Consider your car’s reliability: If your car has a strong track record for reliability, you may not need comprehensive coverage.
• Ask about claim limits: Make sure you understand any caps on repair costs, total payouts or number of claims.
• Avoid pressure sales: Take your time to research and don’t feel pressured to buy a contract at the dealership.

Vehicle service contract vs. manufacturer warranty

Manufacturers’ warranties (aka factory warranties) come with every new vehicle sold in the United States. For example, many cars come with:

• A three-year/36,000-mile bumper-to-bumper warranty, which covers the vast majority of the parts on the car
• A five-year/60,000-mile powertrain warranty, which covers the engine, transmission, drive systems, seatbelts and air bags

All manufacturers’ warranties automatically transfer to vehicles’ subsequent owners until the warranties expire. So, if you buy a used car that’s under five model years old, you might still have some factory warranty remaining.

» LEARN: Car warranty check by VIN

A vehicle service contract, in contrast, is an optional add-on that can provide coverage beyond the manufacturer’s warranty period.

These plans are available from both manufacturers and third-party warranty companies. If you buy a brand-new Toyota tomorrow, the dealer will probably try to sell you a Toyota Extra Care contract. However, you could also buy an extended warranty from a company like Endurance later on. (Manufacturers’ extended warranties typically require you to buy them while your factory warranty is still active.)

Mechanical breakdown insurance is sold by insurance companies.

Unlike factory warranties, vehicle service contracts aren’t always transferable, but they can sometimes give you a lot more freedom when it comes to where you can use them.

Also, factory warranties and vehicle service contracts aren’t always measured in the same way. To illustrate, if you buy a seven-year/100,000-mile bumper-to-bumper extended warranty for your new Toyota, it may only provide an additional four years/64,000 miles of coverage since you’re already covered by Toyota’s manufacturer’s warranty for the first three years/36,000 miles.

You might also see disclaimers stating that extended auto warranties aren’t technically warranties at all, but that’s not a red flag. That disclaimer is simply referring to the legal definition of a warranty, which excludes vehicle service contracts. According to the Federal Trade Commission, “An auto service contract or extended warranty is not a warranty as defined by federal law, because you buy it separately; it’s not included when you buy a car.”

Basically, vehicle service contracts can’t legally be considered warranties because “warranties” have to be included with the original purchase.

» LEARN: What to know about manufacturers’ extended warranties

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