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What is a vehicle service contract?

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by Danni White ConsumerAffairs Research Team
woman with car trouble on side of road

Vehicle service contracts, also called extended auto warranties, offer coverage for certain auto repairs. Most new cars come with a warranty from the manufacturer, but these warranties often expire while the vehicle is still in use. An extended auto warranty can help you cover the cost of fixing your car after the manufacturer's warranty is no longer in effect.

What does a vehicle service contract cover?

In general, vehicle service contracts cover repairs due to breakdowns or malfunctions in covered components. These covered parts and systems should be noted explicitly in the agreement you sign. Specific items may also be excluded from coverage. While individual contracts define their coverages differently, policies are often available in roughly defined tiers, such as:

Many extended warranties also provide other benefits, like rental car reimbursement or roadside assistance.
  • Powertrain coverage
  • Powertrain-plus coverage
  • Comprehensive coverage
  • Exclusionary coverage
  • Specialty coverage

Some vehicle service contracts also have limits that won’t let them cover the full cost of replacement. Even if a part or system is covered in your agreement, you may have coverage for only a portion of the bill after the warranty company factors in your car's age and mileage.

General wear and tear, vandalism, theft, routine maintenance and damage from accidents are generally not included in extended warranty coverage. Warranties and service contracts often specify the conditions under which a necessary repair is covered, too. If you fail to keep up with your car’s maintenance schedule, certain repairs may no longer be covered.

Before you decide to buy a specific auto service plan, read the fine print in the contract. It's essential to fully understand which systems and parts are covered and which are excluded. Coverage varies according to the provider, package and plan you choose.

Service contract vs. warranty

While the terms “vehicle service contract” and “extended warranty” are often used interchangeably, there are some technical differences:

  • Warranties are issued by the manufacturer to cover a new car for a specific amount of time or a certain number of miles — whichever comes first. A new car's warranty may only last three years or 30,000 miles, but it’s common to have different coverages for the powertrain and the rest of the vehicle. The cost of a new car warranty is almost always rolled into the vehicle’s sale price.
  • Vehicle service contracts, generally offered by third-party companies, can provide the same coverage as the manufacturer’s warranty, even for high-mileage cars. However, these contracts also allow for more flexibility than the one-size-fits-all plans from automakers. Covered parts and systems vary by warranty company and the amount of coverage you choose. If you want a vehicle service contract to cover repairs after your warranty expires, you generally must pay for it separately.

Most people don't need a service contract until their car's warranty is about to (or already has) expired, but there are vehicle service contracts you can use to complement your existing warranty. This is often called “wrap coverage.” However, duplicate coverage is a waste of money if you pay for an auto service contract that provides the same services as other financial products.

What does a vehicle service contract cost?

Extended warranty plans can be expensive, but prices generally depend on the coverage you choose and your car's year, make, model and mileage. Your location is also a factor, as repair costs vary widely across the country.

More coverage usually means a higher price. For example, a comprehensive plan that covers your car for five years or 100,000 miles (whichever comes first) should cost more than a drivetrain plan that lasts half as long.

Unless you pay for the whole thing upfront, your vehicle service contract will likely require you to make an initial down payment and monthly payments for a set period thereafter. Extended warranties typically also include a deductible, which you'll pay each time you need to access your policy's benefits.

Vehicle service contract features to consider

Before you decide whether to buy an extended warranty, it's critical to understand how this type of contract may work in your favor. Research average repair costs for your car and compare those with the cost of purchasing an extended warranty. Depending on the type of extended warranty you want, the cost of common repairs, and the price of the vehicle service contract, this coverage might not make sense for you.

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

  • Policy cost: Many extended warranty companies require an upfront fee plus a monthly payment. You may also have to pay a deductible for every repair or visit to a mechanic. To come out ahead with a vehicle service contract, you need your policy to cost you less than it saves you.
  • Policy exclusions: Read through your policy line by line to understand which potential problems are covered and which aren't. Make sure the policy covers the systems that concern you most. If you worry about your car's electrical system or transmission but the policy excludes those repairs, keep shopping.
  • Cancellation options: In some states, you can cancel an extended warranty for a certain amount of time after you purchase the policy. Learn about the company's cancellation policy and whether they prorate refunds.
  • Coverage term: Before you buy a policy, understand precisely how long it will be in force. Does your warranty term start from the first day the vehicle was driven, or does it begin when you purchase the policy?
  • Original manufacturer’s warranty: Are some of your car's parts and systems still under warranty? Hybrid, diesel-powered and electric vehicles may have coverage for certain parts beyond a traditional manufacturer's warranty.
  • Transferability: Find out if the contract is transferable should you decide to sell your car while it’s covered. This may even increase your car’s resale value.

Auto service contracts from third-party companies also don't work the same way as a manufacturer's warranty. You may be able to use any local mechanic instead of being forced to use a dealership's service department. Learn who can perform necessary repairs under your extended warranty contract. If the agreement requires you to work with mechanics outside your area, it may be impossible to get your claims paid.

Finally, extended auto warranty scams are plentiful, so beware 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. Get the warranty contract in writing so you understand exactly what coverage you'll have if you decide to buy.

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    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. Before you choose a policy, do your homework. Research reputable warranty companies and contact your state’s insurance commission to find out if your provider has complaints on file. Before you sign, read the agreement, understand the included coverage and make sure you can afford the cost, including the down payment and deductibles.

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    Profile picture of Danni White
    by Danni White ConsumerAffairs Research Team

    As a member of the ConsumerAffairs research team, Danni White is committed to providing valuable resources designed to help consumers make informed purchase decisions. Danni specializes in content strategy and development, with over a decade of professional writing and research experience.