What Is a Vehicle Service Contract?

The basics of vehicle service contracts

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 most people use the terms interchangeably.

When a vehicle is under warranty, the warranty provider will cover the cost of certain repairs. For example, if you purchase a plan with 3-year/36,000-mile coverage for your transmission and it fails a few months later, your contract protects you.

Normally, you’d have to take your car to the mechanic and pay at least $3,000 out of pocket for a transmission replacement. But, since you have a warranty, your mechanic bills the warranty provider instead. When you come to pick up your car, all you have to do is pay your deductible, which is often about $100.

» READ MORE: How an extended auto warranty works

What does a vehicle service contract cover?

Vehicle service contracts cover only the parts listed in the contract, and only when those parts fail on their own due to a defect. If a component is not named in the agreement, it is not covered.

Imagine you’re driving and your dashboard gauges suddenly stop working. Since you had nothing to do with the component failure, your warranty provider will likely cover the cost of replacement. However, if those parts stop working immediately after an accident, the provider will deny your claim because the accident caused the failure, not a factory defect.

» MORE: Car warranty vs. car insurance

Warranties only cover the specific components outlined in your contract. There are two broad types of coverage:

• Exclusionary plans (bumper-to-bumper): These cover every single component on the vehicle except for a few dozen parts explicitly listed as exclusions. Bumper-to-bumper plans typically offer the best value.
• Inclusionary plans (powertrain, stated-component or Silver/Gold warranties): These plans cover only the specific parts listed in the contract, such as the engine and transmission, and typically include 500 components or fewer.

In general, bumper-to-bumper plans cover more parts than inclusionary plans, but the only way to know exactly what’s included is to read the contract itself.

» MORE: What does a car warranty cover?

What does a vehicle service contract not cover?

A VSC will not cover every repair, even if the plan sounds comprehensive. For starters, vehicle service contracts will never cover parts that aren’t designated in the warranty contract. Always read your contract carefully before purchasing, as the written text overrides any verbal promises from a salesperson.

Common exclusions include 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, such as skipping the recommended maintenance intervals listed in your owner's manual.
• Misuse and abuse, including racing, driving off-road or towing beyond your vehicle’s rated capacity.
• Aftermarket parts or modifications.
• 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.

How does a vehicle service contract work?

Once you buy a vehicle service contract and finish any waiting period, you still need to follow the maintenance schedule in your owner’s manual. That matters because providers can deny claims when a breakdown is tied to missed maintenance.

Then, if you have a covered breakdown, follow this general process to file a claim with your warranty provider:

1. Tow your vehicle to an approved repair 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. Inform the shop of your coverage: Tell the shop that you have a vehicle service contract. This lets 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 the 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 car, 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 many consumers make is forgetting to mention the contract before repairs begin. If the work isn't preauthorized, the provider may refuse to pay.

“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 about $1,000 per year for added bumper-to-bumper coverage, though exact rates may vary significantly depending on your vehicle and extended warranty provider.

Broadly speaking, luxury and performance vehicles often cost more to cover, while cars with strong reliability records may cost less.

But the cost is relative to potential risk — 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?

A vehicle service contract is generally worth considering if:

• You drive a vehicle with a poor reputation for long-term reliability.
• The total cost of the contract is less than your anticipated out-of-pocket repair costs.
• You want an extra financial buffer against sudden, expensive mechanic bills.
• You feel comfortable paying a premium for peace of mind, even if you never file a claim.

It may be less appealing if your car is dependable, you prefer to self-insure or the contract price is close to what you would expect to spend on repairs anyway. The key is to compare the plan cost to the likely value of the repairs it would actually cover.

If you want to move forward with buying a plan, read our guide on choosing 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 for you, compare coverage, cost and claim limits. Also, consider how each vehicle service contract company handles transferability, deductibles and claims. Follow these best practices:

• 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, 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

Manufacturer warranties (aka factory warranties) come with every new vehicle sold in the U.S. and are included in the purchase price. Many cars come with these plans:

• 3-year/36,000-mile bumper-to-bumper warranty: Covers the vast majority of vehicle components.
• 5-year/60,000-mile powertrain warranty: Covers the engine, transmission, drive systems, seatbelts and airbags.

All manufacturer warranties automatically transfer to subsequent owners until they 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 you buy separately, either from the automaker or a third-party provider.

Here is a simple way to think about it: a manufacturer warranty is part of the vehicle’s original sale, while a vehicle service contract is a separate agreement for additional coverage.

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. Note that you typically have to buy an automaker’s extended warranty 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. Some VSCs can be transferred when you sell the car, which may add value for the next owner. Others cannot be transferred, so it is important to confirm the rule before you buy.

Coverage metrics also differ. For example, a 7-year/100,000-mile bumper-to-bumper extended warranty on a new Toyota adds 4 years/64,000 miles of true coverage. That’s because the original 3-year/36,000-mile factory warranty already covers the first few years.

You might see disclaimers stating that extended auto warranties aren’t technically warranties under federal law. That disclaimer is simply referring to the legal definition of a warranty, which excludes vehicle service contracts. This is normal and not a warning sign.

If you encounter a disclaimer stating that an extended auto warranty isn’t a warranty under the law, don’t fret. 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” must be included with the original purchase.

» LEARN: What to know about manufacturers’ extended warranties

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