Our general advice: don’t buy an extended service contract. For most of us, they’re just not worth the cost. But if you want one, at least read this article, which will tell you how to get the best possible deal.

Why Bother?

Extended service contracts for automobiles produce big profits for the dealers that sell them and the extended service contract companies that back them. On a contract for which you pay $1,000, the average payout for claims might be less than $250, with the rest going to administrative costs and profit.

Many new cars are very reliable, so there are few service claims. Also, many cars now carry long manufacturer warranties, so many service problems are covered by the warranty, leaving little to be covered by the extended service contract.

But millions of new car buyers each year buy these contracts. What you get, the salesperson will argue, is “peace of mind.”

If you decide you want to buy a service contract, this article will probably save you at least $150. But first you must decide whether one of these contracts makes sense for you.

You don’t have to rush your decision. Most service contract companies allow you to sign up long after you have purchased your new car. With most, you can delay the decision for at least the lesser of one year or 12,000 miles, and in many cases you can wait until just before your new car warranty expires.

Our general view on service contracts, which are simply insurance against repair bills, is the same as our view on other types of insurance. Don’t insure unless a possible loss—a large repair bill—would be very disruptive to your life. Why pay administrative costs and profits to an insurance company if you could simply “self-insure” and pay any unexpected bills out of your own pocket?

The case for getting an extended service contract is strengthened somewhat if—

  • Your car has a lot of options and accessories—power seats, a CD changer, performance packages—that might break down and that would be covered by a service contract.
  • Your car has needed a surprisingly large number of repairs during the early months of your ownership.
  • You plan to keep the car at least six or seven years—through the duration of the contract. With most contracts, if you sell or trade your car to a dealer, you get only a pro rata refund for the period remaining on the contract. For example, if you have a six-year contract and sell the car to a dealer after three years, you get only half the contract price back. But most of the actual value of a contract is in later years—after the new car warranty has expired and when the car is older and more likely to need repairs.

Choosing a Contract

If you decide to buy an extended service contract, you have many options. You don’t have to buy your extended service contract where you buy your car or where you plan to have it serviced. For example, you can buy a Ford at one dealer, buy a Ford-sponsored service contract at another Ford dealer, and have the car serviced at any Ford dealer in the country.

Your first step in buying a service contract is to review the provisions of available contracts to see exactly what is covered. You can get brochures describing contracts from local dealers or by calling dealers listed on the table below. The Federal Trade Commission urges you to review a copy of the actual contract you will receive rather than just a brochure, but many manufacturers don’t give their dealers sample contracts (you get a contract in the mail after you sign up); so it may be difficult to see one to review.

You’ll find substantial variations in what contracts cover. Almost all contracts exclude from coverage maintenance and wear items, ranging from brake parts to exhaust system components to air filters. And many contracts exclude—or fail to include—many additional items, including electrical devices like power windows and radios, interior trim, gauges, and even air-conditioning systems. Some contracts cover only a specified list of items and you’ll probably have a hard time judging whether important items are left off the list. You’re better off with a contract that covers everything except a specified list of items.

Some contracts cover the cost of towing and a rental car but others do not. Some contracts cover parts but not all the labor necessary for diagnosis and repair. And most contracts require you to pay a “deductible” amount for each repair—in some cases, as much as $100—before the service contract company pays anything.

Be sure to check where you can get repairs done—at the selling dealer only, at any dealer of your make of car, at any new car dealer, or at your choice of new car dealer or independent repair shop. Since consumers tend to be more satisfied with repairs at independent shops than with repairs at new car dealers, it’s good to have the option of using an independent shop.

Also, check how the shop will be paid. Under some contracts, the shop simply bills the contract company; under others, you must pay the shop, then seek reimbursement—often long-delayed—from the contract company. Even if a service contract company says shops can bill it directly, check with repair shops you might use to be sure they will in fact bill the contract company; most independent shops have long since decided not to put up with the hassle of collecting from service contract companies. Shops will be more willing to deal with contract companies that allow the shop simply to charge the repairs to the contract company’s Visa or MasterCard.

