What is a service agreement contract for car

Vehicle Service Contracts: All You Need To Know

A vehicle service contract is an agreement between you and a provider designed to cover specific car repairs or services. It acts like a safety net for your vehicle, ensuring protection from unexpected repair costs.

By Christopher Boston

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans. Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

Edited by Casie McCoskey

Casie McCoskey is a professional editor passionate about providing people with accessible information on personal finance. Before MoneyGeek, she worked in the legal field, drafting and editing briefs and motions.

By Christopher Boston

Edited by Casie McCoskey

Updated: December 29, 2023

Advertising & Editorial Disclosure

Vehicle Service Contracts Defined
Vehicle Service Contract Coverage
Cost of Vehicle Service Contracts
Pros and Cons
Factors To Consider Beforehand
Where To Get Service Contracts
FAQs

Vehicle Service Contracts Defined
Vehicle Service Contract Coverage
Cost of Vehicle Service Contracts
Pros and Cons
Factors To Consider Beforehand
Where To Get Service Contracts
FAQs

If you’ve recently become a used car owner and want financial protection against expensive repair costs, a vehicle service contract can be a solid option. It typically covers mechanical breakdowns and failures, offering peace of mind by reducing the risk of unexpected expenses.

But while vehicle service contracts can be beneficial, they may not be suitable for every driver. Understanding what a vehicle service contract is, what it covers and how much it costs can help you determine if this option is right for you.

Vehicle Service Contracts Defined
Vehicle Service Contract Coverage
Cost of Vehicle Service Contracts
Pros and Cons
Factors To Consider Beforehand
Where To Get Service Contracts
FAQs

What Is a Vehicle Service Contract?

A vehicle service contract covers certain repairs and services beyond the manufacturer's warranty. Although it's often called an "extended warranty," it's not a warranty as defined by federal law. It's an agreement between you and a service provider, which can be the car manufacturer, dealership or a third-party company.

Although optional, a vehicle service contract can be a valuable tool for managing the costs of car ownership. Cars, especially as they age, can require expensive repairs unexpectedly. With a service contract, you pay a predictable amount upfront or in regular installments, spreading out the potential cost of repairs over time.

Additionally, a service contract can offer peace of mind. Knowing that many potential repair costs are covered can make owning and driving a car less stressful, especially an older one. However, it's crucial to read and understand the terms of any service contract before purchasing, as it may not cover all issues or repairs.

Vehicle Service Contract vs. Manufacturer’s Warranty

Although both vehicle service contracts and manufacturer's warranties offer coverage for certain vehicle repairs and services, they have their differences.

For instance, a manufacturer's warranty typically covers a vehicle for a certain period from the date of purchase or up to a certain mileage, often around three years or 36,000 miles. The vehicle's purchase price often includes these warranties, so there's no additional cost.

On the other hand, an owner usually purchases a vehicle service contract toward the end of the manufacturer's warranty period. It extends coverage for a longer time or higher mileage at an additional cost.

What Does a Vehicle Service Contract Cover?

A vehicle service contract can cover a wide range of repairs and services, depending on the specifics of the contract. These may include the following:

Powertrain coverage: This is the most basic level of coverage, focusing on the car's most vital components: the engine, transmission and drive axles. If these parts fail due to a defect or wear and tear, the cost of repair or replacement is covered.
Stated component coverage: This level of coverage includes everything in the powertrain coverage, plus additional components stated in the contract, including the air conditioning system, electrical components, fuel system and more.
Exclusionary or bumper-to-bumper coverage: This covers almost all mechanical and electrical components of the vehicle, from major engine parts to minor items like the door handles. The contract will list the few components that are not covered, hence the term "exclusionary."
Roadside assistance: Many service contracts include services to help if your car breaks down while you're on the road. These services can include towing, flat tire changes, jump-starts for dead batteries and lockout assistance.
Rental car reimbursement: If your car is in the shop for a covered repair, the service contract may cover the cost of a rental car.
Trip interruption coverage: If a covered breakdown happens far from home, some service contracts will cover the cost of meals and lodging.

