What Should be in a Vehicle Service Contract?

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Article QuickTakes:

• Differences between a service contract and warranty
• The cost of a service contract
• What a service contract covers
• How to assess a service contract

Have you decided to purchase a vehicle service contract to supplement your auto-buying experienc? What should be in it, and what protections does it provide that a warranty doesn't? Do you have to have a service plan to purchase a vehicle? Unlike liability insurance, a service contract isn't required, but you may want the additional coverages that a service plan offers. Let's dig a little deeper and take a look at what exactly should be in the agreement.

How Is a Service Contract Different From a Warranty?

According to the Federal Trade Commission, a service contract isn't a warranty. It's simply an agreement between you and a service provider to cover a specific set of repairs to a new or used vehicle after the manufacturer's warranty has expired. Think of it as a budget safety net for unexpected mechanical repairs. While a warranty comes with the vehicle automatically, a service contract is an extra expense.

Differing from your standard warranty, this paid plan isn't limited by time. It provides protection beyond the set time frame that's designated in the manufacturer's warranty, and you can purchase one for your vehicle at any point during ownership. It's also not included in the vehicle's price. Should you choose to purchase one of these protection plans, it's an added expense with rules requiring adherence in order for the contract to remain active, thus providing continued coverage.

How Much Does a Service Contract Cost?

Coverage, rates, and terms vary widely across the industry. Generally speaking, the greater the coverage, the greater the rate. The variances can work to your benefit as a buyer, meaning each of those categories is negotiable. When deciding how much to pay, consider how long you intend to keep the vehicle beyond the manufacturer warranty and how many miles you generally drive. These numbers will help you decide how much coverage you actually need, and can be discussed with your sales contact.

Because you can purchase a vehicle service contract at any time for a new or used vehicle, the vehicle's age, condition, make, model, and mileage often determine the rate. You can purchase a service contract from your dealer, the automaker, your financial institution, your insurance company, or another third-party administrator. Some require that you pay monthly, and others allow you to space out payments over time. More often than not, the choice will be yours. The average cost for a contract is between $1,000 and $1,500.

Typically, you can choose from tiered packages that include different deductibles (usually somewhere between $0 and $250), degrees of coverage, and additional supplemental services. For example, CarShield offers a less expensive plan for vehicles with higher mileage. Overall, contracts are typically a few thousand dollars split over a term of three to five years and up to 100,000 miles, unless you choose to extend that term. Most monthly contracts begin with a down payment equal to the first month's payment, depending on the brand and your credit score, and continue on with monthly payments usually less than $200.

What Should My Service Contract Cover?

Typically, vehicle service contracts cover repairs to major mechanical systems like your engine, transmission, powertrain, safety, and heating and cooling systems. They also often cover repairs due to accidents or normal wear and tear. Coverage also generally includes roadside assistance, towing, and the use of a loaner vehicle while your vehicle is being repaired. Occasionally, these supplementary plans cover some scheduled maintenance like oil changes and wiper replacement, but it's not typically the case.

How Do I Assess My Service Contract?

• Read your contract carefully to ensure you know what items are and aren't covered.
• Determine if adding aftermarket products to your vehicle will invalidate your protection plan.
• If the service isn't listed as a covered protection, assume it isn't included under your plan.
• Take note of the program administrator. You'll need to reach out to them should you need to start and process a claim, access assistance, or need repairs.
• Understand whether any upfront costs are associated with your plan. Some plans require you to pay for repairs upfront and then receive reimbursement after the services are completed.
• Determine whether your plan is transferable should you decide to sell your vehicle.
• Unfortunately, many scams take advantage of buyers seeking extended coverage. Ensure your provider is a reputable entity that will be there long after you've transitioned to your next vehicle.

As with any purchase, do your research. Ask questions, and know that some terms are negotiable. Choose the plan that's appropriate for your needs and budget. Read the contract thoroughly to understand the conditions and additional protections that your plan offers. Like an extra safety net for your budget and vehicle, a service plan can help to keep your car in good working order and allow it to serve you for years to come.