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If you’ve ever bought a new car or one with reasonably low mileage from a dealer, chances are good that it came with some kind of warranty protection. While not a guarantee of perfection, the warranty at least gives you some peace of mind.
If you’re shopping for a new or used car, the salesperson may encourage you to buy an auto service contract to help protect against unexpected or costly repairs. While a service contract may sound like a good idea, it may overlap with the vehicle’s existing manufacturer’s warranty. So before you spend the extra money, do some research to see if an auto service contract makes sense. Coverage varies widely.
Auto service contracts are sold by vehicle manufacturers, auto dealers, and independent providers. If you’re considering a service contract, shop around so you understand exactly what you’re buying.
You are generally not required to buy an auto service contract when you buy a car. You also are generally not required to buy a service contract to get financing. If the dealer tells you that you have to buy a service contract to qualify for financing, contact the lender to find out if this is true. Some people have had trouble canceling their service contract after learning that the lender didn’t require one.
Also beware of unscrupulous dealers who may try to include an auto service contract in your loan without your consent. If you see a charge for a service contract that you didn’t agree to, tell the dealer to take it out before you sign the loan agreement.
Compare service contracts with the manufacturer’s warranty. New cars come with a manufacturer’s warranty, which usually offers coverage for at least three years or 36,000 miles, whichever comes first. A service contract likely will not provide benefits until the manufacturer’s warranty expires. Check over the documents to make sure this is true before you agree to buy a service contract.
If the service contract lasts longer than you expect to own the car, ask if it can be transferred when you sell the car and whether there is a fee, or if a shorter contract is available. If you’re buying a “demonstrator” — a new car that hasn’t been owned, leased, or used as a rental, but has been driven by dealer staff — ask when the warranty coverage begins and ends. It may have begun when the dealer put the car into service.
Usually, the price of the service contract is based on the car make, model, condition (new or used), coverage, and length of contract. The upfront cost can range from one to several thousand dollars. In addition, you may need to pay a deductible. Find out if the deductible is charged on a per visit or per repair basis. This can make a big difference. For example, assume you have a $100 deductible and your car needs three parts repaired. With the deductible per visit, you pay $100. If you have a deductible per repair, you pay $300.
Service contracts often limit how much they will pay for towing or related rental car expenses — meaning you have to cover the remaining cost. There also may be transfer or cancellation fees if you sell your car or end the contract early.
Find out who performs or pays for repairs under the terms of the service contract. It may be the manufacturer, the dealer, or an independent company. Many service contracts are handled by companies called administrators, that authorize the payment of claims to any dealers under the contract. If you have a dispute over whether a claim should be paid, deal with the administrator. If the administrator goes out of business, the dealership still may be obligated to perform under the contract. The reverse also may be true: If the dealer goes out of business, the administrator may be required to fulfill the terms of the contract. Whether you have any legal remedies depends on your contract’s terms and/or your state’s laws.
Find out if the auto service contract is underwritten by an insurance company. It’s required in some states. If the contract is backed by an insurance company, contact your state insurance commission to ask about the solvency of the company and whether any complaints are on file.
A vehicle service plan from American Smart Finance protects you from expensive surprises.
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