A service contract is contract, for a specific period of time, to provide maintenance or repair of your car. Many people often think it is an extended warranty, but it is not. A warranty comes with your car and is a guarantee or promise that the manufacturer will maintain the utility or performance of your car. It is included in the purchase price of your car, whereas a service contract costs extra and is an option you can buy. Think of a service contract like an insurance policy. Depending on the service contract, it will provide coverage for certain parts or components of your car, and the contract provider will pay for the cost of repairing those items minus a deductible that you will typically have to pay.
Dealers will almost always recommend that you buy a service contract, and often will call it an extended warranty. They will tell you it's a good deal and will give you peace of mind knowing that if you have any problems with your car, it will be covered. It sounds like a good thing to have, but there are several things to consider before you buy one.
Typically, these service contracts are not cheap. They often cost thousands of dollars. The dealers want to sell these contracts because they are high margin items for them that allow them to make big profit on the sale of the car. If the contracts were not profitable for the dealers, they wouldn't push so hard to sell them. You can easily end up paying 10% more for your car by buying a service contract.
If you're buying a new car, it will almost always have a manufacturer warranty. Even many used cars now come with dealer warranties. The manufacturer warranties in new cars are usually at a minimum 3 years/36,000 miles. And many car makers offer longer warranties than that. These warranties are usually bumper to bumper warranties, meaning they will cover any problem or defect that occurs with your vehicle during the warranty period. Most car makers offer longer warranties as well that cover the powertrain of the vehicle as well.
Service contracts are usually longer in duration than the manufacturer's warranty. For example: a service contract may be 5 years/ 60,000 miles. Often, dealers trick the buyer in to thinking that the service contract begins when the manufacturer's warranty ends. So if you have a 3-year warranty on the car and buy a 5-year service contract, you may think that you have 8-years of coverage. But that is not the case. Almost always, the service contract will run concurrently with the manufacturer's warranty and will start when you buy the car. And during the warranty period, you will not need the service contract because you already have the manufacturer's warranty. So in our example, what happens is you will pay for a 5-year service contract, but will only be using 2-years of it, because 3 years of it overlap with the manufacturer's warranty. So you end up paying money for something you can't even use.
Although the dealer will tell you that the service contract covers everything, they almost always don't. You should read the fine print. Service contracts specify which parts and breakdowns they cover, and which they don't. Often, many parts/systems are excluded. Even if a part that ends up breaking is covered, there still are other exclusions that may prevent the part from being covered. For example: There is always an exclusion that if a covered part breaks due to the failure of a part that is excluded from the contract, the covered part won't be repaired. These contracts are filled with lots of loop holes, so be careful.
Think of it this way. The companies that provide these contracts expect to make money on them. Otherwise they wouldn't sell them. If they actually believed that your car would have serious problems and that they would be forced to pay to fix them, they wouldn't sell the contracts. So they know that they are going to end up paying much less to fix broken parts than you pay for the contract.
So before you decide to buy a service contract, think twice. Ask the dealer to show you the actual contract so you can see hold long it is valid for, what it covers, and what it excludes. Make sure it makes sense and you are comfortable with its terms.
If you have any questions about a service contract that you want to buy or already bought, contact The Lemon Lawyer at 844-227-7762 or fill out the form on this page. We can help you and will let you know what your options are for free.