What is a vehicle service contract?

A vehicle service contract, sometimes called an “extended warranty,” is a plan that pays for unexpected car repairs.

It works a little like health insurance for your car and has some crucial differences from car insurance.

Most new cars come with a warranty from the manufacturer, but these often expire while you own your vehicle. An extended auto warranty can help you cover the cost of fixing your car after the manufacturer's warranty is no longer in effect.

Vehicle service contract providers include car manufacturers, dealers and independent third parties.

What does a vehicle service contract cover?

Vehicle service contracts cover repairs needed because of breakdowns, failures or malfunctions in covered components.

Each contract defines coverages differently, but plans typically cover the parts most likely to break down.”

Each contract defines coverage differently, but plans typically include the parts most likely to break down. According to Endurance Auto Warranty, these can include:

• Air conditioning
• Brakes
• Cooling system
• Drive axle
• Electrical components
• Engine
• Suspension
• Fuel
• Gaskets
• Steering
• Transfer case
• Transmission
• Turbo and/or supercharger

There are four basic types of warranties for cars: exclusionary, stated coverage, powertrain and wrap.

Exclusionary plans, sometimes called bumper-to-bumper plans, offer the most comprehensive coverage. An exclusionary plan covers everything except items specifically listed in the contract.

Stated component plans are considered the second most comprehensive — these list what's covered in the contract.

Powertrain plans are designed to cover the engine, transmission and drive axle, though some plans also include other select components. Wrap plans cover everything excluded in a powertrain and have a list of exclusions.

What isn’t covered: General wear and tear, vandalism, theft, routine maintenance (including brakes and clutches) and damage from accidents are generally not included in extended warranty coverage. Some providers offer maintenance plan benefits for an additional fee, however.

Auto service contracts often specify conditions under which a necessary repair is covered. Some parts won’t be covered if you fail to keep up with your car’s maintenance schedule.

Vehicle service contract vs. car warranty

Although many people use the terms interchangeably, a vehicle service contract is not the same as a warranty. According to the Federal Trade Commission, a service contract is a “promise to perform (or pay for) certain repairs or services.” It can be purchased from a manufacturer, dealer or independent company.

A warranty comes from the manufacturer and is included with the product at no extra cost. For companies, it’s a promise that they will stand behind their products for a specified amount of time. If the product fails in that period, the manufacturer covers the cost of repair or replacement.

• Car warranties are issued by the manufacturer to cover new or used cars for a specific amount of time or number of miles — whichever comes first. A typical new car limited warranty lasts three to five years and 36,000 to 60,000 miles. Warranty terms differ by car brand.
• Vehicle service contracts offered by third-party companies like CarShield and Protect My Car extend coverage beyond the manufacturer warranty expiration date, even for high-mileage cars. Covered parts and systems vary by warranty company and the level of coverage you choose.

Extended car warranties don't work the same way as a manufacturer's warranty on a new car. For example, with a vehicle service contract, you may be able to schedule repairs with any mechanic instead of having to go through a dealership's service department. There's also usually a deductible you have to pay with a vehicle service contract; a manufacturer’s warranty doesn’t require this.

Vehicle service contract costs

Vehicle service contracts cost anywhere from a few hundred dollars to more than $1,000. A manufacturer's warranty is always included in the vehicle’s sale price.

How much you pay for an extended car warranty varies based on the level of coverage you want, the company you choose and the length of the contract. Coverage for just the drivetrain (transmission, drives shaft, axles) is usually the least expensive. A powertrain warranty adds coverage for the engine and costs a little more. Bumper-to-bumper plans are the most expensive.

For example, comprehensive Endurance plans can cost as much as $4,000. Most people finance the plan over a couple of years and then only have to pay a deductible (when necessary) for the remainder of the term (usually five to seven years).

If you buy a used car from a dealership, the salesperson may encourage you to bundle an extended warranty plan into your regular auto loan payments. While this may be convenient, you often don't have the number of choices you would if you shopped for one yourself.

Also, buying the warranty from the dealer means you may include it in your vehicle financing, which ends up costing you more in interest over the life of the loan. A payment plan with a vehicle service contract may have higher costs for paying monthly than for paying in full upfront.

What to look for in a contract

Before you choose a plan, do your homework and research reputable warranty companies. Read the agreement, understand the included coverage and make sure you can afford the cost, including the down payment, monthly payments and deductible.

If you think you might sell the vehicle, find out if the contract is transferable — this may increase your car's resale value. It’s also important to find out how to file claims (online or over the phone, for example) and where you can take the vehicle in for authorized repairs.

If you think you might sell the vehicle, find out if the contract is transferable — this may increase its resale value.

Here are some more tips to make sure you’re getting your money’s worth with an extended auto warranty:

• Consider your budget: Many extended warranty companies require an upfront fee and a monthly payment. You also likely have to pay a deductible toward the cost of repairs. To come out ahead with a vehicle service contract, you need your policy to cost you less than it saves you.
• Understand coverages and exclusions: Make sure the plan covers the parts and systems that concern you most. For example, if you worry about your car's electrical system or transmission but the policy excludes those repairs, keep shopping.
• Beware of duplicate coverage: If you have a newer car, it might still be under warranty. You don’t need to double up on coverage — if your warranty hasn’t expired yet, you don’t need a vehicle service contract.
• Review the terms: Understand precisely how long the warranty is in effect. Does your coverage kick in the same day, or is there a waiting period? Often, you have to wait 30 days and 1,000 miles before requesting service. Learn about the company's cancellation policy and whether or not there's a fee for canceling or transferring the contract.
• Check the underwriter: If you know what company underwrites the contract, you can check its financial health and the Consumer Financial Protection Bureau’s database of complaints about financial products.

Auto service contracts can be confusing. One car owner from Minnesota assumed their plan covered something that actually counts as wear and tear: “So, I literally had to go and read again, word for word, look up words and all that stuff. And I don't think that's typical for a consumer,” they told us via phone survey.

Additionally, extended auto warranty scams are plentiful, so beware even of callers who claim to know your personal information, including your car's year, make, model and warranty status. Never give in to pressure to make a quick decision, and ask specific questions before you buy a plan.

Bottom line: Are vehicle service contracts worth it?

If your vehicle is outside of its original manufacturer warranty and you find the prospect of surprise repair bills daunting, a vehicle service contract may be worth it. As your car gets older, necessary repairs become less predictable and more expensive.

Extended auto warranty coverage varies according to the provider and plan you choose. Research average repair costs for your car and compare those with the cost of purchasing an extended warranty. Depending on the cost of common repairs and the vehicle service contract’s price tag, coverage might not make sense for you.

Most drivers don't need a service contract until their car's warranty is about to (or already has) expired. You can purchase coverage at any time, but it's a waste of money to pay for an auto service contract that provides the same coverage as an active manufacturer’s warranty.

If you’re shopping for a used car at a dealership or online buying site, you might be better off getting a certified pre-owned (CPO) vehicle. Alternatively, a few insurance companies, including GEICO, offer similar protections through mechanical breakdown insurance (MBI). Also, some credit cards come with roadside assistance services.