The Difference between a Service Contract and a Warranty

Automotive service contracts are a staple in the used car business, but you may know them by another name, “ extended warranty .” You might even be familiar with these terms outside the automotive sphere, such as when buying electronic devices or appliances, but there is a bit of confusion, which leads some to financial pain of one kind or another. First, though, why do you want a warranty to begin with?

When you buy something, be it a laptop, microwave, or a new car, you generally expect it to function for a good amount of time. Reliable manufacturers use quality parts and manufacturing process to deliver what they expect will be an acceptable usable life. Some electronics are only expected to last a couple of years, and cars are generally expected to last at least 100,000 miles, but what if it doesn’t? Are you responsible for repairs or replacement if the car doesn’t last as long as it should? This is where the warranty or service contract comes into play.

The new car warranty is basically a financial guarantee that the vehicle is fit for use for a certain period. Depending on the manufacturer, new car warranty provisions may differ. Be sure to read the fine print to see what exactly is covered and for how long. The new car warranty is included with the purchase of your new car, but once the new car warranty period passes, the owner is responsible for auto diagnostics and repairs, which can be expensive.

A common new car warranty structure might be 36 months or 36,000 miles bumper-to-bumper and 72 months or 100,000 miles powertrain. This means if anything fails in the first 36 months (or 36,000 miles, whichever comes first), such as a bulb, bearing, or door lock, the automaker will pay for all parts and labor to put it back into working order. If something goes wrong with the engine, transmission, or axle in the first 72 months, the manufacturer will fix it for free.

Even when buying used cars, buyers expect that their used car will work for a reasonable period. Buying a car from a private party, you take all the risk upon yourself for any repairs, even if you’ve only owned the vehicle for a day. Buying a used car from a dealer, though, you may be able to protect your self from unexpected repair costs with an extended warranty or service contract. Sometimes, the two terms are used interchangeably, but they are not the same.

An extended warranty might be offered by an automaker on their certified pre-owned (CPO) vehicles , which they’ve inspected and restored to a reasonable level of service. Certified pre-owned vehicles are usually less than five years old and have less than 60,000 miles. They might be previously leased vehicles or trade-ins and are usually in pretty good condition to begin with. When asking a premium for a “certified” used car, automakers will tack on an extended warranty, but this doesn’t cost the buyer anything.

A typical extended warranty might be 84 months or 100,000 miles bumper-to-bumper, or 24 months or 24,000 miles, but why the disparity? It depends on how they count the months. Some extended warranty programs might start coverage from the vehicle’s first in-service date, from mile 1, while others start coverage from when you purchase the vehicle. Extended warranty coverage may also differ regarding exactly what is covered, and you may be required to pay a deductible, and the fine print will explain everything in detail.

Used cars not sold under a CPO program, or at a used car dealer unrelated to an automaker, may offer something very similar to an “extended warranty,” an aftermarket service contract. In fact, extended warranties and service contracts are so similar that the terms are often used interchangeably. You can even buy a service contract from a third party, unrelated to the used car dealer, or for a car that you already own. The main difference is that, while a warranty is offered free of charge by the automaker, you pay for a service contract. One of the nice things about buying a service contract from a dealer is that you can usually work the cost into the financing deal.

Automotive service contracts function something like collision insurance. You pay into the program, at which point your vehicle, or better-said your wallet, is protected in case something breaks. Service contracts work similar to extended warranties in coverage period, such as XX months or XX,000 miles, and coverage items, things like check engine light repairs or transmission repairs. After paying a deductible – you may be required to prove you’re maintaining your vehicle – the service contract covers the rest of the repair costs.

If you’re buying a new car, used car, or your current warranty has run out, it may be advantageous to consider buying a service contract. If you’re planning on getting rid of the car in a couple years and your car is in great shape, you might be better off setting aside $50 to $100 per month in a separate car repair fund. If you plan on running your car until it dies, or your budget doesn’t allow for a car repair fund, a service contract could be great protection in case something major goes wrong.

When considering a service contract, it pays to shop around. Your used car dealer may offer one or several options, with different levels of coverage. You can also shop around online, and there are several companies with different levels of coverage, so you can find something that fits your needs.