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Vehicle service contracts can cover the cost of unexpected auto repairs with minimal upfront costs.
Owning a car costs more than what you may have expected when you first bought it. For every mile you drive, you can expect to pay 8.94 cents in maintenance and repairs, reports AAA. Because the average repair costs between $500 and $600, total costs can add up to quickly drain your bank balance.
If you don’t have that kind of money set aside for car repairs, you’re not alone. As of January 2020, only 41% of Americans could tap into their savings to pay for unexpected car repair costs, according to a survey conducted by Bankrate.
Another option is to rely on your car’s warranty. After all, that’s what it’s there for, right? Of course, your auto warranty has to still be in force (i.e. active) if it’s to pay for any covered repairs. If you’ve exceeded the covered mileage or the manufacturer’s warranty period has expired, you’re out of luck and have to pay for repairs out-of-pocket.
Unless you’re covered by a vehicle service contract.
Vehicle service contracts, or VSCs, are comprehensive plans that pay for unexpected mechanical failures and repairs. Service contracts are commonly sold by the manufacturer or dealership when you first buy your car, but can also be purchased from independent third-party companies at any time, including when you refinance.
A vehicle service contract isn’t a warranty. Instead, it’s a separate service in which the VSC provider promises to pay for the repairs covered by your specific policy. However, like warranties, service contracts stay in force until one of two events: your car reaches the maximum allowed mileage afforded by your plan, or the policy’s term expires.
Vehicle service contracts cover and pay for repairs stemming from mechanical failures, but don’t cover cosmetic issues, problems arising from improper maintenance, or most cases of wear and tear.
A typical vehicle service contract is comprehensive and covers everything from your car’s transmission to its navigation and air conditioning. Below is a list of the most common repairs that service contracts cover, along with the average cost of each one.
Source: 2019 RateGenius dataTop 10 Vehicle Component Failures by Frequency and the Average Claim Amount
Plans also pay for parts, labor, and diagnostics for all covered repairs in exchange for the deductible. Some plans may even include Roadside Assistance.
Despite the general comprehensiveness of a VSC, plans do list certain parts or situations that are excluded from coverage. For example, though a VSC may cover the cost of repairing and replacing your car’s engine, it may not cover some of the other parts that also need to be fixed or replaced during the repair process.
Routine maintenance also tends to be excluded from coverage, so don’t expect your service contract to pay for your oil change or to cover the cost of replacing your brake light — but that’s not the purpose of a VSC anyway.
Before purchasing a vehicle service contract, compare it to your car’s existing warranty. Also consider what the specific service contract covers and, perhaps more importantly, excludes from coverage. Even with a vehicle service contract in place, you may still be responsible for some or all of the cost of repairs depending on what breaks and how.
Vehicle service contracts function similarly to car insurance: Before any repairs are covered, you need to file a claim and pay a deductible. Depending on your specific service contract, you may require prior authorization from the plan provider before repairs can be made.
However, if your car’s already under warranty, a vehicle service contract may provide overlapping coverage. In such situations, your warranty would pay for the cost of any repairs; your VSC would only kick in for any event not covered by your warranty, but covered by your service contract.
Once a repair is authorized, most service plans allow you to choose the mechanic or repair facility of your choice. In other cases, you’ll be able to choose from a list of approved repair facilities.
When repairs are completed, the service contract provider may pay the repair facility outright for any covered parts and labor. If not, your plan will reimburse you for any covered and authorized expenses.
Though they add to the cost of owning your car, auto service contracts provide a variety of benefits that may more than offset the cost of a plan — and save you money on costly and unexpected vehicle repairs.
Warranties don’t often cover minor repairs for parts like brakes or heating and cooling systems. Though levels of coverage vary from plan to plan, many vehicle service contracts cover components and services beyond those covered by a standard warranty, potentially saving you money on minor repairs over the term of the contract.
Multiple tiers of plans are commonly offered to meet a broad range of budgets and needs. The most comprehensive plans include the fewest exclusions and lowest deductibles, but cost more than a plan with a longer list of exclusions and nominal deductible. Some plans may even offer coverage for a degree of wear-and-tear damage.
Some plans are also tailored specifically for older or high-mileage vehicles, giving you an option to cover a car that’s seen better days and doesn’t otherwise qualify for warranty protection.
A deductible is the amount of money you’re responsible for paying before a vehicle service contract pays out for a covered repair. If your plan has a $100 deductible and a covered part costs $700 in total, you’ll have to pay $100 before your plan pays for the remaining $600.
Depending on your choice and budget, some VSCs have deductibles as low as $0, which means the entirety of a covered repair will be paid by your service contract. Choosing a low deductible offsets the financial burden placed on you when your car needs an unexpected repair.
Warranties often require you to take your car back to the dealer or an approved repair facility. In contrast, many vehicle service contracts allow your choice of mechanic or auto repair shop to work on your car. If you’ve got a favorite or trusted mechanic, their work will likely be covered by your VSC.
There are no limitations to when you can purchase a vehicle service contract. Where warranties are only available for new or used cars that still adhere to the terms of the initial factory warranty, VSCs are available for new and used cars of any age — even those with high mileage.
