Do You Need a Vehicle Service Contract?

A vehicle service contract pays for unexpected mechanical repairs and failures. Shutterstock

You’ve just spent hours looking at new cars and negotiating for the one you want to purchase. Now, it’s time for the paperwork and questions. One of the many questions you’ll have is whether to purchase a vehicle service contract, an extended auto warranty.

If it’s a new or certified pre-owned car, there’s a manufacturer’s warranty. The vehicle service contract fills in the gaps and extends the warranty. But what are the vehicle service contract coverages, and how do they work? Are they worth it?

Vehicle Service Contract

According to a MarketWatch survey, more than 36 percent of Americans cannot afford more than $500 in unexpected car repairs. A vehicle service contract pays for unexpected mechanical repairs and failures.

You can buy a vehicle service contract from a car dealer at the time of purchase. Or, if you decide to buy one later, you can purchase one from a third party.

Service Contract Versus Manufacturer Warranty

You should compare the manufacturer’s warranty to the vehicle service contract to determine when coverage applies and to look for overlaps.

A manufacturer warranty applies to new or certified pre-owned vehicles. It covers defects and repairs from the manufacturing process and is only valid for a set number of miles or years.

For example, most manufacturers’ bumper-to-bumper warranties last between three years (or 36,000 miles) and five years (or 60,000 miles). A powertrain warranty usually extends up to 10 years (or 100,000 miles). The manufacturer dictates the warranty length.

A manufacturer warranty is included in the car’s purchase price, so you don’t have to pay extra for it.

A vehicle service contract usually begins after the manufacturer’s warranty expires, and costs extra. If you purchase it through the car dealer when you buy the car, the price will be rolled into your monthly payments if you take out a car loan.

What a Service Contract Covers

Although each policy is different, keep in mind that most service contracts don’t cover all types of repairs. Routine maintenance items such as brakes, clutches, and other parts are not covered.

Service contracts list the items covered. If an item isn’t listed, then it’s not covered.

The most common types of vehicle service contracts are basic powertrain warranties and comprehensive bumper-to-bumper or exclusionary car warranties. Some contracts bridge the coverage gap between powertrain and bumper-to-bumper plans.

Some service contract providers have absolute exclusions and will only cover “mechanical” damages. They will deny claims made for items that malfunction due to normal wear and tear.

If the wear and tear damage involves the engine and the mechanic discovers some covered parts that need repair while repairing it, these parts will be covered. But you will still have to pay to take apart the engine and reassemble it. The initial reason for engine repair was not covered.

Very full contracts offer full coverage. Many service contract companies calculate coverage by factoring in depreciation. They also base repair costs on your car’s mileage.

There are two types of contracts:

• Powertrain Contracts

Powertrain contracts have stated component coverage. This means they only cover what is listed. They usually cover the drivetrain, limited engine components, and the transmission. These are the big-ticket items of a car.

• Exclusionary Contracts

Exclusionary contracts cover everything except the listed parts and repairs. They include powertrain standard coverage plus additional parts and repairs.

Some coverages include air-conditioning systems, electric components, and steering. It’s easier to list what isn’t covered by exclusionary contracts than what is covered.

What Vehicle Service Contracts Don’t Cover

Once more, routine maintenance isn’t covered, no matter what service contract you choose. It also won’t cover cosmetic damages such as tears in upholstery or dings.

Damages from hail or other weather conditions are not covered. Look to your car insurance policy’s comprehensive coverage for those damages. Car accidents are not covered. That’s up to your collision car insurance policy to cover. Theft or damage is also under your car insurance policy.

Any after-market modifications will also not be covered under the vehicle service contract. Follow the manufacturer’s maintenance recommendations and upkeep your car to maintain it in good working condition to be covered.

Vehicle Service Contract Pros

The biggest pro of vehicle service contracts is lowering the costs of repairs. While there may be fees or deductibles to pay, your garage bill might be bigger without a contract. Service contracts take the sting out of car repairs.

There are also some added perks to a vehicle service contract. Many offer benefits such as car rental reimbursement, roadside assistance, and towing.

Many vehicle service contract companies have a wide network of approved repair shops. That makes it convenient if you’re traveling and have a problem.

Vehicle Service Contract Cons

One con is the additional cost. It’s another expense, and there may be a deductible for repair shop visits.

Another problem is that not everything is covered. There are exclusions for items that you may need. As a result, claims can be denied. If that happens, you’ll be paying out of pocket.

Read the Fine Print of Vehicle Service Contracts

Before buying a vehicle service contract, make sure you read it carefully. You should know exactly what type of coverage you’re buying. Finding out at the repair shop that you don’t have coverage will be a hit to your wallet. You’ve paid a premium, and it wasn’t there when you needed it.

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