Vehicle Service Contracts vs. Car Insurance: Which Do You Need and When?

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Vehicle service contracts and car insurance both provide coverage, but coverage isn’t one-size-fits-all.

There are few things worse than hopping behind the wheel, turning the key to your ignition, and seeing your dashboard light up with a stomach-dropping panel of warnings: The check engine, low oil pressure, or ABS indicator warning of potential issues with your car.

Vehicle issues aren’t easy or safe to ignore and may quickly cause you to deplete your savings to stay on the road and get to and from where you need to go.

Fortunately, plans and policies are available to offset the burdensome cost of repairs. However, if you’re covered by auto insurance, are vehicle service contracts and warranties really necessary? More importantly, are they even useful?

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What Is a Vehicle Service Contract?

A vehicle service contract, or VSC, is a type of plan that pays to repair mechanical breakdowns. Vehicle service contracts typically provide comprehensive coverage for many of your car’s systems, including its:

  • Transmission,
  • Navigation,
  • Air conditioning, and
  • Other mechanical systems and components.

Despite its comprehensive coverage, vehicle service contracts do not cover routine maintenance, cosmetic issues, wear-and-tear, or damage from accidents. Certain policies may also limit coverage for specific parts and components.

Vehicle service contracts are often sold when you buy a new car or refinance an existing loan, though plans may also be purchased at any time. Some plans are even available for older cars or those with high mileage.

Vehicle service contracts are sold by dealerships, finance companies, and third-party providers. The cost of a VSC may be wrapped into your loan, though doing so increases your loan’s APR, meaning you’ll pay additional interest than paying for the policy separately.

Is a vehicle service contract an extended warranty?

Though vehicle service contracts are often referred to as extended warranties, VSCs do not meet the legal definition of a warranty. As a result, vehicle service contracts are not extended warranties.

Extended warranties vary in coverage depending on the terms of the specific warranty. Bumper-to-bumper coverage pays for repairs to many of your vehicle’s mechanical systems. Powertrain warranties cover your vehicle’s driveshaft, engine, and transmission.

Vehicle service contracts may be purchased at any time and provide coverage in addition to your factory or manufacturer’s warranty. Extended auto warranties often only kick in after your original warranty has expired.

What Is Car Insurance?

Car insurance, as its name implies, is a type of insurance product. Car insurance is required in nearly every state and is also regulated on a state-by-state basis, with required minimum coverage depending on where you live.

Auto insurance pays for losses and repairs to your vehicle after a covered event, such as an accident, natural disaster, theft, or vandalism. Car insurance policies don’t cover repair costs following a breakdown.

Depending on the policy in question, auto insurance may provide:

  • Bodily injury liability: pays for medical expenses and lost income incurred by another person, as well as any legal fees you may incur following a covered event
  • Property damage liability: pays to repair or replace any property damage caused by you (but doesn’t pay for damage done to you)
  • Uninsured/underinsured motorist coverage: pays you for expenses incurred when someone doesn’t have or lacks sufficient auto insurance coverage
  • Personal injury protection: pays for medical expenses incurred by you or your passengers following a covered event
  • Collision coverage: reimburses you for damage done to your car after a collision with another car or object
  • Comprehensive coverage: reimburses you for damage done to your car after a covered event other than a collision, such as a natural disaster, theft, or vandalism

Separate policies, called GAP insurance, help to cover the difference between your car’s actual cash value and any outstanding loan balance.

In summation, the only way car insurance pays to repair your vehicle is after a car accident or other covered event, and only if you maintain the proper coverage.

Mechanical breakdown insurance

Mechanical breakdown insurance, or MBI, is an insurance product that covers car repairs resulting from mechanical failures.

In many ways, an MBI policy is similar to that of a VSC or warranty and covers many of the same parts, components, and services.

As an insurance product, mechanical breakdown insurance is sold by insurance companies. Coverage is often limited to new cars or those under a certain mileage, making an MBI less-than-ideal, or totally useless, for those who drive older used cars.

However, since it’s insurance, MBI policies aren’t paid for upfront or wrapped into your loan. Mechanical breakdown insurance premiums are paid for on an on-going basis, which means you’re not necessarily married to the policy.

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What Are the Differences Between a Vehicle Service Contract, Car Warranty, and Auto Insurance?

Vehicle service contracts, factory warranties, and extended warranties pay for mechanical breakdowns, even if each plan’s breadth of coverage differs. In contrast, the only time car insurance kicks in to repair your car is following a collision or other covered event — and only if you have the right type of coverage.

Beyond coverage (or the lack thereof), vehicle service contracts, warranties, and car insurance share other similarities and differences, including:

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Do You Need a Vehicle Service Contract if You Have Car Insurance?

Carrying an auto insurance policy is a legal requirement that protects you against many of life’s oops moments: situations that result from external factors, like bad weather or a texting driver. Insurance doesn’t cover situations in which your car seemingly revolts against you by killing its own engine or shedding parts across the interstate.

For random, unexpected mechanical failures, you’ve either got to pony over your cash or rely on other methods of paying for repairs, such as a vehicle service contract.

But do you need a vehicle service contract? The answer is no, you don’t need a VSC, but there are situations in which you’d benefit from having one.

Think about your current finances and the condition of your car. Because a VSC can be purchased at any time, it may make sense for you to consider buying coverage as your car ages and starts to send you worrying signals of its impending troubles. It’s no fun having to fork over hundreds or potentially thousands of dollars to repair a car that’s depreciated significantly in value.

At the same time, if you’re a savvy saver or drive a car not known for developing major issues, you may be better off choosing not to buy a VSC.

Ultimately, there’s no one right answer. A vehicle service contract may give you peace-of-mind in knowing mechanical breakdowns are covered. However, there’s also the possibility you never use the policy despite paying for it.

Understand the Benefits and Pitfalls of Your Coverage

Before signing the dotted lines of any vehicle service contract, extended warranty, or other add-on coverage, consider the policy or policies you have in place to avoid paying for overlapping types of protection.

Then, look to see where any coverage gaps exist. If the potential cost of car repairs has you saying goodbye to your vacation or travel plans, it may be worth considering a vehicle service contract or another type of coverage.

It’s a trade-off, sure, but it’s one you may be thankful for when your car starts clink-clank-banging as you cruise down the highway.

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About The Author

Daniel Mattia

Daniel Mattia is a freelance content writer and author. He's written extensively about insurance, personal finance, and small business. Daniel's past and current clients include The Zebra, Bestow, Ensurem, and others across a variety of industries.

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