It's worth noting that not all service contracts include these coverages. As always, read and understand the specifics of any service contract before you agree to it.

What Vehicle Service Contracts Won't Cover

Before getting a vehicle service contract, read the fine print to determine which repairs and services are covered and excluded. For instance, routine maintenance services such as oil changes, tire rotations, brake pad replacements and fluid top-ups are usually only covered if explicitly stated in the contract.

In addition, vehicle service contracts usually exclude normal wear and tear, vandalism and damages caused by collisions or natural disasters. As a general rule, if a service isn’t listed, assume the contract will not cover it.

How Much Does a Vehicle Service Contract Cost?

The average cost of a vehicle service contract can range from $350 to $700 per year or $30 to $60 per month. Your actual rate may vary depending on the following factors:

Vehicle make and model: Luxury cars or vehicles with complex technology tend to have more expensive parts and labor, which can drive up the cost of the contract. Similarly, models known for their reliability might have cheaper contracts than those with a history of frequent repairs.
Vehicle age and mileage: Older cars or those with high mileage are more likely to need repairs, which can increase the cost of the contract. Some providers may only offer vehicle contracts within a certain age or mileage.
Coverage level: The more comprehensive the coverage, the more expensive the contract. For example, a basic powertrain contract will be cheaper than a bumper-to-bumper contract that covers almost all components.
Contract length: Longer contracts provide coverage for a more extended period, which increases the cost. However, they can offer better value if spread over many years.
Deductible: This is the amount you pay out of pocket for a covered repair before the contract coverage kicks in. A higher deductible can lower the cost of the contract, but it means you'll pay more when you need a repair.
Vehicle service contract provider: Every provider has different pricing structures. Dealerships and manufacturers might charge more than third-party providers, but they often have the advantage of direct coordination with service centers.

It's best to gather and compare quotes from multiple providers to get the best possible deal for your needs and situation.

Pros and Cons of a Vehicle Service Contract

A vehicle service contract can provide peace of mind and financial predictability, but it also comes with costs and limitations. It's crucial to weigh its pros and cons to determine if this option is a worthwhile investment for your specific situation and needs.

Pros of a Vehicle Service Contract

Predictable costs: With vehicle service contracts, potential repair costs are more predictable. Instead of facing a large, unexpected repair bill, you pay a set amount upfront or in regular installments. This can make budgeting for car expenses easier and less stressful.
Coverage of expensive repairs: Some car repairs can be very costly, especially for major components like the engine or transmission. A vehicle service contract can cover these expensive repairs, saving you a significant amount of money.
Additional benefits: Many service contracts offer additional benefits like roadside assistance, rental car reimbursement and trip interruption coverage. These can provide added value and convenience.
Increased resale value: If you decide to sell your car, a transferable service contract can make your vehicle more attractive to potential buyers. It assures them that they won't be hit with major repair costs, which can help you sell the car more quickly and potentially at a higher price.
Peace of mind: Knowing that many potential repair costs are covered can provide peace of mind, especially if you rely on your car for daily activities like commuting to work or running errands. This can be particularly valuable if you own an older car that is more likely to need repairs.

Note that the value of these benefits can vary depending on your specific situation, including the reliability of your car, how much you drive and your financial circumstances.

Cons of a Vehicle Service Contract

Cost: The upfront cost or regular installments for a vehicle service contract can be significant. If your car doesn't need any major repairs during the contract period, you might pay more for the contract than you would have for the repairs.
Coverage limitations: Not all repairs or issues will be covered by a service contract. Routine maintenance, wear and tear items and damage from accidents or misuse are typically not covered. You'll need to read the fine print carefully to understand what it includes.
Repair restrictions: Some service contracts require you to have repairs done at specific service centers, which might not be convenient for you. A service contract might not be a good fit if you prefer to use your own mechanic or a local repair shop.
Duplicate coverage: A service contract might be redundant if your car is still under the manufacturer's warranty. You could end up paying for coverage that you already have.

