Extended warranty vs service contract: what the wording means

In the finance office, you will probably be offered an "extended warranty." The name suggests more of the same protection that came with the car. Often it is a different product with different rules.

Warranty or service contract?

The FTC draws the line clearly. A manufacturer's warranty is included in the price of a new car. A service contract is optional and sold separately, and the FTC says it "is not a warranty as defined by federal law, because you buy it separately." Many service contracts are marketed as extended warranties anyway, so look past the name to the document.

The contract usually tells you what it is. Look at the first page for words such as "vehicle service contract," "administrator," "obligor" or "provider," and for a price. If you are paying extra for it and it is a separate agreement, treat it as a service contract.

Who stands behind it

Service contracts can be sold by manufacturers, dealers or independent companies. The FTC says to find out who the administrator is, because the administrator decides claims. It also notes that if the administrator goes out of business, the dealer may have to do the work, and if the dealer goes out of business, the administrator may have to honor the contract. Read the section on what happens if a claim is denied.

What to check in the wording

Use the FTC's questions as a checklist when you read the contract:

• Price: service contracts can cost from several hundred to several thousand dollars, depending on the car, the coverage and the length.

• What is covered: some contracts list covered parts; anything not listed is not covered. Others list exclusions instead. The FTC says service contracts typically don't cover accident damage or normal wear and tear.

• Deductible: you may pay a deductible each time the car is serviced or repaired. Check whether it is per visit or per repair.

• Labor and parts: whether the contract pays full labor costs, covers teardown labor, and requires remanufactured parts.

• Depreciation: whether payouts are reduced based on the car's age or mileage.

• Towing and rental cars: included or not.

• Pre-approval: whether you need approval before repairs or towing.

• Repair shops: whether you can use any licensed shop, only authorized centers or only the selling dealer, and whether it still works if you move.

• Maintenance: the FTC notes that not following the manufacturer's maintenance schedule might void the contract. Keep your records.

• Transfer: whether you can transfer it if you sell the car, and whether there is a fee.

• Cancellation: look for the section on cancelling and how any refund is calculated. Ask for the answer in writing.

The FTC's advice is to get the answers to these questions in writing before you buy.

How it shows up in your deal

A service contract bought at the dealership is often added to the loan, so you pay interest on it. On a sample buyer's order from fictional Northgate Motors:

Service contract, 60 months/75,000 miles: $2,850

Deductible: $100 per repair visit

On a 72-month loan at 7.9%, financing that $2,850 adds roughly $740 in finance charges. The FTC says add-ons such as service contracts are not free and you can decline them. Our guide to spotting dealer add-ons covers the other products you may see alongside it.

Used cars in the US: a link to implied warranties

The FTC says that if you buy a service contract from the dealer within 90 days of buying a used car, the dealer cannot remove implied warranties on the systems the contract covers, even if the car was sold "as is." Check the Buyers Guide in the car's window to see what it says about warranties and service contracts.

In Canada

In Ontario, OMVIC requires a dealer's advertised price to include all fees and charges the dealer intends to collect, except HST and licensing. An extended warranty you choose to add is an optional product, so make sure any warranty or protection product on the bill of sale is one you asked for. For loans, FCAC says the lender or dealer must give you a disclosure statement before the agreement is final, so check whether a warranty has been added to the amount you are borrowing.

In Australia

Under the Australian Consumer Law, cars bought from a dealer come with automatic consumer rights, such as being of acceptable quality and matching their description. The NSW Government says these rights cannot be restricted or excluded. An extended warranty is extra cover you pay for, so ask what it adds beyond the rights the law already gives you. In NSW, many used cars from licensed dealers also come with built-in cover for defects under state law.

Add-on insurance is different again. ASIC's deferred sales model, which began on 5 October 2021, requires a four-day pause between the sale of a main product, such as a car, and the sale of an add-on insurance product.

Questions to ask before you buy one

• Is this a warranty or a service contract? Who is the provider and the administrator?

• What is excluded, and what is the deductible?

• Where can repairs be done, and do I need approval first?

• Is the price negotiable, and is it being added to my loan?

• How do I cancel, and how is the refund calculated?

• What does this add beyond the manufacturer's warranty or my legal rights?

Get a second pair of eyes on the contract

When EasyToDecode opens, you will be able to upload the service contract or the deal paperwork and see the price, deductible, exclusions, repair rules and cancellation terms pulled out and quoted, with questions ready to send the provider. See how it works or join the waitlist.