When purchasing a car, you’ll likely be approached about also adding on a vehicle service contract. While they’re common, these contracts are shrouded in mystery for many car buyers. However, they can provide valuable protection in many cases. It’s important to understand how vehicle service contracts work before you decide if one is right for you and your vehicle.

The Process Starts When You Buy Your Car

Most often, you can buy the vehicle service contract at the same time that you buy the car. In fact, it is practically standard that a customer is offered a service contract along with the car. This is something for which you need to pay extra. Generally speaking, you can buy a service contract at any time that you own the car.

While you may think that they’re the same as a warranty because the terms are often used interchangeably, vehicle service contracts are slightly different. In practice, these are a promise to pay for some types of repairs as the need arises. How much and what types of repairs are subject to the terms of the individual service contract that you purchased.

While a warranty comes with your car and lasts up until a certain point, you purchase a vehicle service contract. Warranty repairs usually come free because the manufacturer promises to restore your car to a defect-free condition. Service contract repairs will generally cost you some money.

The Dealer Will Always Offer You a Service Contract

The dealer will typically have a service contract provider that they work with. During the vehicle purchasing process, the salesperson will always ask if you’re interested. They will inform you of the various options and the cost. You are not bound to purchase what the dealer offers you. After doing some research yourself, you can find your own vehicle service contract.

Pulling back the curtain on vehicle service contracts
The Different Types of Vehicle Service Contracts

The plans are usually priced based on the age and make of your car. In other words, you may end up paying more for a contract for an older car since there is more of a chance that the vehicle will break down more frequently. You can expect that a vehicle service contract plan will cost you upwards of $1,000 to $2,000. Dealers may add this to the purchase price of your vehicle.

In addition, your plan may have a different term length and deductible. While some plans may cover all the repair costs, you can count on most plans requiring you to pay something toward the price of your repair. Obviously, the lower the deductible, the more you can expect to pay for your plan. Conversely, high-deductible plans will cost you much less money.

All Plans Are Created Different

Again, it is important to know that not every vehicle service contract is created the same. Some contracts will have expansive coverage while others may try to limit some or all aspects of the service that it covers. For example, some vehicle service contracts may only cover a certain amount toward towing if your car breaks down on the side of the road.

Many companies will offer you an entire menu of contracts that you can choose from depending on the level of coverage that you need. At one end of the spectrum, there are even options that are limited to covering some of the most important parts of the vehicle alone. At the other end, there are “titanium” plans that cover the car from bumper-to-bumper and have very few exclusions. As you will see below, exclusions are one of the most important parts of a vehicle service contract.

Pulling back the curtain on vehicle service contracts
Coverage Is the Most Important Issue

Of course, the most important issue with any vehicle service contract is what repairs are covered. It is important to know that almost every service contract available will not cover all possible repairs to your car. For example, some common repair issues with brakes and clutches are not covered under most service contracts.

The terms of the contract will always go into detail about what is covered under the agreement. The way that you know that something would be covered is that it is usually spelled out in the fine print in very explicit terms. In fact, the rule of thumb for vehicle service contracts is that if it is not obviously listed in the contract, it would not be covered.

Normally, vehicle service contracts will contain a number of blanket exclusions. For instance, most contracts will exclude normal wear-and-tear from coverage. Other policies may include a provision on depreciation, meaning that they pay less as the individual part ages. It is important to review this in detail before you decide whether to purchase the policy. Even with the exclusions, many of these vehicle service contracts are well worth it.

How the Claim Process Works

Obviously, the most important parts of vehicle service contracts are the claims process and how the actual repairs are done. This is when and how you realize the benefits of the contract that you bought. Again, not every policy is the same here.

Many vehicle service contracts will specify a handful of mechanics who are authorized to perform work. Others will allow you to pick your own mechanic. These are repair shops that have a deal with the contract administrator. Service contracts often limit the universe of mechanics that owners can work with to fix their cars. Other service contracts come from the seller and mandate that you always bring the car back to the dealer for repair, no matter where the dealership is located.

Once you select the appropriate mechanic to fix your car, most contracts require you to lay out the money on your own. Payment does not work the same as it does for a car insurance claim. Here, you are responsible for paying the repair professional’s bill. Then, you would file a claim on your contract and wait for the administrator to pay you back. The claim would have to go through an entire process before the check arrives in your mailbox.

Your Obligations Under the Service Contract

Many service contracts require you to keep up with all the routine maintenance on your vehicle in order to receive the benefits. For example, you should get your oil changed on schedule and keep the service receipts to prove it. The contract would lay out exactly what your maintenance responsibilities are. To be clear, maintenance tasks like oil changes and replacing the filters would not be covered under a vehicle service contract.

Vehicle service contracts provide a way to give you peace of mind as your car gets older, but you need to know exactly what you are buying first. Pay very close attention to all the fine print so you end up getting exactly what you think you are paying for with a vehicle service contract.