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What is an auto service contract?

Couple looks at a car at a dealership
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During the car-buying process, your salesperson might offer you an auto service contract, which protects you against unexpected or costly repairs. However, the car might include a manufacturer’s warranty that offers the same protections as a vehicle service contract. Your insurance policy might also include similar protections. 

Before spending extra money on an auto service contract, understand what a service contract is, and whether it’s useful for your situation.

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 for new vehicles cover repairs and defects, and are valid up to a certain mileage or time. For instance, three years or 30,000 miles. Third-party warranties don’t extend the exact coverage and terms 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 a vehicle service contract offering similar benefits, verify whether it’s duplicative of an existing coverage you already have.

How to get the most out of your service contract

If you decide to buy a vehicle service contract, try 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. 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. 

The bottom line 

Whether you need a vehicle service contract depends on a few factors, including whether the manufacturer’s warranty is in effect, existing coverage benefits you have, your budget and how long you intend on keeping the car. Vehicle service contracts are optional so don’t feel pressured to pay extra money if it’s not a good fit for you.

Written by
Kim Porter
Contributing writer
Kim Porter is a former contributor to Bankrate, a personal finance expert who loves talking budgets, credit cards and student loans. Porter writes for publications such as U.S. News & World Report, Credit Karma and 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