What is an auto service contract?

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As you’re shopping for a car, your salesperson might offer you something called an auto service contract. Auto service contracts are designed to protect you against unexpected or costly repairs. But you might not need one if the car already comes with a manufacturer’s warranty, or if you have the same protections through an insurance policy or credit card benefit. Before you spend the extra money on an auto service contract, do some research to see what these cover and if buying one makes sense.

What is an auto 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.

You might find one of these offered through an auto manufacturer, car dealer or warranty administrator. The service provider might impose a time frame in which you can buy the service contract — until the end of the first year of ownership, for instance. If your car needs repairs and it’s covered under the contract, you’ll submit a claim to the service contract provider. It’ll send payment directly to the repair shop.

What does a service contract cover?

Service contracts cover parts likely to break down within the warranty period. For example, the contract might cover repairs to 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 through the policy before signing up. They usually come with a long list of exclusions, such as routine maintenance, normal wear and tear, theft and vandalism. If a service isn’t listed, assume it’s not covered under the policy.

Service contract vs. a warranty

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

  • Warranties automatically come with new vehicles and cover 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. If you’re offered a service contract from a third party, it won’t be an extension of the exact coverage and terms set forth in the original manufacturer’s warranty.
  • Auto service contracts usually kick in when the manufacturer’s warranty expires. These always cost extra, while warranties are baked into the car’s purchase price.

You might even 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 an auto service contract that offers similar benefits, make sure that you’re not duplicating coverage and check how much the service contract will pay toward a claim.

How to get the most out of your service contract

If you decide to buy an auto service contract, you might be able to negotiate the price of the car or the contract. This strategy works best when you have several offers in hand, so do your research before heading to the dealership.

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

  • Check the cost of the policy. The cost depends on the car’s make, model, condition, coverage and contract length. You’ll usually pay a fee upfront to buy the policy — ranging from a few hundred dollars to more than $1,000 — and potentially a deductible per visit or per repair.
  • Ask what’s included. You’ll need to understand what’s included and excluded in your policy and whether this can change. For example, if a noncovered part damages a covered part, the service contract provider may deny coverage.
  • Consider how long you’ll have the car. If the service contract lasts longer than you plan to keep your car, ask whether you can transfer the contract and if fees apply.
  • Ask about the process. Check which companies can perform services and how you’ll submit a claim. The service contract might be handled by an “administrator,” which authorizes claims payments and distributes the money.
  • Find out who underwrites the auto service contract. You can check online reviews for a pattern of complaints against the company, the Consumer Financial Protection Bureau’s complaint database and the Better Business Bureau. If an insurance company underwrites the policy, then you may check the solvency of the agency.

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 records can help show that you’ve 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.

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Written by
Kim Porter
Contributing writer
Kim Porter is a personal finance expert who loves talking budgets, credit cards and student loans. In addition to serving as a contributing writer for Bankrate, Porter also writes for publications such as U.S. News & World Report, Credit Karma and Reviewed.com. When she's not writing or reading, you can usually find her planning a trip or training for her next race.
Edited by
Student loans editor