Service Contract
What Is a Service Contract?
A service contract is an agreement to cover certain repair or maintenance costs for a product after the manufacturer’s warranty expires.
In auto sales, a service contract is often marketed as an extended warranty, though it is legally a separate agreement.
Service contracts may be offered by:
- Dealerships
- Third-party administrators
- Manufacturers
Coverage varies based on contract terms, exclusions, duration, and mileage limits.
Why It Matters
- Service contract:
- Shifts certain repair risks to the provider
- Adds to total purchase cost
- May be financed with a loan
Because service contracts increase the total financed amount if rolled into an auto loan, buyers may pay interest on the contract cost.
Understanding coverage limitations and cancellation policies is important before purchase.
How Service Contract Works
Service contract activates after the manufacturer warranty expires or according to its defined start date.
The owner pays a deductible for covered repairs, and the provider pays the remaining eligible amount.
Example: If a covered engine repair costs $4,000 and the deductible is $100, the contract provider covers $3,900 under eligible terms.
Coverage typically excludes routine maintenance and wear-and-tear items.
Service Contract vs. Manufacturer Warranty
Service Contract → Purchased separately
Manufacturer Warranty → Included with new vehicle
Coverage source and duration differ.
FAQs About Service Contracts
Can service contracts be canceled?
Many contracts allow cancellation within specific timeframes.
Are service contracts transferable?
Some contracts allow transfer to a new owner, which may increase resale value.
Is financing a service contract more expensive?
Financing increases total cost due to added interest.
Related Terms
