Auto Warranties and Service Contracts (2022)

If you'rebuying a new or used car, the salesperson might try to sell you an auto service contract to help protect against unexpected or expensive repairs. While a service contract might sound like a good idea, it could duplicate coverage you have through your manufacturer’s warranty. Learn the difference between a warranty and a service contract, what’s covered, and how to steer clear of scams.

  • Be Aware of Add-ons
  • How Auto Warranties and Service Contracts Differ
  • Important Warranty Facts
  • Auto Service Contract Facts
  • Auto Service Contract and Extended Warranty Scams
  • Report a Problem

Be Aware of Add-ons

Auto service contracts and so-called extended warranties are common “add-ons,” optional products and services offered by the dealer in connection with a new or used car purchase. Often, add-ons like extended warranties and service contracts can cost thousands of dollars and are mentioned only at the end of an already difficult and time-consuming day at the dealership. Other times, dealers may try to include these and other add-ons in your deal without ever discussing them with you, and without your knowledge or approval. So you want to be sure that you ask questions, get answers in writing, know what you are paying for, and what you will get.

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How Auto Warranties and Service Contracts Differ

An auto warranty is a contract to fix certain defects or malfunctions for specific amount of time after you buy a car. A manufacturer’s warranty typically is included in the purchase price when you buy a new car, but used cars might come with some type of warranty coverage, too.

An auto service contract is a contract to perform (or pay for) certain repairs or services. Service contracts are sometimes called an “extended warranty, but they’re not a warranty as defined by federal law. They’re sold by car manufacturers, dealers, and independent companies, you can buy them anytime, and prices and coverage vary widely. For example, some of these contracts may extend the length or coverage of the included warranty, and others may cover some maintenance tasks like scheduled oil changes.

Important Warranty Facts

It’s always a good idea to know what your warranty covers and how long it lasts. But you certainly want to find out before you pay someone who’s trying to sell you a new one.

You don’t have to use the dealer for repairs or maintenance to keep your warranty in effect. In fact, it’s illegal for a dealer to deny your warranty coverage simply because you had routine maintenance or repairs done by someone else. That said, the dealer or manufacturer can make you use select repair facilities if the work is done for free under the warranty.

Using aftermarket or recycled parts won’t void your warranty. But the manufacturer or dealer can make you use certain parts if they’re free of charge under the warranty.

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  • An aftermarket part is a part made by a company other than your car’s manufacturer.
  • A recycled part is a part that was made for, and installed in, a new car by the manufacturer or the original equipment manufacturer, but later removed and made available for resale or reuse.

If someone installs an aftermarket or recycled part that’s defective or wasn’t properly installed, it could damage another part that is covered under the warranty. If that happens, the manufacturer or dealer can deny coverage for that part and charge you for repairs. But, before they can deny warranty coverage, the manufacturer or dealer must first prove the aftermarket or recycled part caused the needed repairs.

Keep all your service records — no matter who does the service. This includes oil changes, tire rotations, belt replacement, new brake pads, and inspections. Create a file to keep track of repairs — it will come in handy if you have to use your warranty. If you ever have a warranty claim and it appears that you didn’t maintain your vehicle, your claim might be denied.

Auto Service Contract Facts

Similarly, do some research before deciding whether to buy an auto service contract.

You don’t need (or want) duplicate coverage. Before you buy a service contract, compare it with the manufacturer’s warranty you already have. New car warranties usually offer coverage for a certain period time or miles, whichever comes first. It probably won’t be helpful to have a service contract that starts before the manufacturer’s warranty expires.

The more coverage, the higher the cost. The price is usually based on the make, model, and condition of the car (new or used), what repairs or services are covered, and how long the contract lasts. Pricing can range from several hundred dollars to several thousand. You also may need to pay a deductible each time your car is serviced or repaired.

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Few auto service contracts cover all repairs and maintenance. Watch out for exclusions that deny coverage for any reason. For example, if the contract says only “mechanical breakdowns” will be covered, problems caused by normal wear and tear may be excluded.

  • Service contracts also often limit how much they’ll pay for towing or related rental car expenses.
  • If the engine has to be taken apart to diagnose a problem, and during the process the mechanic discovers non-covered parts that need to be repaired or replaced, you may have to pay for the labor involved in the tear-down and re-assembling of the engine.

You may not have full protection even for parts that are covered in the contract. Some companies use a “depreciation factor” in calculating coverage: the company may pay only partial repair or replacement costs based on your car’s mileage.

You might be able to purchase a shorter contract. If the service contract lasts longer than you expect to own the car, find out if it can be transferred when you sell the car, whether there’s a fee, or if a shorter contract is available.

The contract may be backed by the manufacturer, dealer, or an independent company. Many service contracts sold by dealers are handled by independent companies called administrators. Administrators act like claims adjusters, authorizing the payment of claims to dealers under the contract.

Under the contract, you may have to follow all the manufacturer’s recommendations for routine maintenance, like oil changes. If you don’t, it might void the contract so you’ll lose coverage. Keep detailed records, including receipts, so you can prove you’ve properly maintained the car.

