Service Contract vs. Warranty: What Every Car Owner Should Know

As a car owner, you’ve probably heard about service contracts and warranties, but do you know the difference between them? Understanding these two terms is important because they can save you time, money, and stress when it comes to car repairs.

A warranty typically comes with your car when you buy it, covering certain repairs for a specific period or mileage. On the other hand, a service contract is something you can purchase separately, providing extra coverage after the warranty expires or for things the warranty doesn’t include.

Knowing what each option offers can help you make smarter decisions about protecting your car and your budget. In this blog, we’ll break down what a service contract is, how it differs from a warranty, and which might be the best fit for your needs. Whether you’re buying a new car or looking to extend your coverage, this guide will give you the information you need to feel confident.

What is a Vehicle Warranty?

A vehicle warranty is a promise from the car’s manufacturer that covers certain repairs or defects for a specific amount of time or distance driven. This protection comes with the car at no added cost and ensures that problems caused by faulty manufacturing are fixed without you paying out of pocket.

Warranties generally cover things like manufacturing defects, powertrain issues, and major mechanical problems. For example, if your car’s engine or transmission, which are part of the powertrain, stops working due to a defect, the warranty will pay for the repairs. Typical warranties last for about 3 years or 36,000 miles, whichever happens first. Some may have longer coverage for specific parts, like the powertrain, which might be covered for 5 years or 60,000 miles in many cases.

For example, if your car has a drivetrain malfunction caused by a manufacturing issue, the standard warranty would take care of the necessary repairs or replacement. This gives you peace of mind and helps protect you from unexpected big repair costs shortly after buying a car. Warranties are an important part of car ownership, making sure your vehicle works as intended during the covered period.

What is a Vehicle Service Contract?

A vehicle service contract is an optional agreement you can buy to get extra protection for your car. It offers more coverage than the manufacturer’s warranty and is purchased separately. While often called an extended warranty, it’s technically different because it can include additional services.

Service contracts can cover both unexpected repairs and scheduled maintenance, depending on the terms. They often include benefits like roadside assistance, towing services, repairs for electronics, and help with routine wear and tear, such as brake pads or air conditioning. This makes them helpful for keeping your car in good condition over time.

Unlike a manufacturer’s warranty, which comes with the car at no extra cost, you must pay for a service contract. Payment can be made upfront as a one-time cost or through monthly installments. This allows you to choose the payment option that works best for you.

A service contract can give you peace of mind by reducing the financial burden of repairs or upkeep that might come with owning a vehicle. It’s an added layer of protection you can consider when purchasing a car, especially if you plan to keep it for a long time or want coverage beyond the standard warranty.

How Much Does Each Cost?

Understanding Service Contract Costs

Service contracts, often referred to as extended warranties, typically cost between $1,000 and $3,000. The exact price depends on the coverage plan, the type of vehicle, and its age. Plans covering more components or services, like electronics or routine maintenance, tend to be on the higher end of the price range. However, these contracts can be worth the investment, especially when considering the average annual repair cost for a car, which is about $500–$1,000. For instance, a single major repair, such as replacing a transmission, could cost upwards of $4,000 without coverage. A service contract provides financial protection by spreading the cost into smaller payments or a one-time fee, making unexpected repairs less stressful for car owners.

Vehicle Warranty Costs

Vehicle warranty costs vary widely depending on the type of warranty and the coverage provided. Manufacturer warranties typically come with the vehicle at no extra cost and include coverage for a specific period (e.g., 3 years/36,000 miles). However, additional warranties, such as a certified pre-owned (CPO) warranty or extended warranty purchased from the dealership, may require extra payment. CPO warranties often range from $500 to $1,500, while extended warranties can cost $1,000–$2,000 on average. These prices depend on factors such as the vehicle make, model, and warranty duration. While initial manufacturer warranties are free, they generally offer limited protection compared to service contracts.

Feature

Service Contract

Vehicle Warranty

Initial Cost

$1,000–$3,000

Typically free for manufacturer warranty; $500–$2,000 for extras

Coverage

Customizable with broad options

Limited to manufacturing defects/powertrain issues

Repair Costs Without It

$500–$4,000+ (per repair)

Minor repairs may still apply

Payment Method

One-time or installments

Often included in car purchase or extra for extended coverage

Average Annual Savings

Reduces repair costs substantially

Dependent on warranty scope

What Do Each Cover?

Warranty Coverage

A warranty is a promise from the car manufacturer to fix specific problems caused by defects in materials or workmanship. It is automatically included with your car purchase for a set time or mileage limit. Warranties focus on covering the essential parts of your vehicle to ensure it runs as intended.

What Warranties Cover

• Engine components (e.g., pistons, oil pumps).
• Transmission systems.
• Drivetrain parts like the driveshaft and axles.
• Some electrical components (e.g., power windows, alternator).
• Factory-installed air conditioning systems.

What Warranties Don’t Cover

• Wear-and-tear items such as tires, brake pads, and windshield wipers.
• Routine maintenance services like oil changes or filter replacements.
• Damage caused by accidents, improper use, or lack of maintenance.
• Cosmetic issues like paint scratches or upholstery wear.

