By definition

Many people use the terms " extended warranty" and "service contract" interchangeably. While both are used to address similar problems: i.e., vehicle repairs, there are a few differences.

An extended warranty is usually sold to a consumer at the time of the automobile purchase and is generally sold by the vehicle dealer. While it may be priced separately, it is usually added into the final price of the automobile purchase.

A vehicle service contract can be purchased any time you own an automobile and the price of the service contract is clearly distinguishable from any cost associated with the purchase of the vehicle.

By comparison

A service contract does not necessarily cover the same things covered by a manufacturer's warranty which comes with the purchase of a new vehicle and usually provides coverage for at least one year or 12,000 miles, whichever comes first. An extended warranty many times provides essentially the same coverage and benefits as the manufacturer's warranty. In some cases, the service contract provides more coverage and benefits than the manufacturer's warranty.

How should you research companies who offer vehicle service contracts?

For both the buyer and the company offering the service contract, this paper represents a legal document once signed by both parties. The BBB advises consumers that the best use of your time will be pre-purchase research of the companies offering vehicle service contracts.

• Do your homework. A vehicle service contract that won’t be there when you need it is not worth the price of the paper it is printed on. Check with the Better Business Bureau for a reliability report on the companies who offer vehicle service contracts with whom you are interested.
• Check with the regulatory agencies who oversee or license vehicle service contract companies in your state.
• Be a smart consumer. You will find a variety of automobile service contracts offering different terms and prices. Look for a company that spells out all the inclusions and exclusions up front. Also, don’t choose a company on price alone. Remember, many times you will get exactly what you paid for.
• Read and thoroughly understand the agreement, including all industry terms, before you sign. If you do not understand your rights and advantages under the contract, seek counsel from someone you trust to explain.
• Make sure everything you have been promised verbally is in writing and included in the contract. This should include details such as dates, prices, cancellation provisions, and all other requirements for making use of the service contract.
• Never sign a contract that includes blank spaces. For your protection, see that there are no areas of the contract that could be altered or changed.
• After both you and the company have signed the contract, keep a copy for your records. This copy of the contract is the only proof you have of the conditions of the agreement.

What should you look for in a vehicle service contract?

It is important to measure a vehicle service contract by its benefits to you as a vehicle owner. As a consumer, you can only accurately understand the coverage if you learn the terminology and standard industry requirements. The following are questions you should ask:

Who backs the service contract?

Find out who performs or pays for repairs under the terms of the service contract. Understand that while you may purchase the contract from one company, your future dealing may be with a different entity. Depending on the contract, it may be the manufacturer, the dealer, or an independent company.

Many vehicle service contracts are handled by independent companies called administrators after the sale of the contract. If you have purchased such a contract, any future dealings with regard to vehicle repairs will be coordinated through the administrator. Acting as claim adjusters, the administrator is responsible for authorizing the payment of claims to any dealer or repair facility under the contract. Deal directly with the administrator if you need answers about how to initiate repairs or if you have a dispute over whether a claim should be paid.

Determine how you will be protected should your administrator go out of business. In some instances, the dealership may be obligated to perform under the contract. Likewise if the dealer goes out of business, the administrator may be required to fulfill the terms of the contract. Whether you have recourse is dependent on your contract's specific terms and /or any applicable state laws.

Check out the reliability of the dealer and the administrator. Ask for references of past customers and check them out. Also, contact your area's Better Business Bureau, and any local or state regulatory agency with oversight of vehicle service contracts. Make sure you have obtained verifiable addresses and telephone numbers for any prospective service contract companies.

Ask how long the dealer or administrator has been in business, and inquire about whether there is sufficient financial resources to meet their contractual agreements. For example, car dealers or dealer associations may set aside funds or buy insurance to cover future claims while some independent companies are insured against a sudden surge of claims. In some states, vehicle service contracts are required to be underwritten by an insurance company.

How much does the vehicle service contract cost?

The price of a vehicle service contract will differ from company to company. However, in most cases the cost will be determined by the vehicle's make, model, and condition (new or used). Other cost factors will include coverage inclusions and the length of contract, both of which may be set by the company or available in options to the buyer. The up-front cost for a vehicle service contract can range from just below a thousand to well over $2000.

In addition to the initial charge, you may need to pay a deductible each time your vehicle is serviced or repaired. A service contract may charge one deductible per visit for all repairs, regardless of the number, while another may require you to pay a deductible for each unrelated repair even if they are made on the same visit.

There could be other costs involved if the contract limits or has a set amount allotted for towing or related rental car expenses.

Lastly, you could incur costs associated with the transfer or cancellation of the contract should you sell the vehicle or opt to end the contract prior to the contracted date.