For example, if you own a 10-year old car with 100,000 miles and purchase a VSC with a four-year, 48,000-mile term, coverage will stay in place for four years and until your car hits the 148,000-mile mark.
There’s no telling when and where your car will decide to kick the bucket. Maybe you’re on a roadtrip or spending an afternoon down at the beach when your engine blows and you’re left stranded on the side of the road, cursing at the hunk of junk you call a car.
Then comes the logistics behind getting your disabled vehicle to a safe place. Of course, that’s not without its unplanned hit to your finances. The average tow costs between $50 to $125 for a local five- or 10-mile tow. On average, a long-distance tow starts at $75, plus an added $2 to $4 fee per mile.
The cost of emergency roadside assistance programs adds up, too. If you’re not covered by roadside assistance (whether from your insurance provider, credit card company, or a company like AAA), one-off costs can range between $35 and $250.
The average tow costs between $50 to $125 for a local 5- or 10-mile tow.
And what if you still need to get around while your car’s in the shop? Though the costs differ depending on your location, a rental car in Austin, TX costs about $50 per day. That’s an added expense when you’re already frustrated by having your car go kaputz when you least expect it.
Fortunately, most vehicle service contracts provide towing service and roadside assistance coverage and rental car reimbursement. Though these perks do little to ease your frustration when you’re without a working car, they can certainly reduce the financial burden if you don’t already have similar coverage.
The cost of a vehicle service contract can be paid upfront upon purchase or wrapped into your car loan, even if you’re refinancing. Spreading the cost of a VSC across the length of your car loan helps make it easier to budget and afford, effectively covering the cost of repairs without the unexpected dent to your savings.
However, the trade-off is that you may never need to file a claim against your service contract. If your car never needs a covered repair, or you sell or trade-in your car before it does, you’ll have effectively paid for a VSC without using its benefits. Fortunately, most service contracts are transferable and can be included in your car’s resale value.
Buying a vehicle service contract isn’t for everyone — or every car. Since VSCs are an added expense on top of the actual cost of buying a car, you need to make sure you’ll get some value from the plan.
Depending on your circumstances and personal calculations, a vehicle service contract may still make sense to you. How, then, do you determine whether a given plan is worth what it costs?
Start by negotiating, the same way you (hopefully) did for your new car. Haggle down the cost of your auto service contract to see if you can save a few bucks on what it’ll cost over the plan’s term. Remember: If the plan’s cost is wrapped into your car loan, it may impact how much interest you pay over the life of the loan.
Before you sign on the dotted line, shop around to compare plans from different providers. Because a VSC can be added onto a car at any time, there’s no time limit for when you need to purchase a plan, and you shouldn’t feel any guilt for turning down what a dealership or lender offers you. Comparison shopping can help you find the best bang for your buck, with coverage that best fits your needs and budget.
Finally, actually read the contract. If you know your model of car is likely to develop a certain type of issue at some point, make sure your service contract covers the type of repair you’ll probably need down the road. Look to see what other types of parts and components are excluded from coverage, and make note of whether or not there’s a deductible — and if you’re responsible for paying a deductible per repair or per service visit, the latter of which could end up costing you more out-of-pocket.
The cost of a vehicle service contract depends on its term length, covered mileage, deductible, and how comprehensive the plan is. Your car’s year, make, and model also help determine the plan’s cost. As a result, a vehicle service contract can cost anywhere from a few hundred to a few thousand dollars.
If possible, try to purchase a plan that’s considered transferable. Transferable service contracts could potentially increase the resale value of your car.
Some contracts are also refundable. If you trade your vehicle in or sell it to someone who opts not to have the plan transferred, a refundable plan allows you to cancel the contract in exchange for a prorated refund, minus any claims paid to-date.
The term “vehicle service contract” is often used interchangeably with “extended warranty,” but the two products are not necessarily one and the same. Some extended warranties may function in much the same way as a vehicle service contract, but there are differences between both products.
Warranty products typically provide bumper-to-bumper or powertrain coverage. In contrast, service contracts can provide basic coverage for minor, simple repairs, all the way to comprehensive coverage that would cover the cost of repairing your air conditioning, navigation system, engine, and more.
Extended warranties typically kick in after your warranty coverage expires, whereas a vehicle service contract can work in unison to provide coverage where your warranty doesn’t.
When deciding whether to purchase a vehicle service contract or extended warranty, compare what each covers and for how long. Will either product overlap or cover the gaps of your existing warranty? Are you likely to get the full worth from a vehicle service contract or extended warranty?
Vehicle service contracts promise coverage beyond that offered by a manufacturer or factory warranty. Your needs and budget will dictate whether or not a service contract is right for you, but start by considering the likelihood your car will need repairs, and if those repairs would be covered by a VSC.
If you suspect you’ll be forking over enough cash in repairs to make a service contract look enticing, you might save a few bucks by buying a plan. But if your car’s covered by a warranty and isn’t likely to develop any major issues any time soon, you may be better off saving your cash.
After all, it’s never too late to buy a vehicle service contract once your car starts showing its age.
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