A service contract is often sold alongside a car loan or a retail installment contract, and that is where the second price hides. The contract price you agree to is one number. If you finance it, the contract becomes part of the amount you borrow, and the lender charges interest on that part for the full length of the loan. Before you sign the payment paper, you need to know both numbers, not just the one that gets said out loud at the desk.

Find the disclosure box

Where the federal Truth in Lending rules apply, a lender must show credit costs in a standard disclosure box. The box lists the amount financed, the finance charge, the annual percentage rate, the total of payments, and the total sale price. Find it before you sign. Check whether the service contract price is included in the amount financed, and whether the finance charge applies to that part. If you are somewhere that uses a different form, ask for the equivalent figures in writing.

Then subtract the cash price of everything you are buying from the total of payments. The gap is what the borrowing costs you across the life of the loan. Do the same comparison for the contract alone by asking what it would cost if you paid in full at signing. Setting the two side by side shows whether financing turned a modest add-on into a much larger bill.

Follow the money on cancellation and payoff

Financing ties the contract to the loan, and that link changes where a refund goes. If you cancel the service contract, the refund does not always come back to you. Ask who receives it, whether it is applied to the loan balance, and whether your payments continue until the refund posts. If you plan to pay off the loan early, ask whether there is a prepayment charge and whether the unused portion of the contract is credited back to the balance.

Ask what happens to the loan if a claim is denied or the contract administrator stops operating. Your loan payments do not pause because a claim was refused. Get the answer from the lender in writing, not only from the dealer.

Questions to ask before you sign the payment paper

  • Which lender holds the loan, and does that lender also sell or own the service contract?
  • Is the service contract price included in the amount financed, and what finance charge applies to that part?
  • What is the annual percentage rate on the whole loan, and does the service contract change it?
  • What is the total of payments, and what is the total sale price?
  • Is there a prepayment charge on the loan?
  • Where does a cancellation refund go, and how long does it take to arrive?
  • If I cancel the contract, does my car loan stay exactly the same?

Compare the paper, not the pitch

Offers often lead with a periodic payment, and that figure can hide the length of the loan and the interest stacked on top of the price. A lower payment spread over a longer term can cost more in total. Compare the total of payments and the total sale price across offers, not the payment alone. Then compare the contract terms themselves, because a lower price on a contract with a harsher cancellation formula can cost you more later.

Read the contract before any financing is attached. The providers that publish a sample contract let you check the terms first, and you can start with companies that publish a sample contract. For how the tables on this site are built, see How We Score Vehicle Service Contract Companies.

This guide does not tell you whether a service contract is worth buying. It shows you how to see what financing adds to the price, so the decision rests on the full bill and not on the payment that was quoted.