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The ins and outs of vehicle service contracts

Are vehicle service contracts worth the money you

Are vehicle service contracts worth the money you have to shell out for them? Photo Credit: Getty Images/gilaxia

So you're buying a new or used car at a dealership. Don’t be surprised if the salesperson dangles a vehicle service contract in front of you once you’ve signed on the dotted line to purchase your dream ride.

Should you politely decline?

How do they work?

Vehicle service contracts are like health insurance for your vehicle. You pay a small amount each month, and the company covers all or most of the cost of necessary repairs.

“Some policies are exclusionary, meaning they will cover everything except for certain listed items, while others will cover only those on a specific list.  Routine maintenance or ‘consumables’ like windshield wipers typically aren’t covered,” says Sonia Steinway, CEO of Outside Financial, in La Jolla, California.

What can I expect to pay?

The price is usually based on the car’s make, model, condition and mileage. The amount of coverage and length of the contract also affects the price. “The price could range from $1,000 to several thousands of dollars,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.

Is it worth the money?

Service contracts can be a more affordable way to pay for repairs than paying out of pocket. The contract may include roadside assistance and towing.

But timing is everything. Says Zimmelman, “Often your service contract’s coverage will overlap with your car’s warranty, so you’ll be paying extra for repairs already covered for free.

He also warns, "Most plans don’t cover all repairs. There are typically many exclusions and sometimes a depreciation in coverage, where the plan will only cover partial costs after a certain mileage. You may have to use certain mechanics or dealerships for repairs.”

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