a warranty contract

Buying a New or Used Car? Some Thoughts on an "Extended Warranty"

When buying a new or used car, you may be encouraged to buy an extended warranty to help protect you against unexpected, costly repairs. While it may sound like a good idea, don't buy until you understand both the terms of the contract and who is responsible for providing coverage.

The Auto Service Contract

A service contract is a promise to perform (or pay for) certain repairs or services. Often times called an "extended warranty," a service contract is not a warranty as defined by federal law.

A service contract costs extra, while a warranty is included in the original price of the new or used car. The separate cost distinguishes a service contract from a warranty.

Do you need a service contract?

Before deciding to buy a service contract, compare the service contract to the manufacturer/dealer warranty to ensure that that the service contract doesn't simply duplicate warranty coverage that you already have.

Who backs the service contract?

Determine who performs or pays for the repairs under the terms of the service contract. Is it the dealer, the manufacturer, or an independent company? Many service contracts sold by dealers are administered by independent companies, which will act as the claims adjusters, and will decide whether to authorize the payment of claims. If you have a dispute over a claim, you will have to deal with the administrator. Do your homework and check into the reputation of both the dealer and the administrator.

What is covered?

Few service contracts cover all repairs. Common repairs like brakes and clutches are generally not covered. Your contract should come with a fact sheet that lists all parts that are covered. If an item is not listed, assume it is not covered.

Watch out for any blanket exclusions. For example, a service contract may exclude coverage for a covered part if it is determined that the covered part was damaged by a non-covered part's failure.

How are claims handled?

When your car needs to be repaired, you may be able to choose from franchise dealers or independent repair shops, or you may be required to return to the selling dealer.

Be sure to ask:

  • How long does it take to get authorization for a repair?
  • Can you get authorization outside of normal business hours?
  • Will the car be covered for breakdowns while on a trip?
  • Does the company have a toll-free number? Before you buy the contract, call to see how easily you can get through.

What are your responsibilities?

Under the terms of the contract, you may be required to follow the manufacturer's recommendations for routine maintenance. Failure to do so could void the contract. Also find out if the contract prohibits you from taking the car to a independent shop or performing the work yourself.


A service contract may be worth considering if you would be unable to afford an unexpected costly repair. However, do your research so that you know the limitations of the contract you are purchasing and make sure that the protection you are getting is worth the cost of the contract.


Remember, the cost of a service contract is negotiable.