Automobile Service Contracts: Are They Worth it?

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. (To learn more about automobile warranties, see Nolo's article Car Warranties: The Basics.)

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:

• Does it duplicate warranty coverage?
• How much does it cost and how long does it last?
• Is there a deductible, and if so, how much is it?
• What repairs and services does it cover?
• Who will perform the repairs?
• What company backs the contract?
• Does your lender require a service contract?

Check for Duplicate Warranty Coverage

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 cannot be in effect while the express warranty is in effect unless the service contract offers additional protections.

Cost and Length of the Service Contract

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 more than $1,000. In addition, you may 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 are 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 may not be a good use of your money.

What Repairs and Services Are Covered

Few auto service contracts cover all repairs. In some cases, there are so many exclusions that the policy is worthless. Typical exclusions include:

• common repairs for parts like brakes and clutches
• "normal wear and tear"
• towing or related rental car expenses, and
• adjustments, alignments, or tune-ups.

If an item isn't listed, assume that it's not covered. In some cases, if one of the many parts that are not covered contributes to the damage of a covered part, the claim will also be denied. And you may not have full protection even for parts that are covered in the contract. Some companies use a "depreciation factor" in calculating coverage; the company may 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 may be grounds for denying coverage.

Who Is Authorized to Do the Repairs

Who is authorized to do repairs under a service contract may 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 may 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 may qualify as a "lemon." To learn what your remedies are if you have a lemon, see Nolo's article Lemon Law for Used Cars.

Find Out Who Backs the Service Contract

Find out who is responsible for guaranteeing service under the contract. It may 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 local state consumer protection office (for the office in your state, see Nolo's article State Consumer Protection Offices), the state motor vehicle department, the local Better Business Bureau at www.bbb.org, 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.

Does Your Lender Require a Service Contract?

The dealer may claim you need a service contact to get financing for your car. This is often not true. Always check with the lender yourself—don't rely on the dealer's word.