Extended Car Warranty vs. Service Contract: What the Difference Means for You

Few car products cause as much confusion as the “extended warranty.” Dealers offer them in the finance office, independent companies mail and call about them, and the words used make them sound like the warranty that came with the car. This guide explains the difference using Federal Trade Commission (FTC) consumer guidance and labeled state examples. It is education only; Car Bills Explained doesn’t sell or recommend service contracts.

What is a car warranty?

The FTC describes an auto warranty as a promise to fix certain defects or malfunctions during a specific time after you buy a vehicle. A manufacturer’s warranty is included in the price of a new car and often lasts a certain number of months or miles, whichever comes first. A used car may come with some warranty coverage too, or it may be sold “as is.”

What is a service contract?

An auto service contract is an optional contract sold by a vehicle manufacturer, a dealer or an independent company. The seller agrees to perform, or pay for, certain repairs or services listed in the contract, usually for a set number of months or miles. The FTC says:

An auto service contract or extended warranty is not a warranty as defined by federal law, because you buy it separately; it’s not included when you buy a car.

The Consumer Financial Protection Bureau (CFPB) uses the same idea: an extended warranty or vehicle service contract covers the costs of some types of repairs in addition to, or after, the manufacturer’s warranty.

How do you compare a service contract with the warranty you already have?

Start with dates. The FTC points out that it probably won’t help to have a service contract that starts before the manufacturer’s warranty expires. Then check whether the contract duplicates coverage you already have, and whether it begins after your current warranty runs out.

Service contracts also differ from insurance. They typically don’t cover damage from an accident or normal wear and tear; accident damage is what collision and comprehensive coverage address.

What should you ask before you buy one?

The FTC suggests asking these questions and getting the answers in writing:

• How much does it cost? The price depends on whether the car is new or used, its make and model, what is covered and how long the contract lasts. The FTC says prices range from several hundred dollars to several thousand. Ask about a deductible each time the car is serviced or repaired.
• Who is responsible for coverage? It could be the manufacturer, the dealer or an independent company. Many dealer-sold contracts are handled by independent companies called administrators, which decide whether to pay claims. Read whether you have any rights if the administrator declines a claim.
• How long does it last? If it lasts longer than you expect to own the car, ask whether you can transfer it when you sell, whether there is a fee, or whether a shorter contract is available.
• What is covered, and what isn’t? Few contracts cover all repairs. A contract that covers only “mechanical breakdowns” may not cover wear and tear. Ask how much it pays for towing or a rental car, whether it uses a depreciation factor that pays only part of a repair based on mileage, and whether it requires remanufactured or used parts.
• Can you cancel, and what is the refund? The FTC suggests asking about the cancellation and refund policy and any cancellation fees.

Do you have to buy a service contract to get a loan?

Generally no. The CFPB says that, in most situations, an extended warranty is optional when you take out an auto loan, and that if you add one to the loan you have the right to cancel it during the loan term. If a dealer or lender says it is required, ask them to show you where the sales contract says so. The price is also negotiable, and rolling it into the loan adds interest. See dealer add-ons and GAP.

What changes when you buy a used car from a dealer?

Federal rules give used-car buyers one specific protection. The FTC explains that if you buy a service contract from the dealer within 90 days of buying a used car, the dealer can’t remove implied warranties on the systems the contract covers. For example, a car sold “as is” normally has no implied warranties, but if you buy a dealer service contract covering the engine, you automatically get implied warranties on the engine. The FTC adds: make sure you get written confirmation that your service contract is in effect.

How do cancellation and refunds work?

Cancellation rules come from the contract and from state law. One labeled example:

Texas: the Texas Department of Licensing and Regulation (TDLR), which registers service contract providers, says a service contract must allow you to cancel at any time. If you cancel within 30 days of signing, you are entitled to a full refund without a cancellation fee. After the 30th day, you are entitled to a pro-rata refund and may be charged a reasonable cancellation fee of no more than $50.

Other states have their own rules, and many contracts set their own cancellation terms. If the contract was financed, the CFPB notes you may be entitled to a refund if you sell, refinance or pay off the loan early; the refund usually goes toward the loan. Ask the dealer, lender or administrator for the cancellation form and keep a copy of what you send.

What about calls saying your warranty is expiring?

The FTC warns that companies calling, texting or mailing about an expiring warranty may give the impression they represent your dealer or manufacturer, using phrases like “Motor Vehicle Notification,” “Final Warranty Notice” or “Notice of Interruption.” They are likely selling a service contract. See how to spot warranty scam calls.

What if a claim is denied?

Read the contract’s claim and appeal section first and ask for the denial in writing. If you can’t resolve it, you can report it to the FTC and to your state attorney general or state consumer protection office, and in some states a separate agency registers service contract providers (in Texas, the TDLR). See complaints and where to get help.