A service contract, sometimes referred to as an extended warranty, can offer a car buyer many benefits. The added protection they provide can give many consumers the extra security that they need when making the commitment to finance a vehicle.
What is a Service Contract?
A service contract is a type of additional coverage that a car buyer can purchase at any point. It's an agreement between a contractor and a customer where the contractor promises to perform (or pay for) certain repairs or services over a specified period.
Auto service contracts cover vehicle repairs far beyond the length and limits of routine manufacturers' warranties. The majority of them are sold at automotive dealerships at the point of sale, although you can shop different providers to find the best price. They are available for both new and used vehicles.
The latest data from Experian Automotive shows that 86.6% of new vehicles are bought with financing, as are 55.3% of used vehicles. Financing requires a long-term investment, and a service contract is a long-term measure to give a vehicle extra protection.
When to Buy a Service Contract
Service contracts are optional. Some buyers may not opt for one, but for others, they can be exactly what they need. Whether or not one is right for you is your decision. As Stacy Johnson of MoneyTalksNews has said, "there are two types of people: those who can't stand the idea of unexpected expenses, and those who can't stand the idea of paying for protection they don't need."
Purchasing a service contract is always going to be a bit of a dice roll, but there are still circumstances when the right choice is more obvious.
For example, if you are buying a used car and you are operating on a tight budget, you may feel more comfortable with a service contract to fall back on. For these consumers, a costly repair could create a ripple effect that has long-term repercussions.
But if you are leasing a vehicle, or if you are buying a new car that's known for its reliability, it may be more cost-effective for you to skip the extended warranty.
Service Contract Buying Tips
Whether or not you want to purchase one depends on your own car-buying situation. Ask yourself these questions to help you make the decision:
- Are you buying a new or used car? Does it come with a warranty?
New cars will typically be backed by a 3-year, 36,000-mile warranty, so you probably will be fine without the extra coverage. However, you can purchase a service contract at any time, so in theory you have 3 years or 36,000 miles to decide if you want one. A certified pre-owned (CPO) used vehicle may also come with an existing warranty, and it's even possible that you can extend it. But if you are buying used and that car doesn't come with any warranty, you might prefer the additional coverage an extended warranty provides.
- How tight is your budget?
A big consideration is whether or not your budget can handle an out-of-the-blue car repair. If a big repair bill could cause your finances significant damage, you may prefer the peace of mind that comes with an extended service contract. Also keep in mind that if you finance an extended warranty, it will increase your monthly payment and you'll be paying interest on it, as well.
- How long are you planning on keeping this car?
Vehicle service contracts may extend far beyond any existing warranties your car is under. They could even cover repairs that aren't covered by an existing warranty. If you expect to have the car for a long time, it's nice to know that years from now, a simple phone call could be all that you need to do to get your car back in road-ready condition quickly.
- Did you research reliability ratings?
Certain brands are known for making extremely reliabile vehicles. If the car you have purchased is known for its reliability, it's far more likely that you could end up paying more for the service contract than for any needed repairs. It's also a fact that cars are more reliable than ever, but be warned: although this may be the case, it should be noted that any big problems that come up are more likely to be expensive because of the advanced systems found in vehicles these days.
- What are the details of the service contract you are being offered?
There are several questions that you are going to need to ask and find the answers to. What components are covered? Does it duplicate the coverage of an existing warranty? Are there different coverage tiers? Does it cover incidental expenses like towing? Where can you get the vehicle repaired? Does the coverage provider deal with the repair shop directly? Is there any deductible? If you aren't financing it, can you pay for it as you go or does it have to be paid for up front? It's critical that you analyze all of the details.
- Who stands behind the contract? Are they reputable?
The majority of auto service contracts are sold and/or administered by reputable, licensed companies. There's also a national trade association called the Service Contract Industry Council (SCIC), which works to educate consumers and regulate the industry. Any provider that is an SCIC member is sure to be reputable and trustworthy because of the high standards they hold their members to.
With a big purchase like a car, sometimes it is better to be safe than sorry. Depending on your situation, an extended warranty may provide an economical way of maintaining a vehicle for long-term ownership. For others, it may be more cost-effective to take a pass on this option. Take time to weigh the pros and cons and decide what will be best for you.
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