Service contract

What is a service contract?

A service contract, also called an extended warranty, is a contract that covers certain vehicle problems or repairs after the dealer’s or manufacturer’s warranty expires.

Deeper definition

Auto manufacturers and dealers, as well as warranty administrators, sell service contracts. The buyer of a new vehicle has until the end of the first year of ownership to purchase an extended warranty and receive coverage. All new vehicles come with a warranty that covers repairs and defects for a specific number of miles or a certain amount of time. A new car may be under warranty for three years or 30,000 miles, for instance, including vehicles bought with a bank loan.

A service contract does not cover damage due to road salt or a natural disaster. It also does not cover routine maintenance, repair of dents and dings, theft and vandalism, or car-wash damage. Auto dealers may sell an extended warranty provided by the manufacturer at the time of sale. When that warranty expires, the consumer can opt to buy a service contract from a third-party, but it is not an extension of the exact coverage and terms set forth in the initial manufacturer’s warranty.

Service contracts cover parts likely to break down within the warranty period and usually provide other perks not included in a general manufacturer’s warranty, such as roadside assistance. Besides cars, service contracts also can cover homes and consumer goods such as electronics, appliances and lawn equipment.

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Example of a service contract

Jackie buys a new vehicle from a dealership that comes with a basic manufacturer’s warranty of 60,000 miles or five years, and a powertrain warranty of 10 years or 100,000 miles. Jackie plans to keep the car as long as possible and wants to protect herself against the expense of major repairs down the road. Within her first year of owning the car, she pays $2,000 for an extended bumper-to-bumper service contract with a third-party. The service contract covers repairs to major components of her vehicle, such as the engine, transmission and air conditioning, as well as roadside assistance and rental car reimbursement.

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