What is a vehicle service contract and how does it work?

Vehicle service contracts cover unexpected or costly repairs. But they’re a pricey add-on — especially when what you need may already be covered by a warranty or your insurance. They can be useful, but you should be sure you are getting the most out of it before spending extra money, especially if you’re paying for them on top of an auto loan.

What vehicle service contracts are

A vehicle service contract, also called an extended warranty or auto service contract, is an optional service that covers certain vehicle problems or repairs after the dealer or manufacturer warranty expires. They can cost $2,000 or more and may have added obligations like deductibles or possible transfer fees.

Manufacturers, dealerships and private companies all offer service contracts. There might be a period in which you can buy the service contract after the car purchase is made — until the end of the first year of ownership, for instance. But dealerships often want you to purchase a vehicle service contract at the time of buying the car, though private companies may have longer timeframes after purchase.

If your car needs repairs and it’s covered under the contract, you will submit a claim to the provider. From there, it should send payment directly to the repair shop, although there may be more steps to submitting and verifying a claim, depending on your provider.

What does a service contract cover?

Service contracts cover parts likely to break down outside of the warranty period. Repairs typically include major components of the vehicle — such as the engine, transmission and air conditioning — as well as roadside assistance and rental car reimbursement.

Coverage varies with each provider and contract, so read the policy before signing up. They usually come with a long list of exclusions, such as routine maintenance, normal wear and tear, natural disasters, theft and vandalism. If a service isn’t listed, assume it’s not covered under the policy.

Your policy may not cover diagnostics or mechanic visits for repairs. This means you can expect to foot the bill — even if the actual part is covered by your extended warranty.

Service contracts can be a viable option for anyone who plans to keep a car long-term, especially well past the manufacturer warranty expiration. Especially as they cover a wide range of components that can result in costly repairs, such as the engine or air conditioning.

Service contract vs. manufacturer warranty

Before buying an auto service contract, compare it against your car’s warranty to see when coverage applies and whether they overlap.

Manufacturer warranty

Warranties for new or certified pre-owned (CPO) vehicles cover repairs and defects from the manufacturing process. They are valid for a set number of miles or years — for instance, three years or 36,000 miles. Third-party warranties don’t extend the exact coverage and terms in the original manufacturer’s warranty.

Service contract

Auto service contracts usually kick in when the manufacturer’s warranty expires. These always cost extra and can be purchased later, while warranties are baked into the car’s purchase price.

You might have similar coverage through some of your other financial products. For example, auto insurance might cover rental car expenses and roadside assistance, while your credit card might cover trip interruptions. If you buy a vehicle service contract with similar benefits, verify that it doesn’t overlap with existing coverage.

How to get the most out of your service contract

You may not be able to negotiate the price of an extended warranty like you can negotiate car prices, but you can shop around. You may also be able to pay over a period or reduce your total coverage term, which could reduce cost. Like every part of the process, this depends on the provider.

Get a few quotes for auto service contracts and, as you compare offers, look at these features:

• Check the cost: Your car’s make, model, condition, coverage and contract length all impact price. There may be a fee to buy the policy; many policies cost between $2,000 to $4,000 or more.
• Consider the deductible: As with insurance, you may need to provide a deductible when you use your service contract. This may be per visit or per repair, so check your contract to know how much you will need to pay.
• Ask what’s included: Understand what is included and excluded in your policy and if it can change. For example, if a noncovered part damages a covered part, the service contract provider may deny coverage.
• Know the fine details: Check which companies can perform services and how to submit a claim. If the service contract lasts longer than you plan to keep your car, ask whether you can transfer the contract and if fees apply.
• Learn about the underwriter: A service contract may be backed by an insurance company, dealership or independent seller. Check online reviews, the Consumer Financial Protection Bureau’s complaint database and the Better Business Bureau to see what others have to say.

Once you sign for the policy, get written confirmation that the dealer sent payment to the appropriate administrator. As you use the car, keep car repair and maintenance records and receipts. The service contract typically won’t cover preexisting conditions, and mechanic records can help show that you have provided preventive care.

If you have a problem with the auto service contract, try to resolve the dispute with the provider. If that doesn’t work, file a complaint with your state attorney general, the Federal Trade Commission and a local consumer protection agency.

The bottom line

An auto service contract isn’t the right choice for everyone. You should consider your existing coverage, your current auto loan rate and your plans for the car. Not every service is covered, and for minor repairs, you may end up spending less by paying out of pocket.

Since this coverage is optional, review multiple providers. You don’t have to go with the service contract offered by the dealership or seller, and you may even be able to find a better deal or more covered repairs by looking elsewhere.