The average new-vehicle loan is for six years, according to data from Experian, longer than the typical manufacturer’s warranty, and many people hang on to their vehicles far longer than that. Once the warranty expires, the cost of all repairs comes out of the pockets of owners, and nervousness about that prospect has made buying an extended warranty a popular option. Nearly half of consumers who buy a new or used vehicle from a franchised dealer opt for an extended warranty, according to the National Automobile Dealers Association.
Related: Which 2021 Vehicles Have the Best Warranty Coverage?
Though they are commonly referred to as extended warranties, the correct term is extended service contracts. They don’t lengthen the manufacturer’s warranty, so they may not cover the same parts or have the same benefits and restrictions. Rather, they are insurance policies that promise to repair or replace certain parts if they break, and they always come with specific exclusions (as do manufacturer warranties) about what is covered.
Another big difference: A warranty is included in the cost of a vehicle; you have to pay extra for an extended service contract.
The main reason people buy an extended service contract is to be protected against major repair bills, such as a new transmission or an engine rebuild that can cost thousands of dollars, after the manufacturer’s warranty ends.
The biggest question for many, though, is how much does a service contract cost, and there is no simple answer. It might be less than $1,500 or it could be more than $3,000, depending on whether it’s for a new or used vehicle, the age and mileage of the vehicle, the length of the contract and what it covers. Some cover just major powertrain components, and others provide bumper-to-bumper coverage.
A service contract for a vehicle from a brand that has a strong reputation for quality will cost less than one from a brand that frequently ranks low in reliability surveys. That’s because the company that backs the service contract expects to have to pay for fewer repairs.
Is an Extended Service Contract Right for You?
Though a service contract can provide peace of mind and often sounds like a smart decision, there are several reasons not to buy one when you buy a vehicle, whether new or used, especially if it’s covered by a manufacturer’s warranty.
After careful consideration, you might decide a service contract isn’t worth the money. Here’s why:
- A service contract won’t pay for repairs covered by the manufacturer’s warranty. If you buy a new car with a three-year/36,000-mile basic warranty, you probably won’t use a service contract during that time. Anything that breaks would be covered by the factory warranty (excluding normal wear items, such as brake pads and rotors). Major engine and transmission parts may also be covered for five years/60,000 miles (or longer) by the powertrain warranty. Under that scenario, you may never use a service contract that lasts five years, so you’re paying for something you already had for free.
- Many consumers who make use of a service contract learn the hard way that their contract costs more than they collect in benefits. Vehicles frequently last more than 10 years without requiring major repairs, so the mechanical disaster they feared may never happen. For example, someone pays $2,000 for a contract, but the only covered repairs during the life of the contract amount to $1,350. They would have been better off putting money in a piggy bank instead.
- Moreover, all service contracts have exclusions, so the repairs you need might not be covered, such as engine damage from overheating. Here’s another possibility: An oil seal fails and causes internal engine damage. The internal damage is covered, but the oil seal isn’t, and the contract administrator might reject a claim because a noncovered part caused the damage. In addition, with some contracts, claims can be rejected if the vehicle owner can’t show proof of regular maintenance (the same is true for warranties).
If You Want a Service Contract, Choose Carefully
If you decide that a service contract is right for you, here are a couple of considerations when shopping for one:
- You don’t have to buy a service contract when taking delivery of a new or used vehicle. If the vehicle is under warranty, you have lots of time to check out other service contracts.
- You have options. Numerous independent contract providers advertise on the internet, and you can compare prices on those as well as on manufacturer-backed contracts sold by other dealerships.
- Some dealers only offer contracts backed by the vehicle manufacturer or an affiliated company, but many others also offer plans from independent companies. After you take delivery of a vehicle, you might hear from independent service contract providers who scoured public records to find out you recently bought a vehicle.
- If a dealer is pushing a contract from an independent provider instead of the manufacturer, it might be because it has a higher profit margin for the dealer, not because it provides better coverage.
- Many independent companies provide good service and receive high marks from customers, but some independent providers have gone out of business. It’s not frequent, but it happens, so investigate the company’s reputation and whether it has good financial backing.
- At a dealership you might be encouraged to roll the cost of an extended service contract into the loan for the vehicle you’re buying. That’s convenient, but it also means you’ll be paying interest on it.
Important Questions to Ask Before Purchasing a Service Contract
- Is there a deductible for each visit? You might have to pay $100 or $150 out of pocket every time. Is the service contract transferable to another owner if you sell the vehicle to an individual? (They aren’t transferable if you sell to a dealer.)
- Where can you go for repairs? Manufacturer-backed contracts typically require that you go to a dealer, and exceptions are rare. Other contracts may have restrictions on where you can take your vehicle or let you choose the repair shop.
- Does the service contract pay the repair shop for covered repairs or do you have to pay the bill and then file a claim to be reimbursed? After you pay for a repair, can a claim be rejected?
- Can you read the contract you will have to sign before you agree to buy? That’s where you’ll find the fine print that spells out all the rules and exceptions, not in the glossy brochure or the online advertising, where everyone pictured has a big smile. If the seller won’t show you this information before you sign the contract, take your business elsewhere.
- What are the exclusions and your requirements? Here, too, you will need to see the actual contract to find out what is not covered and other restrictions. Don’t believe it if a salesperson says, “Oh, it covers everything.” It won’t, and you should find out what isn’t covered before you buy.
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