Finally, find out the name of the company that backs the service contract and be sure this company is financially sound. Many of these companies have gone out of business in recent years, rendering their contracts worthless. You are probably safest with a service contract backed by an auto manufacturer like Ford or General Motors.

Keep in mind that the same contract sponsor—Ford, for example—usually offers several different contract options. The more you pay, the more coverage you get.

Choosing a Dealer

At least as important as choosing a good contract is finding a dealer that will sell it to you at a good price. Dealers make a big markup above what they pay for these contracts. One study found that among a sample of contracts it examined, backed by a major manufacturer, 92 percent of the customers paid at least $200 above dealer cost, 24 percent paid at least $600 above dealer cost, and three percent paid at least $900 above dealer cost.

We have done the work for you to cut dealer markups—in some cases to $50 or less—for many types of cars. We invited dealers around the country to bid competitively to be listed on the table below. We conducted this bidding process for a sample of dealers that sell each of the major manufacturer-sponsored contracts and also for dealers who sell “umbrella” policies that will cover any make of vehicle. While many dealers weren’t interested in selling contracts below the heavily marked-up prices they usually receive, some recognized that any business they get from informed Consumers' Checkbook readers is a bonus.

The dealers listed on the table below offered the lowest markup commitments. Regardless of where you live, you can call the listed dealership and arrange by phone or by mail to purchase a service contract. The dealers have agreed to sell you a contract at the specified markup above dealer cost. The dealers have agreed to tell you the dealer cost—what the dealer pays the manufacturer or administrator—for a contract for the type of car and coverage you want. When you call, explain that you want the markup the dealer committed to for listing with “Consumers’ Checkbook.” We’d like to receive a copy of the invoice for your contract to help us monitor this program.

Dealership owners and policies change. If you find you can’t get the promised bargain at the listed dealership, let us know so we can solicit new bids.

We have listed a dealership finance manager as contact person for each dealer. But these individuals may change jobs. So ask for the finance office, explain what you want, and speak with someone else if the named person no longer works there.

The best way to complete your service contract purchase is by phone, using a credit card.

Where to Get a Good Price

Selected dealer
(based on lowest bid)

Dealer’s agreed markup above dealer cost

Pauly Acura
2699 Skokie Valley Road
Highland Park, IL 60035
Contact: Frank Karigiannis or Mike Van Herzeele


BMW of Catonsville
6700 Baltimore National Pike
Baltimore, MD
Contact: Larry Cash


Waldorf Dodge
2440 Crain Highway
Waldorf, MD 20601
Contact: Lloyd Foulds


Waldorf Ford
2440 Crain Highway
Waldorf, MD 20601

Contact: Lloyd Foulds


General Motors
Ourisman's Rockmont Chevrolet
807 Rockville Pike
Rockville, MD 20852
Contact: Charles Cain


Ourisman Honda of Bethesda
4800 Bethesda Ave.
Bethesda, MD 20814
301-656-1000 Ext:2493
Contact: Rich Kandel or Carmen Wells


Fitzgerald Lakeforest Hyundai
905 N. Frederick Ave.
Gaithersburg, MD
Contact: Kenny Booth


Darcars Lexus of Silver Spring
2505 Prosperity Terrace
Silver Spring, MD
Contact: Jam Khan


Hunt Ford
6825 Crain Highway
La Plata, MD 20646
Contact: Butch Hunt


Roto Mazda
1555 E. Rand Road
Arlington Heights, IL
847-255-5700 Ext:290
Contact: Jeff Malecek


Euro Motorcars Mercedes-Benz
7020 Arlington Road
Bethesda, MD 20814
Contact: Juan Hernandez - Jim Pratt


Darcars Nissan of College Park
9330 Baltimore Ave.
College Park, MD 20740
Contact: Dean Sampath


King Volkswagen
979 North Frederick Avenue
Gaithersburg, MD
Contact: Val Koretsky or Tim Mosier


Darcars Volvo
15401 Frederick Rd.
Rockville, MD
Contact: Hamid Samani or Mark Filipovic