What is an extended service contract?

This type of protection is sometimes referred to as an extended warranty, a vehicle insurance policy or a vehicle protection plan against expensive, unforeseen repairs. The term “extended warranty” may lead to confusion since it is not a warranty in the strictest sense of the word.

Understanding extended service contracts

The auto insurance coverage that’s right for you

You might have heard them referred to as extended warranties, vehicle insurance policies or vehicle protection plans against expensive, unforeseen repairs. The term “extended warranty” may lead to confusion since it is not a warranty in the strictest sense of the word. Factory warranties and extended warranties both cover regular vehicle repairs and maintenance for a determined period of time, but a true warranty is included in the price of the product, while an extended service contract is sold separately and costs extra.

This type of contract may be purchased when you buy your vehicle, but it may also be purchased much later. If you’re the type of person who likes to be prepared for everything, this is the solution for you. Due to the astronomical costs of vehicle repairs these days, an extended service contract can make a lot of sense.

To decide if an extended service contract is right for you, and to select the right plan for your needs, you will need to ask yourself the following questions:

Is the vehicle still covered under the factory warranty? Will the factory warranty term protect your vehicle for the amount of time you intend to keep it? What kind of mileage will you put on the vehicle each year?

• If you’re buying a new vehicle:
• Take a close look at the manufacturer’s warranty before you make a decision about whether or not to purchase an extended service contract for the vehicle. If, for example, the factory warranty is for three years or 36,000 kilometres for a vehicle that you intend to keep for two to three years, with an anticipated mileage of 10,000 kilometres per year, then an extended service contract doesn’t make much sense since the factory warranty should suffice.
• On the other hand, if you intend to keep the vehicle after the warranty expires, then an extended service contract is worth considering.
• If you purchase a used vehicle :
• Find out if the dealership offers a warranty and what the coverage period is, since they can range from one month to one year, depending on the dealership.
• If the used vehicle is a recent model, the factory warranty may still apply, depending on how many kilometres the vehicle has been driven, and how much time has passed since it was originally titled.
• Some automakers offer certification programs that extend their warranty coverage on pre-owned vehicles. Plan to purchase an extended service contract if that is not the case for you, or if you intend to keep the vehicle beyond the warranty period.

What’s the reliability record for the make and model you’re considering?

Investigate the reliability of the both the vehicle model and make. Though this is not an infallible indicator of what vehicle repairs will cost, it does give you an idea of what you might be in for, to help you make an informed decision.

Who is the provider behind the extended service contract you’re considering?

It may be backed by the vehicle manufacturer or an independent automobile insurance company (known as after-market service contracts). Knowing who will be underwriting the contract can give you insight into their strengths and weakness, and thus those of the extended service contract. Manufacturer-backed service contracts score very highly when it comes to ease of use; however aftermarket service contracts are sometimes less expensive. (If you opt for an after-market service contract, research the company’s financial strength rating according to A.M. Best or Standard & Poor’s to give you an idea of the likelihood that it will pay your claim. Your safest bet is to choose a company with at least an “A” rating from S&P or A.M. Best and/or an “A-” rating from A.M. Best.)

How much is your deductible?

Before you sign on the dotted line, be sure you investigate everything about the deductible. Consider not only the amount, but whether it applies per visit or per vehicle repair. A per visit deductible will cost you a fixed amount each time you visit the shop, regardless of how many parts are repaired; a per repair deductible applies to each serviced part. What sounds like a minor difference may, under certain circumstances, have a major impact on expenses.

For example, if you have a $100 per repair deductible and you take your car in to get the air conditioner, fuel pump and alternator serviced, your bill will be $300; if you had opted for the per visit deductible, you’d only be out $100. It goes without saying, obviously, that a $0 deductible is the most economical. You will have to pay more upfront for this option, but if your circumstances are such that your vehicle requires repairs often, you’ll save money in the long run.

Is the service contract transferable?

Some extended service contracts end when the vehicle is re-sold. A service contract that allows you to transfer it to a new buyer is preferable, since it’s an excellent selling point.

Where can I have my vehicle repaired?

Some contracts stipulate that only the dealership who sold the contract can perform the vehicle repairs. Other more practical and less restrictive contracts offer at least one other service facility option. You’ll appreciate this should your vehicle ever break down while you’re on a road trip, far from home.

What is covered, exactly?

Know what is included and excluded under your extended service contract. Does it cover breakdown as well as wear and tear? Under a contract that covers breakdowns, a part has to break in order to be covered. This kind of vehicle insurance policy is less desirable since not all parts fail due to breakage. Sometimes they need to be replaced because they’ve been worn down over time. This extended vehicle insurance coverage is why certain extended service contracts exist. Furthermore, you should consider upgrading to vehicle protection that covers overheating, regardless of its cause, as well as ABS brakes, if your vehicle has them. These are often excluded from some “entry-level” contracts. Without this coverage, if your vehicle were to overheat due to problems with an expensive part such as the radiator, you’d be stuck with a hefty repair bill. Before signing an extended service contract, be sure that you have fully investigated the ins and outs of its vehicle insurance coverage. The difference from one contract to another may at times seem insignificant, but their implications may prove to be considerable.

Is paying out-of-pocket always required for vehicle repairs?

Some extended service contracts require you to pay the bill, send them the receipt and then wait for reimbursement, sometimes up to several months. Ideally, you’ll want a service contract that pays the dealership directly with a credit card.

Remember to compare all your options before making a decision. Use the Internet to do your research; many companies offer their vehicle insurance products online or, at the very least, can provide an auto insurance quote giving you a good idea of what the service contract with your desired features should cost. When it comes to choosing a service contract—just as with life in general—it helps to be well-informed.