What is an auto Service Contract ?

A service contract is a promise to perform (or pay for) certain repairs or services. Although a service contract is sometimes called an extended warranty, it is not a warranty as defined by federal law. A service contract may be arranged any time and always costs extra; a warranty comes with a new car and is included in the original price. Used cars also may come with some type of warranty coverage included in the sales price. The separate and additional cost distinguishes a service contract from a warranty.

To decide if you need a service contract, consider:

  • whether the service contract duplicates warranty coverage or offers protection that begins after the warranty runs out. Does the service contract extend beyond the time you expect to own the car? If so, is the service contract transferable or is a shorter contract available?
  • whether the vehicle is likely to need repairs and how much they’re going to cost. You can determine the value of a service contract by figuring whether the cost of repairs is likely to exceed the price of the contract.
  • whether the service contract covers all parts and systems. Check out all claims carefully. For example, “bumper to bumper” coverage may not mean what you think.
  • whether a deductible is required and, if so, the amount and terms.
  • whether the contract covers incidental expenses, like towing and rental car charges while your car is being serviced.
  • whether repairs and routine maintenance have to be done at the dealer.
  • whether there’s a cancellation and refund policy for the service contract, and if it has cancellation fees.
  • whether the dealer or company offering the service contract is reputable. Read the contract carefully to determine who is legally responsible for fulfilling the terms of the contract. Some dealers sell third-party service contracts.

The dealer must check the appropriate box on the Buyers Guide if a service contract is offered, except in states where service contracts are regulated by insurance laws. If the Guide doesn’t include a service contract reference and you’re interested in buying one, ask the salesperson for more information.

If you buy a service contract from the dealer within 90 days of buying a used vehicle, federal law prohibits the dealer from eliminating implied warranties on the systems covered in the contract. For example, if you buy a car “as is,” the car normally is not covered by implied warranties. But if you buy a service contract covering the engine, you automatically get implied warranties on the engine. These may give you protection beyond the scope of the service contract. Make sure you get written confirmation that your service contract is in effect.