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Understand how claims are handled. When your car needs repairs or servicing, some service contracts let you choose among several service dealers or authorized repair centers. Others make you use the dealer that sold you the car. Find out if you’ll need pre-approval from the contract provider for any repair work or towing services.

You may have to pay for covered repairs and have the service company reimburse you. Ask how long you’ll have to wait to get your money.

If you have a dispute over whether a claim should be paid, deal with the administrator. If the administrator goes out of business, the dealer may have to do the work under the contract. The reverse also may be true — if the dealer goes out of business, the administrator may be required to fulfill the terms of the contract.

Auto Service Contract and Extended Warranty Scams

You may also get service contract offers at home, long after you’ve purchased your car. Have you ever gotten calls, texts, or mail warning that your warranty is about to expire? The companies behind the messages may give the impression they represent your car dealer or manufacturer. They use phrases like “Motor Vehicle Notification,” “Final Warranty Notice,” or “Notice of Interruption” to make the offer seem urgent — and to get you to respond. They’re likely trying to sell you a service contract, although they may call it an extended warranty. Consider the same issues mentioned above and be especially cautious.

The truth is

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  • they probably have nothing to do with your car dealer or manufacturer
  • if you respond, you’re likely to get pressured to give them personal financial information and a down payment right away, before you get any details about the service contract
  • if you buy a service contract from one of these companies, you may find they won’t be in business when you need to use the contract.

Report a Problem

To learn more about buying, leasing and owning a car, visit ftc.gov/cars.

FAQs

What is the difference between service contracts and warranties? ›

Service contracts and warranties both provide some element of repair or maintenance for a specific period of time. The main difference is that warranties are included in the purchase price and service contracts cost extra.

What is the difference between an auto warranty and an auto service agreement? ›

A manufacturer's warranty typically is included in the purchase price when you buy a new car, but used cars might come with some type of warranty coverage, too. An auto service contract is a contract to perform (or pay for) certain repairs or services.

What are the two types of vehicle service contracts? ›

There are two main types of vehicle service contracts: a powertrain warranty and a bumper-to-bumper warranty. A powertrain warranty covers the components that make your vehicle move: the engine, transmission, transfer case, drive axles, and other related components.

Are vehicle service contracts a good idea? ›

If you are buying a new car and the length of the service contract is similar to that of the manufacturer's warranty, it's probably not worth your money. Most new cars don't require many repairs during the first few years. And if your car does need repairs, they're likely to be covered by the manufacturer's warranty.

Is a service contract an extended warranty? ›

“Extended warranty” can be a confusing term, but actually refers to a service contract. A true warranty comes from the manufacturer WITH the purchase of your car, while an “extended warranty” or service contract is an extra protection that you can purchase for your vehicle that extends beyond the manufacturer warranty.

What is a service contract on a car for? ›

A vehicle service contract, also called an extended warranty or auto service contract, is an optional service that covers certain vehicle problems or repairs after the dealer or manufacturer warranty expires. Manufacturers, dealerships and private companies all offer service contracts.

Do you have to get your car serviced at the dealership to keep warranty? ›

Car servicing under warranty

In order to keep your car's warranty valid, your car will need to be serviced using approved parts. You can get your car serviced anywhere, but by going to a main dealer, you can be sure those all-important approved parts are used.

Can you cancel a service contract on a car? ›

Your right to cancel

On a used vehicle, you can cancel a service contract within 30 days without penalty. After 30 days, you can cancel and receive a partial refund. To cancel, write a letter to the dealer and the warranty company.

What a service contract means? ›

Service Contracts are agreements between a customer or client and a person or company who will be providing services. For example, a Service Contract might be used to define a work-agreement between a contractor and a homeowner. Or, a contract could be used between a business and a freelance web designer.

What is included in a service contract? ›

A Standard Service Agreement is a legal contract between a client and a service provider. The agreement outlines important details about the business relationship and the duties owed to one another. It may include information like pricing, ownership, shipment details, and much more.

What does warranty of a service mean? ›

A warranty is a product manufacturer or service provider's documented guarantee of quality as promised to a customer. Warranties provide customers with legally-ensured service replacement or correction of issues insofar as the warranty stipulates in its conditions, for the duration of its term.

What does a service warranty cover? ›

They include roadside assistance, towing, or trip interruption protection. Some dealers will pay for every dollar of the cost, while others will have you pay a deductible before the plan takes effect. The dealer might also extend a third-party warranty which is usually cheaper those other warranties.

Videos

1. Should you buy an extended warranty from a car dealership? NO! NO! NO!
(Your Advocate Alliance (YAA))
2. Should You Buy Extended Warranty on Cars?
(Car Help Corner)
3. Why Not to Buy an Extended Car Warranty (Scam)
(Scotty Kilmer)
4. Former F&I Manager Breaks Down Extended Warranties | Top FAQs Answered
(Your Advocate Alliance (YAA))
5. Vehicle Extended Warranties: Vehicle Service Contract Types, Cost, and Pros/Cons
(The Proctor Dealerships)
6. tips on selling service contracts / extended warranties
(Greg Brent)

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