When you purchase a new vehicle, two different agreements can provide repairs and service for your vehicle in the future: warranties and service contracts. Every new vehicle comes with a manufacturer warranty, but service contracts (also called extended warranties) are optional agreements that buyers make to provide for necessary vehicle services not covered under the manufacturer warranty.
Warranty vs. Service Contract
Every manufacturer issues a warranty with the purchase of a new vehicle at no cost to the buyer. This warranty stipulates that, should specific problems occur with the vehicle within a certain time frame or before you have driven the vehicle a certain number of miles, the manufacturer will pay to fix it at no charge to you. On top of this coverage, dealerships offer service contracts that cover a broader collection of services over an extended period.
Misconceptions
The majority of automobile dealerships do not make their profits on new vehicle sales. Instead, they make their money by performing warranty-covered repairs for manufacturers and by selling "extras" to customers, such as service contracts. Remember that you do not have to purchase any type: Even if the dealer acts as if it is compulsory, it is not.
Pricing and Coverage
Even if you want to purchase a service contract for your new vehicle, you do not necessarily need to do so through your dealer. An advantage of going through your dealer is that he will often specifically tailor your service contract for your vehicle in light of the manufacturer's warranty. This is important because the is no use in paying for a service contract that simply duplicates the coverage that comes with the manufacturer warranty at no cost. However, remember that dealerships often look at their customers as being a captive audience of sorts. This may mean that your dealership is offering you a price significantly higher than similar coverage would be from a third party service contract provider. According to SmartMotorist.com, "coverages available from dealerships cost anywhere from 40 percent to 100 percent more than the same coverage available from the third party insurers I surveyed."
Service Availability
Even if a dealership or third party service contract firm can give you an affordable service contract that covers the services you need, it may not be any good to you if it is only available in a certain area. Dealership service contracts, for instance, might only be good for services performed at the dealership. If you move to another state or if vehicle problems arise while you are on vacation, your service contract may prove useless exactly when you need it the most. If you decide to buy a service contract, make sure that it applies to a large network of service providers rather than a single location or a small chain.
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