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A Vehicle Service Contract (VSC) is an automotive protection plan that covers the cost of certain repairs and breakdowns in exchange for an upfront or monthly fee. Unlike auto insurance, which covers damage from accidents, a VSC helps pay for mechanical failures and unexpected repairs, giving car owners peace of mind.
While individual drivers often purchase a VSC for their own vehicle, fleet operators also use these contracts to protect multiple vehicles under their management. The terms of a VSC outline which repairs are covered and under what conditions, helping consumers avoid costly out-of-pocket expenses when unexpected breakdowns occur.
Understanding the difference between a Vehicle Service Contract and auto insurance is key. Insurance primarily covers accident-related damage, while a VSC steps in when a vehicle experiences a mechanical failure unrelated to a collision. For many drivers, having both types of coverage provides the best financial protection against unforeseen car expenses.
That being said, it is of the utmost importance that you understand what vehicle service contracts are (and what they are not), so that you can make an informed decision. Without further ado, let’s dive in.
Vehicle Service Contracts vs Extended Warranties
Believe it or not, there is actually no such thing as an “extended warranty” for a car, truck, or SUV that comes from a third party (not the manufacturer or the dealer). Let’s take a closer look at this common misconception.
The term “extended warranty” is used colloquially by third party companies, but technically it does not exist. A warranty is something that comes with the purchase or lease of the vehicle. It can be given by the manufacturer (most typically) or the dealer, but it is an incident of the sale. Warranties are express (the vehicle conforms to a written statement like this vehicle has a new transmission) or implied (warranty of merchantability or fitness for a particular purpose such as if the dealer knows the customer will use it for commuting).
If a customer pays for extended coverage, that is a vehicle service contract. Under the Magnuson Moss Act, if a dealer sells a vehicle service contract to the customer within 90 days of sale, the dealer cannot disclaim implied warranties. Nevertheless, the term “extended warranty” is sometimes used incorrectly to refer to a vehicle service contract.
Of course, vehicles can (and do) have warranties. Those warranties most commonly come from manufacturers. For example, Kia offers a 10-year/100,000 mile limited powertrain warranty on new vehicles. If you’re then being sold an “extended powertrain warranty,” look at the fine print to confirm it is coming from either the dealer or the manufacturer.
If it is a third party, know that they are not selling you an extended powertrain warranty, they are selling you an extended service contract that covers the vehicle’s powertrain. There is a difference between the two. You’ll know it’s a third party if the name on the contract isn’t the dealership’s or the manufacturer’s company name.
Types of VSC Coverage
Typically, when we talk about coverage, we talk about two things: stated coverage and exclusionary coverage. Stated coverage refers to a policy where the covered items are explicitly listed in the contract. If it is not stated as “included” then it is not covered. Exclusionary coverage is broader, and therefore offers better protection for the consumer. If a part is not specifically listed as excluded, then the contract provider has to pay the claim for the part. This type of coverage is the best because it protects your vehicle in all but a small selection of circumstances.
Are Vehicle Service Contracts Worth It?
Now that we know the difference between a vehicle service contract and an extended warranty, the question is, are vehicle service contracts worth it? To answer this question we need to talk about VSC coverage for new and used vehicles.
Vehicle service contracts for new vehicles
Are vehicle service contracts worth it for new vehicles? In summary, it depends on your risk tolerance.
Any vehicle service contract you are offered is inclusive of manufacturer warranties. What does this mean? This means that a vehicle service contract does not replace, nor extend a manufacturer’s existing warranty on a vehicle.
With that in mind, why then would you buy a VSC, if the manufacturer warranty is already in place? There are two reasons:
The VSC will cover other things outside the scope of the manufacturer’s warranty; and
VSCs for new vehicles are generally very cheap.
Let’s unpack both of these two reasons why you should consider getting a VSC on a new car.
First, it’s important to understand that many administrators offer perks with their service contracts to make them more appealing to new car owners. For example, trip interruption coverage, rental car reimbursement, and 24/7 roadside assistance are all included in CarEdge’s vehicle service contract. These are perks that are typically not included in a manufacturer’s warranty.
Generally, new car vehicle service contracts are much more affordable. Unfortunately, for consumers, most dealers add incredible mark up to these products, so you’d be hard pressed to consider them “cheap” when you’re sitting in the finance and insurance office at the dealership, but CarEdge is proud to offer the best Vehicle Service Contract pricing.
At the end of the day, if you’re able to negotiate a fair price on a VSC for a new car, it can most certainly be worth it. Purchasing coverage for your new car is entirely up to you and your risk tolerance. And, as always, read the contract before you sign!
Vehicle service contracts for used vehicles
Similar to new cars, service contracts for used vehicles are priced according to how much risk the plan administrator is taking on. That being said, service contracts for used vehicles are the same “value” as they would be for a new vehicle.
