Auto Warranties and Service Contracts

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.

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. 

• 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.

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.

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

• 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

• Your car dealer
• Service contract company
• State attorney general
• Federal Trade Commission

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