Automobile Service Contracts

A service contract provides repair and/or maintenance for your car for a specific period of time.  Service contracts should not be confused with the car warranty, since they are optional and are sold separately.

A service contract should not duplicate the coverage that comes with the manufacturer's warranty.  It should not extend beyond the time that you plan to own the vehicle.  If it does, then you want to ask for a shorter-term contract or make sure that the service contract is transferable to another automobile.

Make sure you understand exactly what the service contract covers before you sign on the dotted line.  Specifically,  the contract should state:

  • what parts and repairs are covered;
  • if a deductible is required and the amount and terms;
  • whether incidental expenses (towing, car rentals) are covered under the terms of the contract;
  • whether routine maintenance, such as oil changes, are covered and if they have to be done at the  dealership;
  • whether you have the right to cancel the service contract, and if you will incur cancellation fees or if you will receive a partial refund;
  • who will fulfill the terms of the service contract (some dealers may sell third party service contracts)

Extended Service Contracts for Automobiles

Extended service contracts are designed to cover major repairs after your car warranty or service contract has expired.  Many new cars are very reliable, so there are few service claims made during the period the service contract and car warranty are in force.  Most car breakdowns occur after the manufacturer's warranty and service contract have expired, so it is really unnecessary to spend money on extended service contract on a new car.

If an $800 or $2,000 vehicle repair bill would seriously damage your budget, you might want to purchase an extended service contract.  Just be sure that you understand  exactly what is covered before you sign any agreement.  Specifically, you want to know whether the contract excludes coverage for maintenance and wear items, ranging from brake pads to exhaust system components to air filters. Know before signing up whether the contract excludes or fails to include electrical devices like power windows and radios, interior trim, gauges, and even air-conditioning systems. Some contracts cover the cost of towing and a rental car but others do not.  

Does the contract  require you to pay a "deductible" amount for each repair?  What will your share of the cost be?  Be sure to check whether you can get repairs done at the selling dealer only, at any dealer of your make of car, at any new car dealer, or at your choice of new car dealer or independent repair shop. Since many consumers are more satisfied with repairs at independent shops than with dealer repairs, it's good to have the option of using an independent shop.

Also, check how the shop will be paid. Under some contracts, the shop simply bills the contract company under others, you must pay the shop, then seek reimbursement from the contract company. Even if a service contract company says shops can bill it directly, check with repair shops you might use to be sure they will in fact bill the contract company many shops have decided not to put up with the hassle of collecting from service contract companies.

If you want an extended service contract, you don't have to buy it where you buy your car or where you plan to have it serviced. For example, you can buy your car from one Ford dealer, buy a Ford backed service contract from another Ford dealer, and have your car serviced under the contract by still another Ford dealer, There have been cases where one dealer was selling a contract for under $500 while another was selling the exact same contract for more than $1,000.

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