Vehicle service contract.

In plain English

A vehicle service contract is a plan you buy, usually at the dealership, that pays for specific repairs after your factory warranty runs out. It is not technically a warranty, even though sellers often call it an 'extended warranty'. It is a contract that lists exactly which parts and problems are covered, which are excluded, and what you pay out of pocket (often a per-visit deductible). Coverage is limited to the items named in the contract, so a breakdown that is not on the list is not paid. Many contracts also require you to use approved repair shops and follow a maintenance schedule, or the coverage can be denied.

01Why it matters

These contracts are one of the most profitable add-ons a dealer sells, often costing well over a thousand dollars, and many cars never have a covered repair big enough to make the contract pay for itself.

02The math, step by step

Say a finance manager offers you a vehicle service contract. If it costs $2,500 and is rolled into your loan, you also pay interest on that $2,500 for the life of the loan. Over a 6-year loan that can add a few hundred dollars in interest on top of the contract price. If your car only ever needs a covered repair that the contract values at $400, you paid far more than you got back.

03What this is NOT

04Receipts

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