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An automobile service contract is similar to a warranty—they both promise to perform or pay for certain repairs or services to your car. However, unlike a warranty, a service contract always costs extra. Sometimes service contracts are worth the extra money, but often they're not.
To determine if a particular contract is worth the money, carefully consider the following:
Often, the coverage in a service contract is duplicated by a warranty that already covers your car. Before paying hundreds of dollars (or more) for a service contract, find out the exact terms of the contract and compare them carefully to all warranties that cover your car.
In some states, a service contract can't be in effect while the express warranty is in effect unless the service contract offers additional protections.
The price of a service contract is usually based on the car's make, model, condition, as well as the contract's coverage and length. The initial price can range from several hundred dollars to over a thousand.
In addition, you might be required to pay a deductible each time your car is serviced or repaired. Finally, some contracts charge fees if you sell your car and transfer the contract to the new owner or even if you cancel the contract.
The length of the service contract is another important factor to consider. If you're buying a new car and the length of the service contract is similar to that of the manufacturer's warranty, it's probably not worth your money. Most new cars don't require many repairs during the first few years. And if your car does need repairs, they're likely to be covered by the manufacturer's warranty.
Also, if you tend to change cars frequently, a service contract might not be a good use of your money.
Few auto service contracts cover all repairs. In some cases, there are so many exclusions that the policy is worthless. Typical exclusions include:
If an item isn't listed, assume that it's not covered. In some cases, if one of the many parts that aren't covered contributes to the damage of a covered part, the claim will also be denied. And you might not have full protection even for parts that are covered in the contract. Some companies use a "depreciation factor" in calculating coverage; the company might pay only partial or replacement costs once they consider your car's mileage.
Once you know exactly what repairs and services are covered by the service contract, find out what problems your car is likely to have. (Websites such as www.autosite.com, www.cars.com, and www.autosafety.org provide information about common problems for various car makes and models.) If your car's make and model often has emission problems and the service contract doesn't cover emission repairs, it's probably not worth your money.
Follow your car's maintenance schedule. Most contracts require you to follow the manufacturer's recommendations for routine maintenance, such as oil and fluid changes. Failure to follow this strict regimen could be grounds for denying coverage.
Who is authorized to do repairs under a service contract might make a big difference in your decision whether to buy it. Some contracts allow you to choose among several service dealers or authorized repair centers. Or you might be required to return the vehicle to the selling dealer for service. That could be inconvenient if you bought the car from a dealership in another town.
Find out if your car will be covered if it breaks down while you're out of town—for example, while you're on a trip or if you move permanently. Some auto service contract companies and dealers offer service only in specific geographic areas. Under some contracts, you are also required to get prior authorization for any repair work or towing services. This could be a problem if the company doesn't have a toll-free phone number or is open only during business hours.
If your new car breaks down often, it might qualify as a "lemon."
Find out who's responsible for guaranteeing service under the contract. It might be the manufacturer, the dealer, or an independent company (also called an "administrator"). Some dealers assume all responsibility for the service contract. Others will sell you the service contract, but another entity is actually the backer (and therefore responsible for making sure you get what you pay for).
Because the contract is only valuable if the backer makes good on the terms, learn as much as you can about the reputation of the company. Contact your state consumer protection office, the state motor vehicle department, the local Better Business Bureau, or your local automobile dealer association.
In addition, find out if the contract is underwritten by an insurance company. This is required in some states.
The dealer might claim you need a service contact to get financing for your car. This statement is often untrue. Always check with the lender yourself—don't rely on the dealer's word.
To learn more about cars and driving, get Nolo's Encyclopedia of Everyday Law, by the Editors of Nolo. This handy guide contains answers to everyday legal questions that come up in all aspects of life.