It is important to understand that if the used vehicle you are purchasing has existing manufacturer warranties in place (for example the vehicle you are buying has 25,000 miles on it, and the manufacturer warranty cover up to 36,000 miles), then the vehicle service contract is inclusive of that existing warranty (just like what we discussed above with regards to new cars). For clarity, this means that the service contract does not extend the manufacturer’s warranty, instead it exists in conjunction with the manufacturer’s warranty.
It is very important that you read the contract carefully before purchasing a vehicle service contract. In the contract you will see what repairs the administrator excludes. The last thing you want to do is sign up for a service contract, only to go to the repair shop one day and have to foot the bill because what broke wasn’t covered.
Peace of Mind Is Just a Click Away
When deciding whether a VSC is worth it, consider your risk tolerance, vehicle reliability, and budget for unexpected repairs. For new cars, an affordable service contract can be a smart way to add extra perks like roadside assistance, trip reimbursement, and rental car reimbursement. For used cars, a VSC can provide financial protection against costly repairs, but it’s essential to read the contract carefully to understand what’s covered.
At CarEdge, we believe in transparency — no inflated dealership markups, just fair pricing for coverage that can give you peace of mind. Get your vehicle service contract quote in minutes, and rest assured with CarEdge!
As if buying a car wasn’t hard enough, purchasing add-ons like an extended warranty can be even more frustrating and irritating for car shoppers. For starters, what if I told you that the phrase “extended warranty”, is frequently used in an intentionally misleading way to profit off car buyers? We are talking about the car business, so maybe it’s easier to believe because of that, but the truth is, nine times out of ten, when someone is talking to you about an extended warranty they’re using the entirely wrong phrase.
Why then do you see commercials for extended warranties, get letters telling you that you should purchase an extended warranty, or receive phone calls telling you that your car is out of warranty and that you should buy an extended warranty RIGHT NOW? Because capitalism, that’s why.
Selling extended warranties is a lucrative business, even if in most cases it is a made up word that doesn’t actually exist. Many companies have found great success in the tactics described above (essentially fear marketing), and for better or worse, the term “extended warranty” isn’t going away anytime soon.
All that being said, we strongly suggest that you read or guide to vehicle service contracts. Most extended warranties are actually just vehicle service contracts. More on that below.
If you’re dead set on learning about extended warranties, then have no fear. We’ve taken most of our guide on vehicle service contracts and adapted it for this page. The reality is, more car buyers search for “extended warranty” than they do for “vehicle service contract” so it’s important we cover both topics (even though in most cases they are the same thing).
Without further ado, let’s dive in.
What is a car extended warranty?
So what actually is an extended warranty on a car? First you need to understand that a warranty is something that comes with the purchase or lease of a vehicle. It can be given by the manufacturer (most typically) or the car dealer, but it is an incident of the sale. Third parties cannot issue warranties for goods they did not produce or sell directly.
An extended warranty on a car, truck, or SUV that is sold by a third party is actually a vehicle service contract. An extended warranty sold by a seller (dealer), or manufacturer is an extended warranty.
The Magnuson–Moss Warranty Act of 1975 was enacted to fix problems as a result of sellers using disclaimers on warranties in an unfair or misleading manner. The unfortunate reality is that sellers are still using the term warranty in a misleading way.
Here’s a great example of this in practice. Go to PenFed Credit Union and you’ll see they sell “extended warranties”.
The moment you click on one of the sample contracts you quickly realize it is for a vehicle service contract.
What’s the difference between the two? Quite a bit!
Warranties are express (the vehicle conforms to a written statement like this vehicle has a new transmission) or implied (warranty of merchantability or fitness for a particular purpose such as if the dealer knows the customer will use it for commuting).
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If a customer pays for extended coverage, that is a vehicle service contract. Under Magnuson Moss, if a dealer sells a vehicle service contract to the customer within 90 days of sale, the dealer cannot disclaim implied warranties. In approximately 38 states, a dealer can otherwise disclaim express and implied warranties. It does so on the Used Car Buyers Guide and in the RISC or lease agreement.
All that being said, the term “extended warranty” is frequently used incorrectly to refer to a vehicle service contract. Extended warranties on vehicles can only be administered from the manufacturer or the dealer. For example, CarMax offers a 90 day or 4,000 mile limited warranty, and then prolonged vehicle service contracts through their third party administrators.
If you are purchasing a vehicle from your local dealer and they offer an extended warranty, it is up to you to do your due diligence and check who the administrator is of that warranty. Is it the dealer (unlikely)? If so, then it’s an extended warranty. Is it a third party administrator (likely), then it’s a vehicle service contract.
Why is it important that you understand the difference between an extended warranty and a vehicle service contract? Because some unscrupulous people will try and sell you an extended warranty that leads you to believe your existing warranty is “extended” thanks to the warranty you just purchased. This is not the case! Extended warranties administered through a third party (aka a vehicle service contract) do not extend your current warranty (crazy right?). Instead, they are inclusive of existing warranties on a vehicle. This means it will run in parallel with the manufacturer warranty and does not “extend” the warranty of the vehicle. It is critically important that you confirm who is actually administering the “warranty” to know if it is actually extending your coverage, or if it’s simply a vehicle service contract.
