A warranty is the first layer of mechanical breakdown coverage on any new vehicle. The coverage is provided, at no cost to the buyer by the Manufacturer. A warranty has a specific term expressed in months or miles. and usually protects the entire vehicle against defect in workmanship and material. This is known as "bumper to bumper" protection. An extended warranty - also known as a service contract can cost you in the thousands and most consumers collect very little of that. It extends the mechanical breakdown protection beyond the basic warranty term, and applies to specific assemblies contained within the vehicle. A good example is the powertrain warranty. In this case, only the powertrain (engine, drive axle, transmission) is protected for an additional length of time or miles such as 6 years or 60,000 miles. These cost extra and are sold separately. Mechanical Breakdown Insurance is a true insurance product. Like personal auto or homeowners insurance the MBI creates a direct relationship between the vehicle owner and the insurance company. MBI coverages and premiums are regulated by state insurance departments.

Another warranty is known as vehicle service contracts and are written agreements between the vehicle buyer and the dealership. This contract is often mistakenly called an extended warranty. The dealer becomes responsible for providing mechanical breakdown coverage or reimbursement to the vehicle owner. Most service contracts are restrictive and conditional. The dealer is allowed to set the actual price of the contract at whatever level he chooses.