Car warranties can be confused with vehicle service contracts (VSCs), in part because a VSC is often called an extended warranty. Though they’re both called warranties, they provide different types of coverage from different sources.
A true car warranty is automatically included with a new car and provided by the vehicle manufacturer. It promises that the vehicle doesn’t have any defects, and that the manufacturer is responsible for paying for repairs if anything goes wrong for a set period of time or mileage.
An extended warranty or VSC is an optional contract you can purchase from a dealership or third-party company. You pay a premium to have certain repairs covered for a set period of time or mileage. You’ll typically pay a deductible per repair, and you might have to pay a mechanic first and then submit a claim for reimbursement.
It’s important to know the difference between a true car warranty and an “extended warranty,” because the two are regulated differently by the government. An extended warranty is actually classified as a type of insurance or service contract, not a warranty.
How can I tell the difference between a car warranty and a VSC?
There are a few key factors that can help you determine whether your warranty is built-in or optional:
Car Warranty
Vehicle Service Contract (VSC)
Called
Full warranty, auto warranty, manufacturer’s warranty or factory warranty.
Extended warranty, auto service contract or mechanical breakdown insurance.
Provider
Original manufacturer (the company that made the vehicle).
Third-party companies or dealerships.
Cost
Included in the car’s purchase price.
An additional, separate cost, charged upfront or monthly.
Timing
Starts when the car is sold brand-new for the first time and typically lasts three years.
Can be purchased anytime (even for used cars).
Regulation
Governed by federal law through the Magnuson Moss Act.
Regulated as service contracts or insurance. Can vary by state.
Flexibility
Usually requires repairs at the dealership.
Often allows repairs at any certified shop.
Do I need a car warranty and a VSC?
VSCs are meant to extend coverage after your factory warranty expires, so you don’t need both at the same time.
A new car factory warranty typically lasts 36,000 miles or three years, whichever comes first. Some cars also include “powertrain” warranties that cover components like the engine and transmission for longer periods of time, typically five to 10 years.
Whether or not you also need an “extended” warranty depends on your car’s condition and age:
If your car is brand-new, you’re already covered. You don’t need to purchase another warranty.
If your factory warranty is about to expire, consider shopping around for a VSC. A VSC is most helpful if you plan to keep your car for a long time and the car model has a known history of expensive electronic or mechanical issues.
If you bought a used car, consider purchasing an extended warranty if you’re not sure if you can handle unexpected repair costs.
🤓 Nerdy Tip
Check if a VSC is “transferable.” If you sell your car privately later, being able to hand over a service contract can significantly boost your car’s resale value. And if you’re buying a used car, check whether it comes with a VSC or any time left on the original factory warranty.
Is a service contract the same thing as prepaid maintenance?
To make things more confusing, some dealerships also offer “service contracts” that allow you to prepay for regular car maintenance tasks like oil changes and air-filter replacements.
These prepaid services are different from the mechanical issues that a VSC covers. They might include an oil change every 5,000 miles, for example, but won’t cover any breakdowns or replacement parts if something goes wrong.
In the car warranty industry, similar names can mean very different coverage. Always request a sample contract to make sure you know exactly what you’re getting. Dealerships might slip in a service contract to your purchase. Know that this is an optional add-on that you can opt out of.
🤓 Nerdy Tip
Dealerships, third-party companies or even scammers might try to sell you an extended warranty by threatening that your factory warranty is about to expire. Don’t fall for the trap – an extended warranty is optional, and if you purchase one before your factory warranty expires, you’ll end up paying for duplicate coverage. Take your time shopping around and don’t let pushy sales tactics pressure you into a financial decision.
What is mechanical breakdown insurance?
Mechanical breakdown insurance (MBI) is sold by insurance companies like Geico and Progressive as an add-on to your car insurance. You usually have to sign up for MBI when your car is brand-new or close to brand-new.
To make things more complicated, California law doesn’t allow third-party companies to sell “extended warranties” (VSCs). In California, these products have to be sold as mechanical breakdown insurance, and sellers have to be licensed insurance providers.
What Reddit users say about car warranty vs. vehicle service contracts
Reddit is an online forum where users share their thoughts in “threads” on various topics. The popular site includes plenty of discussion on financial subjects like home improvement, so we sifted through Reddit forums to get a pulse check on how users feel about car warranties. People post anonymously, so we cannot confirm their individual experiences or circumstances.
One Reddit user clarifies that a true warranty is guaranteed by the carmaker, while a service contract is extra paid protection after that guarantee runs out. Users remind each other that the two can’t legally be sold as the same thing, and that it’s important to check the fine print to make sure you know what you’re getting. Some users believe that warranties are never worth the added cost if they’re not backed by the manufacturer.
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About the author
Dalia Ramirez writes about home and car services for NerdWallet. She has previously written about estate planning, cryptocurrencies, small business software and other personal finance topics. Dalia has a B.A. in science and technology studies from Wesleyan University. Her work has appeared in publications including The Washington Post, the Los Angeles Times, Bloomberg and The Associated Press. She is based in San Francisco.
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