Maybe congress should pass another law that makes it illegal for companies to call themselves “Route 66 Warranty” when they really sell vehicle service contracts, but that can be for another blog post!
Should I buy an extended warranty for a car?
Okay, now that we understand what an extended warranty for a car is (and isn’t), the question is “should I buy one?” There are a few factors that go into answering this question. The TLDR is; you have to assess your risk tolerance and decide for yourself if an extended warranty is a good value or not.
One of the first things you need to understand about extended warranties for cars is that they are priced dynamically. Similar to other insurance products (think auto insurance for example), extended warranty pricing is different based on each and every vehicle identification number (VIN), and the current mileage of the car. That is to say that no two vehicles have the exact same price quote. An extended warranty on a Ford F-150 will be different then a BMW 3 series. Depending on the year, make, model, trim, and mileage, each extended warranty will be quoted from an administrator (like a Route 66 warranty, or even the manufacturer who is actually selling a legitimate extended warranty and not a vehicle service contract) with a different wholesale price.
Pricing for extended vehicle warranties is dynamic because the administrator is monetizing the risk associated with covering the costs of certain repairs to that vehicle. If you’re buying a brand new Toyota Camry that is covered by the manufacturer’s warranty, you can expect the wholesale price of a vehicle service contract to be very low. Toyota is an economy brand, and the parts needed to repair it are relatively inexpensive. Being new and under the manufacturer’s warranty means that the third party vehicle service contract most likely won’t end up with any claims against it.
Compare that to a used Mercedes-Benz E-Class sedan with 70,000 miles on it. The wholesale price for this VIN will be MUCH greater than the same extended warranty on the Camry. Why? Because the administrator is taking on a lot more financial risk. To make up for this, they sell the vehicle service contract at a much higher wholesale price.
At the end of the day, extended warranty companies are going to make their money. They know for each VIN in existence what the price is they need to offer to cover their risk and still make a profit.
What does that mean for you? It goes back to our TLDR. If you have a high risk tolerance, don’t bother with a vehicle service contract or an extended warranty. If you value the comfort of knowing things will be “covered” (although it is important to understand that there are a lot of exceptions in manufacturer, dealer, and third party contracts), then consider purchasing an extended warranty or vehicle service contract.
How much does an extended warranty cost?
Now that we understand how an extended warranty for a car is priced on the wholesale side of things, we can begin to unpack what happens on the retail side. Traditionally third party extended warranties are sold to “agents,” who then turn around and sell the products to car dealerships.
If you’re keeping up at home, that means the administrator sells the extended warranty to the agent, then the agent sells the extended warranty to the dealer, and then the dealer sells the extended warranty to you, the car buyer. I don’t know about you, but that’s a lot of hands involved in one transaction.
How much does an extended warranty cost when you go to buy one? Well, that depends on how much mark up each person in the supply chain added on to the extended warranty before it gets to you. Agents need to make their money, so they’ll mark up the extended warranty 10 to 20% when they sell it to a dealer. Dealers need to make their money, and since they don’t make it by selling cars, they try and make up for that when they sell products like extended warranties. They typically mark up extended warranties 200 to 300%.
What does that mean for you? Well, an extended warranty that may have cost the agent $500 to buy wholesale will be offered to you for more than $2,000 at the dealership.
Now if you are actually buying an extended warranty from the manufacturer, and not a vehicle service contract disguised as an extended warranty, the pricing will certainly be similar. Remember, extended warranties can only be provided by the manufacturer or the dealer. Most dealerships do not offer their own warranties, and instead they rely on third party products (like vehicle service contracts that we’ve been discussing). However most manufacturers do offer some extended warranty plans.
For example, if you purchase a certified pre-owned vehicle it will typically come with an extended warranty. This actually is an extended warranty because it is coming from the manufacturer. You may also have the opportunity to purchase an extended warranty directly from the manufacturer, again that is a real extended warranty. The cost for these warranties is different for each and every manufacturer, and it is unknown what the markup is. However, just like with third party warranties, manufacturers price their extended warranties dynamically to make sure they are charging enough to make a profit.
Extended warranty companies
Many third party companies claim to sell extended warranties. As we’ve discussed, they actually sell vehicle service contracts. Be weary of any company that markets themselves as a warranty provider when in reality they are selling vehicle service contracts. That being said, there are dozens of third party administrators you can purchase from.
Can I buy an extended warranty directly from the manufacturer?
Yes! This is literally one of the only ways you can purchase an extended warranty. Manufacturers of goods are able to sell extended warranties on their products. You don’t even have to deal with the local car dealer to secure a manufacturer extended warranty. You can call the manufacturer directly and purchase a policy.
I want to learn more about extended warranties
I don’t blame you! It’s fascinating how this part of the automotive industry works, isn’t it? Here are the resources I used to help gain a better understanding of how the extended warranty industry operates.
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