What is a vehicle service contract, and what are the benefits of obtaining one?

Many new cars—and some used or certified pre-owned ones—come with a limited warranty, which is covered in the purchase price of the vehicle. A limited warranty usually lasts for a certain amount of time or a certain number of miles and covers defects or some repairs and sometimes even routine maintenance. But what happens when the warranty expires? Typically, the owner would be 100 percent liable for any repairs needed from that point on.

This is where a vehicle service contract comes in. Sometimes referred to as an extended warranty plan (though not officially a warranty by legal definition), a vehicle service contract is a paid plan that helps cover the costs of any repairs needed once the limited warranty has expired. As the car ages, the likelihood of it needing repairs rises. The biggest benefit of obtaining a vehicle service contract is the potential savings on unforeseen repairs for a car that is no longer covered by a factory warranty.

But there are some things to consider before signing up and paying for a vehicle service contract.

Where is it coming from?
There are various kinds of vehicle service contracts – some are backed by the vehicle manufacturer, while many others are offered by independent third-party companies. Consider the integrity of the company before determining whether it’s worth it for you to sign that dotted line. While independent third-party companies are usually cheaper, they might not be as reliable (or still in business) when you need them most, and you might spend more money in the long run. Many times, the car’s manufacturer will partner with a reputable third-party provider (typically a well-known and reliable company) which usually provides better and dependable service than an independent third-party company.

How much does it cost?
The contract’s cost will vary depending on many factors, including the make and model of the car, the length of the contract, and what that contract will cover. You’ll need to determine if the money you’ll pay each month for this contract will be worth it. Most warranties—like insurance policies—have a deductible, meaning you will pay the first $100 (for example) of the repair. Take into consideration not only the amount of the deductible but whether it is “per visit” or “per repair.” Also, is the warranty transferrable if you sell the car? It will cost more but it is a great selling point if you trade out cars often.

What exactly is (and isn’t) covered?
This is probably one of the most important considerations, as warranties can cover breakdowns or wear and tear (while some cover both). A vehicle service contract that doesn’t cover the things you’ll most likely need repaired is certainly not worth the money, and just because a part fails, it doesn’t mean it will be covered. Very few contracts, for example, cover overheating, regardless of the cause. Check the fine print and make sure the coverage is adequate for the equipment your car has.

How will claims be handled?
Depending on the vehicle service contract, you may have your choice of repair facilities, or you could be confined to a select group of repair centers. This is definitely worth consideration, especially if you have a shop or dealership you like or if you experience an issue outside of that network of repair facilities. As well, some warranty companies require that you pay for the repairs out of pocket and then wait for reimbursement, which can sometimes take months.

These are a few of the most major considerations to make when looking to purchase an extended vehicle service contract. Choosing the one that will cover what you need for a cost you can afford can be difficult. Do a little research before signing up to ensure you get the best contract for you.

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