When you buy a new car you'll be offered an auto service contract to help protect you against the expense of major repairs. If the dealer tells you that your lender requires you to purchase an auto service contract to qualify for financing, call the lender directly to verify this. Prices on service plans vary greatly and you'll almost always pay much more if you buy it through the dealer. Read the contract carefully and make sure you're not duplicating coverage that's already offered by the manufacturer. Most new cars come with at least a one-year, 12,000-mile warranty, and some come with a three-year or 36,000-mile warranty. Any service plan you buy should kick in after the manufacturer's warranty runs out, or “wrap around” the manufacturer's warranty. Otherwise you're paying for duplicate coverage.

You'll need to know what repairs are covered (some plans explicitly disallow certain items or repairs), how long the contract lasts, whether repairs must be made by a certain company, and whether parts and labor are included. Most dealer plans are mechanical breakdown plans, not wear-and-tear plans. They cover only things that actually break, so something like piston rings that need to be replaced wouldn't be covered. You want a plan that includes both breakdowns and wear and tear.

Where to Look

You should check out the company providing the service contract, because if they go belly up, you're out of luck unless they've put aside funds to insure your contract. One of the largest warranty service providers is Warranty Direct, which Forbes magazine named as one of the Top 200 Small Public Companies. Their plans are nearly half the price you'd pay through the dealer and you're buying directly from the source with no middleman markup. Before you visit the dealership to buy a new car, get an instant online quote on the service plan from Warranty Direct by visiting their Web site at www.warrantydirect.com.

Warranty Direct has been a major player for years, and the company has a number of third-party organizations that keep an eye on it (such as Dun and Bradstreet). With their service plans, you can take the car to any Automotive Service Excellence (ASE)–licensed repair facility you choose, whether it's an auto dealership, repair shop, or private mechanic. The warranty company will pay the repair shop directly.