Service Contract Coverage

A service contract, also called an extended warranty, goes beyond the basic warranty to offer broader and more customizable coverage. It is an optional purchase that gives additional peace of mind by including advanced services and repairs.

What Service Contracts Cover

• Routine maintenance tasks like oil changes and tire rotations (if included).
• Diagnostics and repairs for high-tech systems or electronics (e.g., infotainment screens, safety sensors).
• Roadside assistance (e.g., towing, lockout services).
• Repairs for wear-and-tear items, depending on the contract.
• Air conditioning, heating, and cooling repairs.

What Service Contracts Don’t Cover

• Items excluded by the terms of your plan (varies by provider).
• Damage due to accidents, neglect, or improper modifications.
• Non-essential modifications or accessories not covered under the plan.

Exploring the Transferability of Service Contracts and Vehicle Warranties

When purchasing a vehicle, understanding the transferability of service contracts and warranties is crucial, especially if you plan to sell your car in the future. While both are designed to provide coverage and peace of mind, their transferability varies, which can impact the resale value and attractiveness of your vehicle to potential buyers.

Vehicle warranties, typically provided by the manufacturer, often come with built-in transferability. This means that if you sell your car while it’s still under warranty, the new owner can usually benefit from any remaining coverage. This transfer is particularly appealing to buyers, as it ensures protection against unexpected repairs without additional cost.

Service contracts, on the other hand, are typically third-party agreements purchased separately to cover maintenance or repairs after the manufacturer’s warranty expires. Their transferability depends on the terms set by the provider. While some service contracts allow transfer to a new owner for a small fee, others may restrict this entirely, limiting their value during a resale.

To maximize your car's appeal, it’s essential to clarify the terms of both the warranty and any service contracts. Understanding these details can help you make informed decisions and better communicate the benefits to prospective buyers.

Key Differences Between a Service Contract and a Warranty

Key Aspect

Warranty

Service Contract

Provided By

Manufacturer

Third-party company or dealership

Cost

Included in the car's purchase price

Paid separately, either upfront or in installments

Coverage

Limited to manufacturing defects, engine, and drivetrain issues

Broader and customizable; may include wear and tear, electronics, and maintenance

Timeframe

Fixed duration (e.g., 3 years/36,000 miles)

Can extend up to the car's lifetime, depending on the plan

Do You Need a Service Contract, a Warranty, or Both?

When deciding between a warranty, a service contract, or both, it’s important to think about your needs and situation.

A warranty is often enough if you own something brand-new, like a car fresh from the dealership. Most new products come with a manufacturer’s warranty that covers issues for a set time. For example, if you’ve just bought a new car and plan to sell it in a few years, the warranty should handle repairs during that time.

If your car is older or you use your vehicle for long trips, a service contract might be a smart choice. These contracts cover repairs and maintenance after the warranty ends. For instance, someone with a used car that’s out of warranty may value the added security of a service contract. It’s also helpful for people who don’t want to worry about surprise repair costs for technology, appliances, or vehicles.

Some people might want both, a warranty and a service contract. This is ideal if you want full coverage. For instance, someone who drives frequently, owns an older vehicle, or values peace of mind may find it worth buying both. Having both means fewer worries about unexpected breakdowns or hefty repair bills.

Is a service contract the same as an extended warranty?

Many people confuse service contracts with extended warranties, but they aren’t exactly the same. Both aim to protect you from costly repairs, but they work a little differently.

An extended warranty is an addition to the original manufacturer’s warranty. It extends the coverage for certain repairs after the initial warranty ends. For example, if your car’s manufacturer warranty lasts three years, you might buy an extended warranty to add more years of coverage for big issues like engine or transmission problems.

A service contract, on the other hand, is a separate agreement that you purchase. It may cover maintenance and repairs not included in the original or extended warranty. For instance, a service contract could include oil changes, brake pad replacements, or other wear-and-tear items that warranties don’t address.

While both provide peace of mind, understanding their differences will help you choose the right option for your needs.

Frequently Asked Questions:

How can I find out if my warranty is still valid? 

To determine if your warranty is still valid, you can refer to the warranty documentation provided by the manufacturer or dealer. Alternatively, you can contact the manufacturer or dealership directly with your Vehicle Identification Number (VIN) to confirm the status of your warranty.

Can I purchase a service contract later, or does it need to be at the point of sale? 

Most service contracts can be purchased at a later date, though some restrictions or conditions may apply. It's important to check the terms and timing requirements with your dealer or service provider to ensure eligibility after the initial purchase of your vehicle.

Do service contracts cover routine maintenance like oil changes and tire rotations? 

Typically, service contracts do not cover routine maintenance such as oil changes, tire rotations, or other standard upkeep tasks. These are considered part of the vehicle owner's responsibility. However, it’s always recommended to review the specific terms of the service contract for clarity.

Will a service contract void my warranty? 

A service contract will not void your manufacturer’s warranty as long as it complies with the terms of the warranty agreement. It’s crucial to ensure that any service or repair performed under a service contract is done by authorized providers to avoid conflicts with your existing warranty coverage.