These potential drawbacks highlight the importance of considering your specific needs, preferences and financial situation before purchasing a vehicle service contract.

Factors To Consider Before Getting a Vehicle Service Contract

Before diving into a vehicle service contract, taking a step back and evaluating several factors is crucial. Here are some key considerations to help guide your decision-making process:

Vehicle reliability: A service contract might not be necessary if your car is known for its durability and has a good track record of few mechanical issues. On the other hand, if your vehicle is prone to problems, a service contract could save you money in the long run.

Overlap with existing warranties: If your vehicle is still under a manufacturer's warranty, getting a service contract might be redundant. Make sure to check the terms of your existing warranty to avoid paying for duplicate coverage.

Coverage details: Read the fine print of the contract. Ensure you understand what is covered, what isn't and any conditions or requirements that apply.

Cost of repairs vs. cost of contract: Estimate the potential cost of repairs for your vehicle and compare it with the cost of the service contract. If the contract cost is higher than the estimated repair costs, it might not be a worthwhile investment.

Financial stability: Can you handle a large, unexpected repair bill or would it be easier to manage smaller, regular payments for a service contract? Your financial situation can play a big role in whether a service contract makes sense for you.

Contract provider: Research the reputation and financial stability of the contract provider. Check customer reviews and ratings to ensure they have a history of honoring their contracts and providing good customer service.

Remember, this decision isn't one-size-fits-all, and what works for one car owner might not work for another.

Where To Get a Vehicle Service Contract

There are several places where you can purchase a vehicle service contract, including the following providers:

Car dealerships: Dealerships often offer service contracts at the point of sale. The vehicle's manufacturer typically backs these contracts, which can provide some assurance of quality and reliability. However, dealership service contracts can sometimes be more expensive than other options.

Car manufacturers: Some manufacturers sell service contracts directly to consumers. Like dealership contracts, these are usually reliable but can be on the pricier side. They often require you to get service and repairs at authorized dealerships.

Third-party providers: Many companies specialize in vehicle service contracts. These are often cheaper than dealership or manufacturer contracts and offer more flexibility regarding where you can get repairs. However, the quality and reliability of third-party providers can vary widely, so it's important to do your research.

Auto insurers: Some car insurance companies offer vehicle service contracts or mechanical breakdown insurance (also known as car repair insurance) as an add-on to their regular insurance policies. This can be a convenient option if you already have car insurance, but make sure to understand what's covered and how it affects your overall insurance cost.

Keep in mind that each of these providers comes with its own set of advantages and considerations.

Frequently Asked Questions

Vehicle service contracts can be a complex topic, so having questions before getting one is natural. To help you navigate this process, we've compiled a list of frequently asked questions about vehicle service contracts.

Is a vehicle service contract worth it?

Whether a vehicle service contract is worth it depends on several factors, including the reliability of your vehicle, the cost of potential repairs, the cost of the contract and your financial situation. It can be a worthwhile investment if you prefer predictability and peace of mind, but it's crucial to do your research and consider your specific needs and circumstances.

Can you cancel your vehicle service contract?

Yes, you can cancel most service contracts. The specifics will depend on the terms of your agreement. Some providers offer a full refund if you cancel within a certain period, while others may charge a cancellation fee or provide a prorated refund.

Is a vehicle service contract transferable?

Many vehicle service contracts are transferable, which can increase the resale value of your car. However, there might be a transfer fee, and the process and costs can vary between providers. Always check the terms of your contract.

Do you have to use specific repair shops?

Some vehicle service contracts require using specific repair shops, often those affiliated with the dealership or manufacturer. Others allow you to use any licensed repair shop. Check the terms of your contract to understand any restrictions.

Does a vehicle service contract cover pre-existing conditions?

Most vehicle service contracts do not cover pre-existing conditions or issues that were present before you purchased the contract. It's important to get any known issues repaired before buying a contract.

About Christopher Boston

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.